On Friday I was invited to a conference call with Ed Lazear, Chairman of the President’s Council of Economic Advisors. The call was devoted to the topic of an economic stimulus package being considered by the President. Supply side economists like me were respectful but somewhat skeptical of the idea of the government sending out checks to the public in the hopes that we’ll spend the money. The idea is that we have a short run slow-down and we need a quick kick to get us through this rough spot. I don’t agree.
The problem with a short run stimulus package is that we don’t have a short-run stimulus problem; we have a long run investment problem. Business owners and managers see a rising political tide of economic populism and that is a very dicey environment for long term business planning. And when uncertainty is high, time horizons shrink.
Would you be willing to seriously consider buying some shares in Chinese companies? The answer is probably ‘yes’. What about buying a house in China? Probably not. You just don’t know what things are going to be like there in 15 or 20 years. If their market goes down, you can always sell the stock, it’s a liquid asset. But if the Chinese suddenly snap back to hyper-nationalism (as they have done in the past), you’re home in China will be an anchor. This doesn’t just apply to different countries; it applies to different ages. Brian Anderson former head of Chase Manhattan Bank makes this point in his excellent American economic history, Economics in the Public Interest. The more risk, the more the desire for liquidity. The less liquidity, the better long term return. In other words, building factories or power plants is a risky business with high long term returns. The converse of this is that an environment in which price levels, interest rates and tax rates are highly susceptible to surges of anti-business fanaticism, is an environment in which entrepreneurs are hesitant to take the big risks that lead to the big returns. We’ll loads of web sites, and maybe we’ll even build a handful of Applebee’s, but very, very few power plants.