Politicos like to focus on a single factor and discuss the effectiveness and the justice. But an economy is the sum total of all the policies. It is popular from the left to decry the Bush tax cuts as if not renewing them will not have any effect on production or incentives to invest.
But taxes must be considered in light of the total impact of all friction costs. Friction costs can be regulations, taxes, mandates that require higher expenses, increased threats of litigation, inflation and higher financing expenses, and any other threats to profitability. This is above the normal risks of business such as competition and operations risk.
Cutting taxes can be a trap if this friction cost is offset by increasing other friction costs such as regulation.
There are also psychological friction costs. When the talk about raising taxes is never ending the impact is the same as raising taxes even if they have not yet been raised. It is like giving someone a gift and complaining about how much you spend on it. The gift just will not be appreciated.
Business people are by necessity forward thinking. When all the talk is about higher friction costs they will be reluctant to invest because they do not know what their return will be.
At the beginning of this administration there was discussion of the Card Check Bill and Cap and Trade. Neither passed but that did not mean that the mere effort to push them through did not do serious damage. These efforts presented serious potential friction costs, that businesses could avoid by avoiding growth and expansion. Businesses did not miss the efforts of regulatory agencies to rule the same objectives that lawmakers clearly rejected.
I picture a prospective business like a seesaw. On one end is risk, reward and effort. On the other is the host of friction costs. When too many friction costs are added to their end of the seesaw, the reward becomes negative and the risk will be avoided. This administration has loaded their side of the seesaw; and new business creation and new jobs are at a standstill as a result.
I intentionally did not include stimulus of the positive side of the seesaw because it is by nature temporary, and thus the removal eventually undoes its benefits. One does not rely on short term stimulus to justify long term investment.
It is foolish to champion any single friction cost. This economy is stilled by an accumulation of friction costs, each one of them justified individually and rationalized as harmless.
“Every snowflake pleads innocent, but it is still an avalanche.”