Economic Growth: Incentives Matter

President Obama spoke to the U.S. Chamber of Commerce today (February 7), to try to encourage the CEOs of American businesses to do their share to reinvigorate the economy by investing, hiring, and matching what his administration has done through its various stimulus programs.  In part, the president said, “As we work with you to make America a better place to do business, ask yourselves what you can do for America. Ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation.”

The bottom line (and, I mean that literally in this case) is that businesses are not charities.  They need to make profits to survive.  If they see an opportunity to invest that they expect to lead to profit, they will take it without any presidential prodding.  If they see an opportunity to hire more workers that they expect to lead to profit, they will take it without any presidential prodding.

Investing, and hiring, are not sacrifices.  They are risks businesses take in the pursuit of profits.  If the risk pays off, businesses benefit.  If not, businesses lose, and if they lose too many times, they go out of business, like GM and Chrysler.  (Whoops, those may not be good examples.)

Right now, many businesses are playing it safe, and understandably so, because of the regime uncertainty that the Obama administration has introduced into the economy, something my fellow blogger Robert Higgs has consistently emphasized.  President Obama does not seem to understand that investment and hiring mean taking on risk, and prudent CEOs weigh that risk against any potential return.

Increase the risk, or lower the return, and businesses will invest less and hire less.

The president’s call for CEOs to “ask yourselves what you can do for America” does not end there.  He goes on to say that under his administration, CEOs should not expect any investment and job creation to result in “greater profits and bonuses for those at the top.”

He’s telling CEOs they should take risks with their businesses for the good of their country, but that they should not expect any personal benefit if the risks they take pay off.  This strikes me as a message he would be better off not delivering.  He is saying to CEOs, you take a chance, with your business and your career, for the benefit of “the middle class,” but I will make sure you — the CEOs who take these risks — will not benefit yourselves.

The president says he wants to cooperate with the private sector to help the economy.  Is this the message he should be sending to those whose cooperation he is seeking?

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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