Is Weak Aggregate Demand Really the Main Problem?

Or is it the regime uncertainty that many observers attribute to the Obama administration? The answer from several recent surveys say it is weak aggregate demand. First, a Wall Street Journal survey shows most economists see the lackluster recovery as a the result of weak aggregate demand rather than uncertainty over government policy:

The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey…In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren’t hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing.

This conclusion is supported by the findings in the most recent NFIB’s survey of small businesses. This survey has consistently shown, and shows for June, that the number one problem facing small business is not regulation or taxes–though they do matter according to the survey–but weak sales. Here is a table, for example, from the June, 2011 survey that underscores that it is weak sales more than anything else that is creating stress for small firms. Note that regulatory costs and taxes are captured under the increased costs category (see underlined footnote).

I suspect regulatory costs become more apparent and seem more important when aggregate demand is persistently weak. Conversely, if firms were flush with growing revenues and expected higher sales the regulatory costs would probably seem less burdensome. This is not trivialize the importance of such regulatory costs, but to point out that some commentators should probably spend more time thinking about the problem of weak aggregate demand and what can be done to fix it.

Update: Nick Rowe makes a good point in the comments section:

[L]ook at the table on page 20 of the report. Once again, only a very small percentage of firms list “quality of labour” as their most important problem. 5% today, compared to 4% one year ago, 3% as the survey low, and 24% as the survey high. The fact that labour is so easy to hire is more confirmation that there’s generalised excess supply, and the problem is AD.

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