Public Policies & Private Investments: Herding Sheeple or Respecting People?

Last week I posted on how low business confidence and slow fixed private investment limit potential employment growth. There is a solid 30% association between business confidence and private fixed investment, since 2009.

Data on gross private domestic investment goes back further, and has a stronger correlation with business confidence. What does this all mean?

Some economists argue that public officials can use their control over policy variables to achieve certain social goals, or to “stabilize the economy”, in the “public interest”. Public officials control policy variables (e.g. tax rates, subsidies, minimum wage rates, bank reserves). State officials don’t control how entrepreneurs react to public policies. Officials can achieve their policy goals only if we react to policies in predictable ways, as sheeple.

Other economists argue that attempts to regulate or stabilize the economy often have unintended consequences. Many factors can affect business confidence. But we must admit that policies affect business confidence without controlling business confidence. Entrepreneurs, among others, react to policies as thinking self-interested people, IMO.

The correlation between business confidence and the level of private investment fits with the idea that regulatory policies affect business confidence. Is there evidence that supports this proposition more directly?