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Posts Tagged ‘Policy Uncertainty’

Uncertain Examples

September 6, 2011 Leave a comment

In my Quixotic quest to find evidence for “policy uncertainty” holding back our recovery, the closest thing I’ve heard to a reasonable and measurable indicator is low “US fixed capital investment.” Alan Greenspan has been trumpeting this metric for at least over a year now. He also uses this example to question the wisdom of the stimulus package. But looking at fixed investment, it’s not apparent that it’s being held back by any change in regulation or fear of future taxes as Greenspan argues.

It’s obvious that investment levels aren’t back to pre-recession heights, yet the trend is clearly recovering from the depths of the recession. In contrast, we have this chart from Jared Bernstein that shows that the stimulus package certainly wasn’t inconsistent with economic growth.

Notice that as fiscal and monetary stimulus begin to run down close to the present we see weaker growth. This correlation isn’t proof, but I’m still waiting on a believable counter-explanation for this data.

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Testing Uncertainty

July 18, 2011 11 comments

Steven Davis, economics professor at the University of Chicago, writes in Bloomberg why he thinks “Employers Are Slow to Fill Jobs.” Davis goes through a number of different theories and all probably play some role, but this paragraph caught my attention.

Another part of the explanation involves broader economic conditions. The same concerns about weak sales and an uncertain economic outlook that depress job creation also undercut the desire to fill openings. We live in a time of extraordinary uncertainty about government policy with respect to taxes, health care, financial regulation, monetary issues, environmental regulation, and other areas. The political impasse over the federal debt ceiling further muddles the outlook. Policy uncertainty discourages investment, job creation and hiring.

As I’ve discussed, most of the evidence seems to point to “weak sales” as the most direct reason businesses aren’t hiring more workers. But, we keep seeing this focus on “policy uncertainty” from right of center commentators – a topic I’ve discussed frequently. Tying political uncertainty to the debt ceiling is interesting for this ongoing argument for a number of reasons.

  • It provides a seemingly clear and dramatic case of policy uncertainty, but if the debt ceiling is raised we’ll have a distinct before-and-after. Are proponents of the political uncertainty argument willing to predict how big an effect this will have on job creation? I’m not willing to say it’s zero, but if I had to guess it’s probably very low at best. If they’re not willing to forecast a noticeable upward shift in the trend of hiring after this uncertainty is resolved, why do they continue to devote so much energy to the argument?
  • It demonstrates the emptiness of Republican lawmakers that pushed the “policy uncertainty” theory. If they really believed their claim, why would they be so willing to create more uncertainty?
  • I realize I may be contradicting my first point a bit, but what counts as evidence for policy uncertainty? Proponents of this theory love to claim that employers are deterred by uncertainty, but the bond markets haven’t even begun showing signs of concern. If investors aren’t changing their activity much, what makes anyone think employers are?

It’d be easy for me to use Davis’s argument to hammer the GOP as harming job creation by causing uncertainty over the debt ceiling, but I don’t see any evidence for it. The real danger is what happens if the debt ceiling isn’t raised, when policy uncertainty turns into market panic. Once that happens we won’t be talking about why business are slow to fill jobs, but how stupid we were to push ourselves back into recession.

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