Don’t get me wrong. Some of my best friends are economists. But their response to any and all problems is, “first, let’s create a time series, which we’ll regress against other time series until we find a relationship worth writing about.” This process has its place, but it can divert attention from obvious realities not lending themselves to quantification.
Consider “uncertainty,” which the media blames for high unemployment because it dissuades companies from hiring even though they have tons of cash. To explore the relationship between “uncertainty” and economic growth, Stanford economists created an Index of Economic Uncertainty based on A) news articles mentioning certain key words such as—you guessed it—uncertainty, B) tax code expiration data, and C) the dispersion of economic forecasts for GDP growth, CPI, and government spending. They find that:
The index spikes near consequential presidential elections and after major events such as the Gulf wars and the 9/11 attack. Index values are very high in recent years with clear jumps around the Lehman bankruptcy and TARP legislation, the 2010 midterm elections, the Eurozone crisis and the U.S. debt-ceiling dispute.*
Paul Krugman, Jan Hatzius and others point out that the Index is highest when the economy is weak, which raises the usual “chicken and egg” problem that bedevils economists – does economic uncertainty create economic weakness, or vice versa? Krugman wants to have it both ways. With his usual analytical dispassion he labels uncertainty analysis a “scam” perpetrated by “right wing economists” who want to blame the weak economic recovery on Obama’s policies. But he embraces this “scam” when it fits his politics, agreeing that GDP growth suffered in 2011 from uncertainty caused by Congressional Republicans’ refusal to automatically raise the debt ceiling.
Economic Uncertainty vs. Policy Certainty
This uncertainty debate is miscast at several levels. Critical distinctions need to be made:
In the first place, the very concept of “economic uncertainty” is dubious on its face because the future is always uncertain. In fact, certainty creates its own uncertainty. When things go well in the economy for an extended period, people tend to extrapolate the good times, which is called “complacency.” Complacency tends to be self-limiting because it leads to over-investment, excess capacity and recessions (like the bursting of the 1990s tech bubble).
Secondly, it is true that sometimes genuine “exogenous events” unexpectedly ratchet up “uncertainty.” Good examples are the 9/11 attacks and Saddam Hussein’s invasion of Kuwait in 1990; these events surprised everyone on Wall Street. (The 2008 TARP vote and even the Eurozone crisis are NOT good examples because they are derivatives of the financial crisis.)
Finally, the “uncertainty” rubric that is applied to regulations emanating from Washington is obviously inappropriate. Far from being “uncertain” these policies are in many cases already the law of the land, including healthcare reform, financial reform, and the EPA jihad against fossil fuels. There may be some “uncertainty” about how bureaucrats will interpret and apply the thousands of pages of legislation—for example, how the Volcker Rule will affect bond trading. But, relatively speaking, this is Policy Certainty not Economic Uncertainty. The policies hurt growth and employment not because they increase uncertainty but because they raise costs, limit revenues, increase risks, and hurt profits.
Economists’ Quantitative Blinders
Economists are ill-equipped to analyze Policy Certainty because they are not lawyers or accountants who understand the excruciating complexities of regulation. Thousands of pages of legalese cannot be distilled into a statistic or time series. In econoland, if it can’t be quantified, it doesn’t exist.
So economists have largely ignored the warnings of leading businessmen (who, whatever one thinks of them, actually make spending and hiring decisions) about the damage to economic growth wrought by Obama’s regulatory avalanche. Wall Street economists have little to say about regulation. Krugman dismisses it as the “you’re looking at me funny” argument. You can read dozens and dozens of articles in The Financial Times diagnosing anemic growth without seeing mention of regulation – it’s all about deleveraging.
In a lengthy, portentous front page New York Times article on the supposedly mysterious slump in middle class incomes, David Leonhardt fingered all the usual suspects – globalization, automation, digitization, weak labor unions, low minimum wage, rising healthcare costs, a faulty education system – but never mentioned rising regulation. Umm David, don’t you think the middle class outside the beltway might be doing better if regulation were not raising energy costs, killing high paying jobs on energy projects, penalizing small businesses that employ over fifty workers, and destroying thousands of good paying middle class jobs in the financial sector? A compelling case in point is the state of Texas, whose business-friendly regulatory environment has led to much stronger job creation than in other large states – a point Dallas Fed President Richard Fisher makes in all his speeches.
The Great Suppression, Part Deux
Back on July 9 we deconstructed the “Great Suppression” of Keynesian “Animal Spirits” by Washington’s regulatory onslaught. Suffice it to say that businesses are loath to hire and invest when they have to hack their way through an ever-expanding thicket of complex regulations. And Obama’s disdain for capitalists who supposedly don’t “pay their fair share” of taxes is not exactly a confidence builder.
And no regulatory relief is in sight. In a recent Barrons article Jim McTague detailed the next wave of rules and regs to hit the private sector, including ozone regulation costing $90 billion, regulation of “particulate matter” (aka soot), expansion of the Clean Water Act to cover millions of acres of land draining into rivers and lakes, etc. “The EPA,” McTague writes, “could end up regulating a huge swath of the economy, and the impact could be enormous.”
A Romney Rally?
Most of this regulation could be reversed without ill consequences, and a President Romney will try to do that. The payoff would be big and quick. Business confidence would improve, hiring would pick up, the fracking boom would proceed, commodity prices would be restrained and middle class incomes would start rising again. All this could happen fairly quickly because the private economy is remarkably healthy. Corporations are well managed, well-capitalized, and highly efficient; the banking system is sound; the housing market has started to rebound; households have successfully deleveraged. A Romney victory would have as big an impact as the Reagan victory in 1980, but the payoff would be faster because the private sector is stronger and we are not in the middle of a recession. So a Romney victory would be very bullish for stocks, even if Barnanke departs and monetary policy becomes less accommodative.
*Scott R. Baker, Nicholas Bloom, and Steven J. Davis, Measuring Economic Policy Uncertainty, June 4, 2012
