There is no such thing as business certainty. Uncertainty is a natural part of the business environment and never goes away. In our previous post, we saw evidence that rising stock prices reflect an improving U.S. economy. Still, there are plenty of noisemakers offering half-truths, mistruths and a distortion of facts who claim that uncertainty about taxation, regulation and other reforms are impeding the economic recovery. Simply listening to the media, one could easily conclude that there is widespread disagreement about how to accelerate the recovery.
In reality, however, there’s little disagreement among reasonable people. The University of Chicago Booth School of Business finds remarkable agreement among leading U.S. economists on most major macroeconomic issues, though they hold diverse political perspectives. The most surprising thing is that these economists agree, even when there is considerable disagreement on Capitol Hill. What have economists found concerning the extent to which federal policy affects business and economic uncertainty?
- In 2011, the Economic Policy Institute (EPI) conducted extensive research on the economic costs and benefits of federal regulations. EPI found that the benefits of regulations have significantly and consistently exceeded their costs. EPI determined that regulations did not result in a significant decline in jobs either in the broader economy or at the industry level. Researchers Shapiro and Irons discovered a surprising number of studies that showed regulations actually produced small positive employment effects. Shapiro and Irons concluded that well-designed and strongly enforced regulations are often necessary for the U.S. economy to operate effectively. As an example, they note how the wave of deregulation in the mortgage and banking industries played a major role in the housing bubble and financial crisis that followed in 2008.
- The National Federation of Independent Business(NFIB) conducts a regular survey to determine the key concerns of small and independent U.S. businesses. Since 1973, the survey has always included the question, “What is the single most important problem your business faces?” The answer choices are inflation, taxes, government regulation, poor sales, quality of labor, interest costs, health insurance costs, the cost of labor and other matters. One could easily assume it would be regulation or taxes given the current debate. Interestingly, however, poor sales have been the primary concern for 30% of survey respondents since 2009, taxes for 21% and government regulations for 13%. The NFIB survey supports what a majority of economists are saying about the current recovery: weak consumer demand (poor sales) is keeping the recovery and thus hiring from being stronger.
- Lawrence Mishel of EPI analyzed and graphed NFIB historical data since 1973. His analysis revealed that small businesses have consistently complained about regulation and taxes, regardless of which party occupies the White House. The level of concern about taxes is lower today than it was from the mid 1980s through 2000, which peaked during the mid-1990s. Similarly, there is less concern today about government regulation than there was in the late 1980s through 2000. These findings do not support the claims that uncertainty about regulations and taxes are holding back the economy or have kept it from being more robust since the recession ended in 2009.
- Reinhart and Rogoff collected and analyzed historical data for their book This Time Is Different: Eight Centuries of Financial Folly. Their research revealed that over the millennium countries repeat a similar pattern of slow growth and slow employment following a severe economic crisis. For instance, Reinhart and Rogoff discovered that it takes almost five years for employment to recover and over six years for a housing recovery. Their findings indicate that the current U.S. recovery is consistent with historical norms. In an April 2012 commentary they wrote, “Our research makes the point that the aftermaths of severe financial crises are characterized by long, deep recessions in which crucial indicators such as unemployment and housing prices take far longer to hit bottom than they would after a normal recession. And the bottom is much deeper.” Reinhart said that for the U.S. economic recovery, “The clock starts ticking in the summer of 2007.” That means we could be muddling through until 2017.
These findings and many others show that the current debate about tax and regulatory uncertainty are unfounded. Yet, because the U.S. economy and political system are inextricably linked, could the political climate in Washington be increasing economic uncertainty?
Davis, Bloom and Baker developed a new policy uncertainty index (PUI) and estimate its relationship to economic growth going back to 1985. They measured policy uncertainty by combining three factors: (1) the volume of newspaper coverage of economic policy uncertainty of some type (i.e., fiscal, monetary, or regulatory), (2) the extent of disagreement among professional forecasters over inflation and future spending by federal, state and local governments, and (3) the number of federal tax code provisions set to expire in future years. Davis et al discovered that PUI surges around major federal elections, political shocks such as 9/11 and wars, the bank crisis and government bailouts, and congressional debates over economic policy. PUI peaked in August 2011, when the U.S. lost its AAA credit rating following the intense debt-ceiling debate. Since then, PUI has steadily declined. Today, PUI is at its lowest level since August 2008, just before the financial collapse of Lehman Brothers, and will likely increase as the 2012 election nears and the “fiscal cliff” approaches. Davis et al estimate that political uncertainty is shrinking the U.S. gross domestic product by 3% and costing between two and three million jobs.
In the July 2012 article The U.S. Economic Policy Debate Is a Sham, economists Stevenson and Wolfers wrote what many voters already believe, “The debate in Washington about economic policy is phony. It’s manufactured. And it’s entirely political.” Wolfers further comments, “I’ve never seen the disjunction between the political debate about economics and the consensus of economists be as large as it is today.” He adds that instead of having a serious discussion about how best to end the current economic slump, Congress is gridlocked and many of the Congressional arguments are so far outside the mainstream that it is hard to find a single economist to agree with them.”
Simply by examining the actual facts, taking a broader view of the economy, and putting things in proper context, you can begin to understand that much of the debate on uncertainty is purely political and self-inflicted due primarily to the ongoing pattern of dysfunction in Washington.