We’re Having the Wrong Conversation About Uncertainty
Imagine the following situation: You’re the CEO of a small business with one store and just five other employees. You survived the Great Recession and business has been slowly improving. As the economy improves, you’re thinking about expanding by opening another store with five more workers. Then you hear the President’s State of the Union Address calling for a higher minimum wage. This scares you. A higher minimum wage would raise your costs and prevent you from opening that new store (this is how a minimum wage hurts job growth). Now, it’s the beginning of August and no minimum wage bill has passed. The President isn’t pushing it particularly hard and Congress is focused on other bills. Do you open the second store?
It’s a tough call. It would just about wreck your business if you expand and then Congress passes a higher minimum wage. On the other hand, you’re leaving profits on the table for every day you don’t expand and the minimum wage stays the same. That right there is policy uncertainty and it is what Republicans have been yelling has been holding back the economy for years.
Republicans wanted to blame the sluggish recovery on mountains of red tape from the business-hating Obama administration, and the press played along. This means that “uncertainty” got a lot of media attention, which in turn means that if you have an “uncertainty index” based partly on media mentions, it would have shown persistent elevation during 2010-12, the heyday of the uncertainty campaign. Sure enough, that’s exactly what it showed:
As we knew all along—and as the media should have known all along—”uncertainty” was just an invented partisan talking point. It no longer serves any purpose, so now it’s gone. But the sluggish recovery is still with us.
Roosevelt Fellow Mike Konczal proved last year how ridiculous uncertainty indexes are. It’s more media manipulation than anything else. But this doesn’t mean that uncertainty isn’t real. The simplified example above demonstrates how it works on a theoretical level. But saying that uncertainty is holding back the recovery doesn’t imply that one party or the other has the correct policy prescription. In the above example, you can remove the uncertainty in two different ways: passing a higher minimum wage or the President declaring he is no longer interested in pushing for it. In either choice, the uncertainty disappears.
This isn’t how Republicans described uncertainty as holding back the recovery. For them, uncertainty was excessive regulations and new rules from the Obama Administration. But this is just one factor in the uncertainty debate. There is economic uncertainty. Who knows what the next jobs report will look like? There’s also fiscal uncertainty. The looming potential government shutdown may be holding firms back as well. Same with corporate tax reform which is slowly moving forward. Businesses must take all of this into account. The more threats to shut down the government, breach the debt ceiling, rewrite existing regulations and pass major policies, the more businesses are going to be hesitant to make major decisions. That’s how uncertainty affects the economy, but it’s largely not the Obama Administration’s fault. That’s where Drum is right: it became a partisan talking point in the last election.
So instead of having a smart discussion on how we can actually reduce uncertainty, Republicans fostered a partisan belief that the uncertainty that was really holding back the recovery was the Obama Administration’s regulations and nothing else. Not the economy. Not Congress. It was all on the Obama Administration.
So is it any surprise that as uncertainty has decreased (according to uncertainty indexes meh), liberals are using it to show that uncertainty wasn’t holding back the economy? Tankersley demonstrated this aptly:
The index seeks to measure the effect of policy uncertainty, including pending regulations and expiring tax provisions, on the economy. As you may have heard once or twice over the last few years, many conservatives blame uncertainty for holding back hiring and growth in this recovery. Those lawmakers love to cite this index as proof of elevated uncertainty.
According to the index, the decline of uncertainty this year is clear*.
And the hiring boom that was supposed to follow? Well…
Maybe hiring would be significantly less if uncertainty was at 2009 levels. Maybe reduced uncertainty has offset some of the effects of the payroll tax increase earlier this year and has been an important factor in our recent meager job growth. It’s tough to tell for sure. But no matter what, the facts are that uncertainty indexes show reduced uncertainty and job growth is weak. So liberals have jumped on this to show that reduced uncertainty and job growth don’t go together. This continues to obscure the debate as uncertainty is a drag on growth. But it’s not just regulatory uncertainty. It’s much more. Republicans need to admit that. Democrats need to admit uncertainty exists. And uncertainty indexes need to go away. Then maybe we can have a conversation about how to actually reduce it. Right now, it’s a partisan mud-flinging contest with hand-picked stats and a bogus index used to support them. isn’t that just great?