The Truth About Uncertainty Is That It's (Mostly) Untrue
When corporate executives are asked why they don’t spend more of their record profits by investing in their businesses and hiring workers, they offer this mantra: uncertainty, brought on by President Barack Obama.
Verizon Communications Inc. Chief Executive Officer Ivan Seidenberg led the charge in 2010. “By reaching into virtually every sector of economic life,” he said, “government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.” More recently, John Chambers, the Cisco Systems Inc. CEO, said sales were down partly because of corporate customers’ worries about government policy. “Business doesn’t like uncertainty,” he told Bloomberg TV on May 10.
Is the uncertainty plaint really just an excuse for inaction — and cover for lobbyists looking to build support for less regulation? Or is there substance to the anxiety? If so, what can be done about it?
Let’s break it down. Many executives blame Obama’s health — care overhaul for the uncertainty. The law has multiple parts that take effect over many years and, yes, it can be confusing. But the law is the law; it’s been passed. If there is uncertainty, it’s from what Obama’s political opponents are doing: challenging its constitutionality. The possibility that the Supreme Court will overturn the law’s centerpiece, the individual mandate, is driving much of the uncertainty.
After health care, CEOs broadly point to overregulation as the biggest economic damper. But the raw numbers of new regulations don’t support the uncertainty purveyors, either. The Office of Management and Budget says 931 major regulations — those with enough economic significance to require OMB review — were issued by the executive branch during the first three years of George W. Bush’s first term, more than the 886 from Obama’s first three years.
Those figures don’t cover independent agencies, where most of the rulemaking under the Dodd-Frank financial reform law, another major source of overregulation gripes, is happening.
Wall Street firms do have to comply with a host of new financial regulations. Some of Dodd-Frank is unnecessarily intrusive, and costs to industry deserve close consideration. Nevertheless, the law is essential to U.S. efforts to avoid inflicting another financial calamity on taxpayers and the world, after the one in 2008 that occurred because of . . . inattentive regulators.
The OMB numbers do include the Environmental Protection Agency, another supposed wellspring of regulatory uncertainty. The business community may have a point: In Obama’s first three years, the agency issued 89 rules versus 47 under Bush. Lately, however, the EPA has more often postponed or withdrawn rules (sometimes under White House pressure) than imposed them. Initiatives have been shelved that would toughen standards for ozone pollution, the main ingredient in smog; limit emissions from industrial incinerators; and reduce soot from power plants, diesel trucks and factories. New rules on hydraulic fracturing operations won’t require drillers to add equipment to capture smog-forming pollutants.
Here, Obama has discouraged economic activity, but not in the way one would think: Investment in scrubbers, filters and other technologies to control pollution would create jobs for the people who design, manufacture and install such equipment. Moreover, the annual benefits of nine major EPA rules that will take effect under Obama exceed costs by at least 4-to-1, according to government estimates. Compliance costs to the industries covered by the rules may only amount to 0.1 percent of gross domestic product.
Companies are also sitting on cash or refusing to hire because, paradoxically, unemployment of 8.1 percent is a drag on consumer demand, a problem they lay at the president’s feet. It’s important to note that historical data collected by economists Carmen Reinhart and Kenneth Rogoff show that it takes almost five years for employment to recover from the wreckage of a deep financial crisis.
Hiring is down because consumer demand remains low as households continue to deleverage. Employers are also using technology and other productivity enhancements to make do with fewer workers. And it’s worth repeating the obvious: Business investment hasn’t bounced back to pre-2007 levels because there’s still too much slack in the economy.
If you accept these explanations for the elevated jobless rate, as most economists do, it’s hard to see the connection to Obama’s economic policies or to blame him for uncertainty.
So who or what is to blame? Some of it stems from the European debt crisis, which is cutting into demand for American exports. At the same time, China’s growth is slowing down. And some of the blame rests with the banks. They are still restricting lending, in part out of fear loans won’t be repaid.
Much of the problem is self-inflicted by Congress. Lawmakers are putting off until after November’s elections a crush of expiring Bush-era tax cuts, the payroll tax reduction and dozens of other tax breaks and spending programs. If they expire, and an approved $100 billion in spending cuts occur at the same time, economic growth would slow to 0.5 percent next year, the Congressional Budget Office says. As Bloomberg View columnists Betsey Stevenson and Justin Wolfers write, last summer’s debt-ceiling fight almost derailed the recovery, and this year’s replay could be worse.
Congress also lacks a plan to attack the long-term problem of entitlement spending and has yet to fix an overly complicated tax code. Worse, lawmakers have purposely built instability into the system by disingenuously adding expiration dates to tax cuts to meet budgetary rules.
Those invoking the uncertainty principle fail to mention that inflation and interest rates are historically low. Federal Reserve Chairman Ben Bernanke has repeatedly pledged not to raise rates at least through late 2014 — a gold-plated certainty guarantee if we ever saw one.
The pledge may be showing up in an uncertainty index created by Steven J. Davis, a University of Chicago business professor, with two others. Using news searches, differences among economic forecasters and other tools, they have measured the level of uncertainty by month, back to 1985. Their research shows that monetary policy and taxes, not regulatory policy, are the biggest drivers of uncertainty.
The highest point, in August 2011, came when Congress was embroiled in the debt-ceiling debate and the U.S. lost its AAA credit rating. Since then, the index has declined steadily and is now at the August 2008 level, before the collapse of Lehman Brothers Holdings.
Business thrives on certainty, to be sure. Obama’s rhetorical broadsides against business leaders aren’t helpful. Nor are declarations like the one by House Speaker John Boehner on May 15, in which he promised another bare-knuckle fight over the debt ceiling. Yet of this you can be certain: You can blame Obama for many things, but uncertainty isn’t one of them.
The preceding editorial appears on Bloomberg View.