AUGUST 20, 2012
Political polarization has become an obstacle to economic growth because it is increasing uncertainty, and delaying new private sector investment and hiring. That’s the view emerging from the business community and—increasingly—from the economics profession.
Earlier this month, in a front-page New York Times story, a number of CEOs gave voice to their fears about the fiscal cliff and the broader policy impasse in Congress. According to Vincent Reinhart, chief U.S. economist at Morgan Stanley, more than 40 percent of companies in their monthly survey cited the fiscal cliff as a major reason for pulling about on hiring and investment, and he expects that percentage to rise. These concerns go well beyond the defense sector, whose stake in a speedy resolution of the controversy is direct and clear. Alexander Cutler, the CEO of a large Ohio-based maker of industrial equipment, put it this way: “We’re in economic purgatory. In the nondefense, nongovernment sectors, that’s where the caution is creeping in. We’re seeing it when we talk to dealers, distributors, and users.”
A few days later, the Wall Street Journal ran an article by Dennis Berman, a reporter who sometimes sits in on the conference calls companies use to preview earnings results. According to Berman, “You can hear the bafflement, the anger, on the just completed run of company earnings calls. Typically scripted and banal, the calls have become an unexpected public platform for chastising Democrats and Republicans alike for what’s become of our way of governing … Most spread the blame on the broader culture of Washington itself. Its dysfunction, they say, is having real-world effects.”
Skeptics might discount all of this as anecdotal. It turns out, however, that a growing academic literature is working to measure policy-related economic uncertainty and to quantify its effects on economic activity. A recent paper, “Measuring Economic Policy Uncertainty” by Stanford economists Scott Baker and Nicholas and Steven Davis of the University of Chicago Booth School of Business, constructs a sophisticated index of economic policy uncertainty and finds that it has risen substantially during the past five years. The authors are able to disentangle the portion of overall economic uncertainty that is driven by public policy from the portion that isn’t, finding the former as a share of overall uncertainty has risen substantially as well, now amounting to about 65 percent of total uncertainty. Using standard regression techniques, they estimate that the increase in policy-related economic uncertainty is associated with peak effects declines of 4.0 percent in industrial production, 3.2 percent in GDP, 16 percent in private investment, and 2.3 million jobs.
As my faithful readers never tire of pointing out, I am not now, nor have I ever been, an economist. Those who are and want to judge for themselves can find the paper at www.policyuncertainty.com. But everyone should keep in mind that the thrust of the research I’ve just summarized is hardly outside the mainstream. Indeed, nearly two decades ago, a young economist named Ben Bernanke published a paper arguing that when it is expensive to cancel investment projects or to hire and then fire workers, then high levels of uncertainty increase the incentive of firms to delay making new investments and hiring additional workers. Unlike many other economic discoveries, this one makes intuitive sense as well.
Although the U.S. economy and political system are inextricably intertwined, the gulf between economic and political leaders has rarely if ever been wider. CEOs simply can’t understand why politicians are behaving in such a myopic and destructive manner, multiplying uncertainties and depressing economic activity. At the same time, the business community has been much less willing than it once was to weigh in on the side of the long-term policies it favors.
This year, Romney is getting massive corporate support, especially from the financial community, for his election bid. But I can see no evidence that business leaders have had any influence on Romney’s fiscal policy, the details of which just don’t add up. Romney has yet to explain how his tax reform can approach revenue neutrality, and taken literally, his overall fiscal program is a formula for even larger deficits. Most business leaders I know support a grand bargain along the lines of the Simpson-Bowles or Domenici-Rivlin proposals, but few of those plans have gone much beyond kibitzing from the sidelines. (There have been some signs in the past month that this may be changing, but it’s too early to tell whether the shift is real.)
Objectively, the long-term interests of the business community are more closely aligned with those of business-friendly wing of the Democrats than they are with a Tea Party-dominated Republican Party. Business leaders may hope that Romney would govern as the CEO he used to be rather than the populist he now pretends to be. If so, they have not reckoned sufficiently with the forces in his party who will block any serious move toward economic sanity. If CEOs really wants the kinds of long-term economic policies that will give them the ability to plan and the confidence to invest, they will have to get off the sidelines and enter the fray.