Beware the Meme!

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ECONOMY JANUARY 6, 2010

Beware the Meme!

My favorite moment from last month’s White House jobs summit came when the president asked if Washington had been doing something to discourage hiring. At this point, a man named Fred Lampropoulos, the CEO of a Utah-based medical device manufacturer, chimed in that yes, in fact, it had. “[T]here’s such an aggressive legislative agenda that businesspeople don’t really know what they ought to do,” Mr. Lampropoulos told the president, according to The New York Times. Political uncertainty, he said, “is really what’s holding back the jobs.”

Well, okay. Let’s stipulate that if you make MRI machines, or whatever, and Congress is threatening to pay a lot less for them (via health care reform), you’re probably not rushing out to hire more workers. In the same way that toilet-seat makers probably weren’t hiring like gangbusters after some bad publicity put the kibosh on the Pentagon’s $600 toilet seats in the 1980s.

But suppose, like the vast majority of American businesses, your profits aren’t in the crosshairs of legislation that would reduce government waste. In that case, is political uncertainty the reason you’re not hiring and investing? Increasingly, conservatives insist that it is.

The latest incarnation of the argument comes care of a Wall Street Journal op-ed
on Monday by Gary Becker, Steven Davis, and Kevin Murphy. In it, the three distinguished University of Chicago economists argue that, while the recent financial crisis deserves some blame for the weakness of the recovery, we shouldn’t underestimate the role of Democrats’ efforts to “radically transform the American economy.” The upshot of this “highly uncertain policy environment,” the authors conclude, “is reluctance … by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.”

At this point it probably suffices to point out that the recent financial crisis isn’t just a factor in the tepid recovery, or even the most important factor. It is, quite simply, the only thing you need to know to explain the state of the economy. Consult, for example, a widely-acclaimed paper on the history of such events by the economists Kenneth Rogoff and Carmen Reinhart. Rogoff and Reinhart find that, after a typical financial crisis, GDP declines for two years, unemployment rises for five years, the stock market drops for three-and-a-half years, and the housing market for six. So, if anything, we’re probably ahead of schedule.

But, for the sake of argument, let’s say the United States should be doing much better than the typical country heading out of a financial crisis. (This is America, after all.) If so, then political uncertainty could in principle be the reason we’re lagging. The problem is that there’s almost no evidence for this. While it’s unquestionably true that uncertainty is restraining job-creation and investment, the relevant strain of uncertainty isn’t political. It’s economic.

For example, the Chicago crew bleats that political uncertainty is depressing lending by banks. In the Fed’s most recent survey of bank loan officers, nearly 75 percent of respondents say the reason they’re lending less is “economic uncertainty.” Granted, the Fed doesn’t ask about the political environment per se. But if three-quarters of bankers are telling you one thing, you’d certainly want some countervailing evidence before concluding they mean something else entirely. Becker, Davis, and Murphy provide none.

The same goes for subpar job-creation and spending by businesses and consumers, all of which the Chicago schoolers blame on Democratic legislative ambitions. Take one of their most alarming statistics: Business investment last quarter was down 20 percent from the year before. Set aside the fact that business investment tends to fall in a recession, and that we’d expect it to fall much further during a deep recession. (It was down about 9 percent during an analogous point following after the 2001 recession, a much shallower affair.) If the explanation was that a Democratic Congress and Democratic president were creating paralyzing uncertainty, then we should have seen a similar dynamic when Bill Clinton took office amid a lackluster recovery in 1993. Clinton, you’ll recall, also entered office with an ambitious domestic agenda. And he continued chasing its centerpiece—health care reform—long after ditching his other spending priorities. So what happened? Business investment increased every quarter as far as the eye could see. 

Conversely, if Democrats’ statist ambitions are the reason for sluggish job growth, then the job market should have firmed up a lot more quickly after the 2001 recession, when Republicans controlled most of Washington. Alas, the economy kept shedding jobs into the summer of 2003, almost two years after the recession ended. That’s quite a stretch even if you factor in post-9/11 uncertainty, particularly for such a shallow recession. (By comparison, we may well have had job growth in November or December, only a few months after a much deeper recession.) The point isn’t that Clinton was “good” for investment or that Georg W. Bush was "bad" for jobs, though both may be true. It’s that any theory of political uncertainty would have to account for these data points, and Becker, Davis, and Murphy don’t even try.

In fact, even they concede that economic, rather than political, circumstances are a more important factor in the lackluster recovery. Citing a recent National Federation of Independent Business survey, they note that “[t]he weak economy is far and away the most prevalent reason given for why the next few months is ‘not a good time’ to expand.” But, they hopefully add, “‘political climate’ is the next most frequently cited reason.” You have to read the survey to appreciate just how meaningless this point is. Out of 75 small-business owners who pooh-poohed expansion, a mere eight blamed the “political climate” while 54 blamed “economic conditions.” Please remind me how this is evidence for their thesis.

Becker, Davis, and Murphy are political conservatives, and they badly want you to believe government intervention is counterproductive. But, empirical evidence aside, even their logic is dubious. They argue that health care “reform” (scare quotes theirs) is a job killer because businesses worry that new insurance mandates will raise labor costs. But couldn’t the logic run the other way? With health care costs rising five to ten percent each year, wouldn’t many businesses benefit from a reform that restrained medical inflation? And even if these businesses wouldn’t (or didn’t think they would), they must realize that such rapidly rising costs are unsustainable over the long-term. Shouldn’t business, so averse to uncertainty, prefer that the inevitable reform come sooner rather than later? (Though I’d certainly expect businesspeople, generally a conservative lot, to grumble while it was happening.)

Ditto for cap-and-trade, which the Chicago schoolers insist will “surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.” But there is a vast scientific consensus that greenhouse gases are warming the earth to unsustainable levels. Clearly the political system is going to respond to this looming catastrophe sooner or later. Wouldn’t the prospective builder of a power plant, an investment whose lifetime spans several years if not decades, want to know as soon as possible whether the plant will be profitable under the eventual gas-reducing regime? The alternative to some short-term uncertainty is several more years of political limbo before the inevitable reform passes anyway.

Even taxes, that great conservative hobbyhorse, are hardly so clear cut. Becker et al complain that Obama’s plan to “increase greatly marginal tax rates for higher incomes” is stalling the recovery by creating uncertainty and risk. Set aside the dodgy economic logic employed here (higher-income people consume only a small fraction of their income, so raising taxes shouldn’t affect their consumption much). Wouldn’t the uncertainty argument apply to a prospective tax cut in the same way it applies to a prospective hike? If a president came into office promising a tax cut, rich people—at least the subset who base their spending decisions on income taxes—might sit on their wallets until it actually passed, thereby depressing consumption. Alas, I’m not holding my breath for Becker et al to condemn tax cuts.

Which brings us to the great irony of arguments about political uncertainty. Conservatives who make them invariably accuse liberals of exploiting the recession to enact a wish-list that has little to do with the economy's problems. “They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession,” sniff Becker, Davis, and Murphy. But these conservatives are exploiting the recession in a similar way. They start from the ideological assumption that a bigger role for government is bad and use the convenient existence of the recession to drive the point home, however unrelated the two may be. As the saying goes, a crisis is a terrible thing to waste.

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posted in: economy, chicago, washington, the new york times, wall street journal, america, united states, bill clinton, carmen reinhart, fred lampropoulos, gary becker, kenneth rogoff, kevin murphy, steven davis, congress, federal reserve system, pentagon, university of chicago, white house, utah

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