Don\u2019t get me wrong.\u00a0 Some of my best friends are economists.\u00a0 But their response to any and all problems is, \u201cfirst, let\u2019s create a time series, which we\u2019ll regress against other time series until we find a relationship worth writing about.\u201d This process has its place, but it can divert attention from obvious realities not lending themselves to quantification.<\/p>\n
Consider \u201cuncertainty,\u201d which the media blames for high unemployment because it dissuades companies from hiring even though they have tons of cash.\u00a0 To explore the relationship between \u201cuncertainty\u201d and economic growth, Stanford economists created an Index of Economic Uncertainty based on A) news articles mentioning certain key words such as\u2014you guessed it\u2014uncertainty, \u00a0B) tax code expiration data, and \u00a0C) the dispersion of economic forecasts for GDP growth, CPI, and government spending.\u00a0 They find that:<\/p>\n
The index spikes near consequential presidential elections and after major events such as the Gulf wars and the 9\/11 attack.\u00a0 Index values are very high in recent years with clear jumps around the Lehman bankruptcy and TARP legislation, the 2010 midterm elections, the Eurozone crisis and the U.S. debt-ceiling dispute.*<\/p>\n
Paul Krugman, Jan Hatzius and others point out that the Index is highest when the economy is weak, which raises the usual \u201cchicken and egg\u201d problem that bedevils economists \u2013 does economic uncertainty create economic weakness, or vice versa?\u00a0\u00a0 Krugman wants to have it both ways.\u00a0 With his usual analytical dispassion he labels uncertainty analysis a \u201cscam\u201d perpetrated by \u201cright wing economists\u201d who want to blame the weak economic recovery on Obama\u2019s policies.\u00a0 But he embraces this \u201cscam\u201d when it fits his politics, agreeing that GDP growth suffered in 2011 from uncertainty caused by Congressional Republicans\u2019 refusal to automatically raise the debt ceiling.<\/p>\n
Economic Uncertainty vs. Policy Certainty<\/strong><\/p>\n This uncertainty debate is miscast at several levels. Critical distinctions need to be made:<\/p>\n In the first place, the very concept of \u201ceconomic uncertainty\u201d is dubious on its face because the future is always uncertain.\u00a0 In fact, certainty creates its own uncertainty.\u00a0 When things go well in the economy for an extended period, people tend to extrapolate the good times, which is called \u201ccomplacency.\u201d\u00a0 Complacency tends to be self-limiting because it leads to over-investment, excess capacity and recessions (like the bursting of the 1990s tech bubble).<\/p>\n Secondly, it is true that sometimes genuine<\/strong> \u201cexogenous events\u201d unexpectedly ratchet up \u201cuncertainty.\u201d\u00a0 Good examples are the 9\/11 attacks and Saddam Hussein\u2019s invasion of Kuwait in 1990; these events surprised everyone on Wall Street.\u00a0 (The 2008 TARP vote and even the Eurozone crisis are NOT<\/strong> good examples because they are derivatives of the financial crisis.)<\/p>\n Finally, the \u201cuncertainty\u201d rubric that is applied to regulations emanating from Washington is obviously inappropriate.\u00a0 Far from being \u201cuncertain\u201d these policies are in many cases already the law of the land<\/strong>, including healthcare reform, financial reform, and the EPA jihad against fossil fuels. There may be some \u201cuncertainty\u201d about how bureaucrats will interpret and apply the thousands of pages of legislation\u2014for example, how the Volcker Rule will affect bond trading.\u00a0 But, relatively speaking, this is Policy Certainty<\/strong> not<\/span> Economic Uncertainty<\/strong>.\u00a0 The policies hurt growth and employment not because they increase uncertainty but because they raise costs, limit revenues, increase risks, and hurt profits.<\/p>\n Economists\u2019 Quantitative Blinders<\/strong><\/p>\n Economists are ill-equipped to analyze Policy Certainty because they are not lawyers or accountants who understand the excruciating complexities of regulation.\u00a0 Thousands of pages of legalese cannot be distilled into a statistic or time series.\u00a0 In econoland, if it can\u2019t be quantified, it doesn\u2019t exist.<\/p>\n So economists have largely ignored the warnings of leading businessmen (who, whatever one thinks of them, actually make spending and hiring decisions) about the damage to economic growth wrought by Obama\u2019s regulatory avalanche. \u00a0Wall Street economists have little to say about regulation.\u00a0 Krugman dismisses it as the \u201cyou\u2019re looking at me funny\u201d argument.\u00a0 You can read dozens and dozens of articles in The Financial Times<\/strong> diagnosing anemic growth without seeing mention of regulation \u2013 it\u2019s all about deleveraging.<\/p>\n In a lengthy, portentous front page New York Times<\/strong> article on the supposedly mysterious slump in middle class incomes, David Leonhardt fingered all the usual suspects \u2013 globalization, automation, digitization, weak labor unions, low minimum wage, rising healthcare costs, a faulty education system \u2013 but never mentioned rising regulation.\u00a0 Umm David, don\u2019t you think the middle class outside the beltway might be doing better if regulation were not raising energy costs, killing high paying jobs on energy projects, penalizing small businesses that employ over fifty workers, and destroying thousands of good paying middle class jobs in the financial sector?\u00a0 A compelling case in point is the state of Texas, whose business-friendly regulatory environment has led to much stronger job creation than in other large states \u2013 a point Dallas Fed President Richard Fisher makes in all his speeches.<\/p>\n The Great Suppression, Part Deux<\/strong><\/p>\n Back on July 9 we deconstructed the \u201cGreat Suppression\u201d of Keynesian \u201cAnimal Spirits\u201d by Washington\u2019s regulatory onslaught.\u00a0 Suffice it to say that businesses are loath to hire and invest when they have to hack their way through an ever-expanding thicket of complex regulations.\u00a0 And Obama\u2019s disdain for capitalists who supposedly don\u2019t \u201cpay their fair share\u201d of taxes is not exactly a confidence builder.<\/p>\n And no regulatory relief is in sight.\u00a0 In a recent Barrons<\/strong> article Jim McTague detailed the next wave of rules and regs to hit the private sector, including ozone regulation costing $90 billion, regulation of \u201cparticulate matter\u201d (aka soot), expansion of the Clean Water Act to cover millions of acres of land draining into rivers and lakes, etc. \u201cThe EPA,\u201d McTague writes, \u201ccould end up regulating a huge swath of the economy, and the impact could be enormous.\u201d<\/p>\n \u00a0A Romney Rally?<\/strong><\/p>\n Most of this regulation could be reversed without ill consequences, and a President Romney will try to do that. The payoff would be big and quick. Business confidence would improve, hiring would pick up, the fracking boom would proceed, commodity prices would be restrained and middle class incomes would start rising again.\u00a0 All this could happen fairly quickly because the private economy is remarkably healthy.\u00a0 Corporations are well managed, well-capitalized, and highly efficient; the banking system is sound; the housing market has started to rebound; households have successfully deleveraged.\u00a0 A Romney victory would have as big an impact as the Reagan victory in 1980, but the payoff would be faster because the private sector is stronger and we are not in the middle of a recession.\u00a0 So a Romney victory would be very bullish for stocks, even if Barnanke departs and monetary policy becomes less accommodative.<\/p>\n *Scott R. Baker, Nicholas Bloom, and Steven J. Davis,\u00a0 Measuring Economic Policy Uncertainty,\u00a0\u00a0 June 4, 2012<\/p>\n","protected":false},"excerpt":{"rendered":" Don\u2019t get me wrong.\u00a0 Some of my best friends are economists.\u00a0 But their response to any and all problems is, \u201cfirst, let\u2019s create a time series, which we\u2019ll regress against other time series until we find a relationship worth writing … Continue reading