Quote of the Day: Buy and Hold Edition
From the delong Twitterstream: September 30, 2011

The "Uncertainty" Argument

Thinking again about what Robert Barro said during our debate on Saturday September 24, his argument seemed to me at least to have the following structure:

  • The enormous widening of interest rate spreads tells us that a major factor holding business back from entrepreneurship and expansion right now is uncertainty.

  • The uncertainty that matters is uncertainty about future government policy.

  • Resolve the uncertainty about what taxes and regulatory systems are going to be in th future, and the economy will recover very quickly.

I pointed out that the big increases in uncertainty about taxes and regulation in the 2000s came in two waves:

  • One wave between 2001 and 2003 when the Bush administration, via its tax cuts and Medicare D, destabilized the financing of the American social insurance system.

  • A second wave in 2009, when the Republican Party went into opposition on health care reform and rejected its own ideas--the Heritage Foundation-originated Romneycare plan that became the ACA.

Both of these took large and important areas of government policy and shifted them from being settled consensus to being completely up for grabs.

Yet business was distressed not by the increase in uncertainty about taxes that came in 2001-3 or about regulation that came in late 2009 but instead by the uncertainty about financing and demand that took place in late 2008.

Barro came very, very close to saying that if only we would roll back taxes, spending, and regulation to the form they were in at the end of the Clinton administration then the economy would recover to full employment very quickly. That seems to me to be simply wrong.

And that discussion of ours reminded me of Mark Thoma's report on Gary Burtless's take on the "uncertainty" argument:

A couple of hours after talking to an ABC correspondent about the woeful job numbers and what might be done to improve them, I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business "uncertainty" about future tax hikes and regulatory burdens.  I asked Bloomberg's host whether he was aware that corporate profits relative to national income had just hit a 60-year peak?  He had heard rumors to that effect.  Was he aware that taxes on corporate earnings were at a 60-year low?  The Heritage guy had heard that might be the case.

Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now?  If managers thought taxes or regulatory costs might go up in the future, wouldn't it make sense to take advantage of today's low taxes and lower burdens to invest and hire today?  According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018.  Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?

The "tax uncertainty" and "regulatory uncertainty" arguments would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all.  As we used to say down on the farm, you should "make hay while the sun shines." In other words, if you think it's going to rain later in the week, it strengthens the case for cutting and baling right now.

The odd thing is, when businesses are asked why they're not expanding, "high taxes" and "heavy regulatory burdens" and "tax uncertainty" don't feature as prominent answers.  They mostly say they don't see good prospects for extra sales.  But right-wing economists have their talking points, even if they make little sense, and they're sticking with 'em.  Another of their favorites is "... executives tell me they can't find good candidates for the job openings they have."  Don't get me started on that one.