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Jan Eberly: Is Regulatory Uncertainty a Major Impediment to Job Growth? NO!

Is Regulatory Uncertainty a Major Impediment to Job Growth

The Assistant Secretary of the Treasury for Economic Policy:

Is Regulatory Uncertainty a Major Impediment to Job Growth?: If regulation was a significant drag on business today, we would expect to see profits constrained after recent regulatory reforms were passed into law.  However, corporate profits as a share of gross domestic income have about recovered their pre-recession peak, and earnings per share in industries most affected by recent regulatory changes, such as energy and health care, have among the highest earnings per share of those in the S&P 500.  This growth is inconsistent with a corporate sector held back by regulation…. If regulatory uncertainty was the primary problem facing businesses, firms would prefer to use their existing capacity and current workers as much as possible, while avoiding building additional capacity until they are more certain about the contours of future regulation…. [T]hey would increase the hours of the workers they already employ rather than hiring additional workers.  We have seen no evidence of this…. Low capacity utilization is inconsistent with concerns about future regulatory risk, but aligns with weak demand holding back current production….

Since the end of the first quarter of 2009, real investment in equipment and software has grown by 26 percent – about five times as fast as the economy as a whole….

Is Regulatory Uncertainty a Major Impediment to Job Growth 1

If regulatory uncertainty were having a significant impact on business performance, we would expect this to be reflected in capital markets.  However, financial indicators do not provide any evidence in favor of this hypothesis…. [C]orporate bond yields are low across a range of industries, suggesting that firms in industries facing greater regulatory risk, such as insurance and energy, are not being priced out of the market….

One commonly cited measure of uncertainty is the Chicago Board Options Exchange Market Volatility Index (known as the VIX), which measures the implied volatility of S&P 500 index options.  For most of the past year or so, the VIX has stood only a bit higher than in the pre-crisis period…. [T]he sharp increase in the VIX in August and previous sharp increases in late 2008 correspond to virtually identical movements in the VDAX, a similar measure calculated for the German stock market.  The correlation between these two indicators suggests that uncertainty in both countries primarily reflects global financial and economic conditions, rather than conditions specific to the United States, such as regulatory changes….

In an August survey of economists by the National Association for Business Economics, 80 percent of respondents described the current regulatory environment as “good” for American businesses and the overall economy. As noted above, in a recent Wall Street Journal survey of economists, 65 percent of respondents concluded that a lack of demand, not government policy, was the main impediment to increased hiring…