On Policy Uncertainty…

Paul Krugman says that the notion that the weak economy is due to policy uncertainty has been thoroughly debunked. The Stanford/Chicago uncertainty index has considerably fallen:

chart3

Without any considerable boost to job growth:

PayrollJobs7.13

While policy uncertainty is concerned with policy in general, and not executive policy in particular, Krugman’s analysis is that “policy uncertainty” is a thinly-veiled attempt to blame Obama for the sluggishness of the recovery:

One of the remarkable things about the ongoing economic crisis is the endless search for explanations of something that’s actually quite simple — the sluggish pace of recovery. You have a large overhang of private debt; you have a still-depressed housing sector; and you have contractionary fiscal policy. Add to this the well-established fact that recovery tends to be slow after recessions caused not by tight money but by private-sector overreach, and there’s just no mystery that needs explaining.

Yet we’ve seen an endless series of analyses declaring that there is indeed a deep mystery, and it must be Obama’s Fault. Probably the most influential of these analyses was the claim that Obama was creating “uncertainty”, and this was holding everything back.

This crude notion of policy uncertainty is often attached to the notion of the Confidence Fairy; the idea that by running large deficits, government is crowding out private investment due to fears of future tax increases. The corollary of the Confidence Fairy view is that the only way to bring back private investment is to have large-scale austerity, to solidify expectations of lower future taxes. This view has been the basis for David Cameron’s economic policy in the UK, which can only be soberly judged as a large-scale failure.

Krugman is right to trash the Confidence Fairy — austerity at this point in the business cycle is a catastrophic error, because it sucks money out of the real economy. And he’s also right to trash those who view the sluggishness of the recovery as solely Obama’s fault. But he’s wrong, I think, to throw policy uncertainty out of the window entirely as a proximate cause of some of the problem’s we’re now facing.

Broadly, policy uncertainty goes both ways. That is simply because not all entrepreneurs in the private sector are looking for or worrying about tax cuts. People are heterogeneous. While there are some entrepreneurs worried about the future trajectory of taxes, many other entrepreneurs may be hoping for fiscal stimulus either because they would expect to receive orders from the government (for example, construction firms, defence contractors, universities, energy companies) or because they would be hoping that with stimulus, more people would have money in their pockets and they would be spending it.

While this, of course, cannot explain the crisis itself, nor the long and slow deleveraging since, having a deadlocked Congress erring on the side of austerity could be a major headache for many private enterprises. The fact that the more severe austerity experienced in Europe and Britain has actually led to bigger budget deficits there could result in even deeper and greater uncertainty for businesses. Put more simply, many businessmen could be reading Paul Krugman and others like him, agreeing with their interpretations, and worrying about the confused and deadlocked approach that the Federal government has taken to the post-2007 economy, and the dangers of austerity. This could contribute to the uptick in policy uncertainty measured by the Stanford/Chicago Index experienced since 2007 just as much as Wall Street Journal-reading Republicans worrying about the Confidence Fairy and taxes.

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14 thoughts on “On Policy Uncertainty…

  1. The S/C uncertainty index has fallen from 2012 but it is still nearly twice as high as the average in the 2005-2007 period. So in absolute terms, the current uncertainty index is high. I do not think the current reading absolves Obama policies as Krugman claims.

    I still think it was a major blunder of Obama not to focus exclusively on the economy in January 2009. If he did and was successful, I think he would still have control of both houses of Congress and would be writing his own ticket on legislation at this time.

  2. Isn’t this another example of economic analysis where we might be arguing that cart is pulling the horse? In other words, what drives what; does policy un/certainty drive economic performance, or vice versa? I am sure there is some overlap and not a clear delineation,but why did the economy grow post 9/11 and recession despite there being upticks in policy uncertainty?

    http://research.stlouisfed.org/fred2/graph/?g=lmT

    There is also the curious case of the early 1990s where we see RGDP growth moved cyclically for a handful of years, yet policy uncertainty declined (to say nothing about the Ds taking the executive in 1992, and the Rs taking the House in 1994, which obviously altered policy in DC). Likewise, economic growth declined leading up to the 2007/8 recession, yet so did PU.

    I just don’t buy that policy uncertainty is a driver of economic performance. I am sure there is some influence (both in terms of supply and demand side policies, though the latter has a greater impact on balance), but it is way overstated, much like consumer confidence/sentiment indexes. It’s dictated more by economic growth/performance than vice versa.

  3. When an economic system is corrupted to the degree this one is, it’s not a matter of confidence, instead, it’s about having access to money/markets; that is, either government contracts and/or the Fed’s printing presses [debt creation].

    If you have neither, then you are SOL.

  4. The problem is this:
    1) Economists have relied upon DSGE and hence have not recognized that accounting data proves that there is a fundamental, elemental scarcity of total individual incomes in ratio to total prices in the very act of production and hence the economy is constantly in a fundamental, elemental disequilibrium.

    2) A further blindness to this because of the irrelevance of unexamined orthodoxy about the velocity of money.

    3) The private financial system’s monopoly on credit creation (along with their dominated partners the governments of the world) and their equally monopolistic and restrictive paradigms of loan ONLY and loan ONLY FOR PRODUCTION lacks any countervailing power or purpose for finance.

    4) The value of technological innovation is sabotaged by 1, 2 and 3 above which would otherwise result in lowering prices, increased productivity and eventually probably even a conservation of resources.

    The solution to the above is adapting the money and economic system’s policies to a new primary purpose of serving the physical and psychological needs of the individual based on the relative wealth of the individual nation. Profit would fit nicely within this new primary purpose, but would be consciously a secondary purpose. The keys to making the above work are the policy of a citizen’s dividend which addresses the elemental scarcity of individual incomes and a general discount on prices to the individual which addresses the elemental disequilibrium between their incomes and prices.
    This also resolves the power imbalances of private finance and progressive benefits sabotaged as stated in 3 and 4 above.

    • BFWR, you can dress it up however you like, but the bottom-line [in economics] is, when things don’t work, it’s because people are stealing.

      • The fact that certain people will game, cheat or steal is irrelevant. Of course that’s going to happen. However, if the system’s inherent instabilities are dealt with in a manner that sets the individual economically free there will be much less pressure to commit the above unethical acts. We must not let the perfect be the enemy of the Good.

        • PERFECT??

          Even in it’s best form, capitalism [by it’s very design] is stealing. Do you really believe that your money can work for you, and all the other innumerable fairy tales handled down by those who believe that others should work in their stead?

          Taking from others as the basis for our socioeconomic system leads to massive chaos. Just take a look out the nearest window and witness the mayhem for yourself.

  5. Finally an honest Journalist. Watch this new political discourse site

    http://nofibs.com.au/2013/08/15/pup-candidate-buddy-rojek-says-his-offer-to-give-campaign-volunteers-a-party-night-with-hot-models-seemed-a-good-strategy-for-victorias-surf-coast/

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