Job creation has finally returned as a front and center priority in Washington. The prescription for spurring job creation, however, depends on the diagnosis of the underlying problem. Policymakers are currently invoking two very different explanations for the jobs crisis. The more persuasive explanation is that the demand for goods and services is depressed because of the collapse of the housing and stock market bubbles—the financial crisis—that has led to both a deleveraging (paying off debts) of households and a cratering of the construction sector. The initial shock of the bubble’s burst then cascaded into non-construction business investment that dried up as customers disappeared. Finally, all of this led to state and local governments cutting back services and jobs as tax revenues plunged.
There is a competing story, widely told by Republican politicians and business trade associations, which claims that business investment and hiring is being held back by uncertainty over future regulations and taxation. As Maine Senator Susan Collins said in introducing her bill to put a moratorium on all new regulations: “Businesses, our nation’s job creators and the engine of any lasting economic growth, have been saying for some time that the lack of jobs is largely due to a climate of uncertainty, most notably the uncertainty and cost created by new federal regulations” (Kasperowicz 2011). Her view has been repeated by others, including House Majority Leader Eric Cantor (2011) and the Chamber of Commerce (Donohue 2011).
An examination of current economic trends, and especially what employers are doing in terms of hiring and investment, debunks this story about regulatory uncertainty as the cause of our dismal job growth. An examination of what employers and their economists are saying again and again in private surveys (cited later in this paper) makes it clear that what businesses actually identify as their primary set of challenges does not fit this story either. In other words, what the heavily politicized trade associations in Washington are saying does not correspond to the real challenges facing both large and small businesses, even as they themselves perceive them.
What is the flawed reasoning behind the “uncertainty” argument?
What is the logic behind the “uncertainty” argument for our poor job growth? Based on numerous media reports, we know that firms have substantial cash on hand to invest (Monga, Mattiloi, and Chasan 2011), but that they are not using it for new hires or investments. We also know that firms are making a third more profit than they did before the recession (Eisenbrey et al. 2011), so they are not being held back by current profitability or the ability to finance investments. There is no mention of any demand-side problems in the rhetoric coming from House leaders, so presumably they believe that businesses have ample customers.
In conclusion, when looking at both what employers are doing in terms of hiring and investing and what they (and their economists) are saying in private surveys, it’s nearly impossible to make the argument that uncertainty about regulations is holding back the economy. A Bloomberg News (2011) editorial makes the point even more broadly:
“There is no doubt that certainty is generally preferable to uncertainty, in the economy as in most aspects of life….But there is no evidence that uncertainty has increased during the Obama presidency, or that, if it has, the president’s policies are responsible for it…The charge of ‘creating uncertainty’ is a way to blame Obama for the U.S.’s economic trials without having to explain the connection.”Read the whole story by Larry Miscel at the Economic Policy Institute
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