Has regulatory uncertainty slowed the economic recovery?

by on March 31, 2010 at 1:47 pm in Economics | Permalink

Monday night I gave a talk at George Mason University on the jobless recovery; in the comments Pete Boettke summarizes some parts of the talk.  One point I made is that the slow aspects of the recovery do not, contrary to some accounts, seem to stem from uncertainty about the plans of the Obama administration.  I see at least two reasons for this doubting this account:

1. Output has recovered much more rapidly than the labor market; last quarter gdp growth exceeded five percent yet employment is essentially flat.  The labor market is one of the least regulated sectors of the American economy, so it would be odd if regulation were causing the slow aspects of the bounceback.  Many of the extant government-blaming hypotheses predict slow output growth, not rapid output growth and slow labor market participation.

2. Arguably health care and finance have been subject to the most regulatory uncertainty.  Yet the health care sector has held up OK and banks have made a very strong comeback in terms of profits.

I believe the causes of the jobless nature of the recovery are unique to the labor market.  I hope to blog more about these reasons and to communicate further points from my talk.

1 DavidL March 31, 2010 at 1:54 pm

Casey Mulligan of the U. of Chicago has pointed to a great number of employment-reducing policy changes implemented during the crisis, particularly minimum wage hikes, mortgage modifications and unemployment-insurance extensions. These may — at least in part — account for employment lagging behind output. See, for example, this post: http://caseymulligan.blogspot.com/2010/03/employment-reducing-policy-list-updated.html

2 G March 31, 2010 at 2:45 pm

Maybe employers, if they laid off workers in the past year or so, are finding they can get by with a reduced number of employees, they can achieve the same or similar output with fewer workers (worker efficiency has increased). Or maybe the scope of their business has been reduced, possibly as a result from lower expectations during the recession and post-recession, and they feel no need to hire workers.

3 An Onyx Mousse March 31, 2010 at 3:10 pm

Isn’t this the story about HOW productivity improvements generally occur? During boom times, all firms are growing and hiring. During the down cycle, the inefficient firms go bust (check), and the firms that remain are more efficient, either having made capital improvements or finding other returns to scale, requiring fewer resources per unit of output. Society’s demand is met with fewer workers, freeing up people to join growing sectors. But change is hard, especially for older workers, so the transition can be ugly.

What part of the above story is not consistent with what’s happening right now? Productivity is shooting up as firms find ways to operate with fewer employees, with lots of people looking for work. Of course, a buyer’s labor market, combined with a buyer’s real estate market, with low interest rates, is a great environment to start a company, and hopefully as credit loosens up, we will see more start-ups absorbing some of the unemployment. But they may not want to grow to more than 50 employees or they will have to offer health care coverage!

4 Thomas March 31, 2010 at 3:28 pm

1. Perhaps you’re putting too much emphasis on one quarter’s GDP results. We haven’t seen strong annualized GDP growth, and current projectins suggest we aren’t going to see strong GDP growth for awhile.

2. Uncertainty related to health care wasn’t about health care delivery (fortunately or unfortunately) but about the division of health care costs among the government, individuals and employers.

I don’t think that the uncertainty story is a significant part of the story; instead, I think that certainty about policy choices is a bigger driver.

5 Matt C. March 31, 2010 at 3:53 pm

I just want to point out that the banking and financial sector have posted gains because they have been able to borrow at extremely low rates from the Fed. They then take that money turn it around lend it back to the Treasury at a premium. They didn’t lend it to businesses, they lent it to the government. Since they are able to post high profits does not mean there is no uncertainty.

6 daveave March 31, 2010 at 4:16 pm

A government job is financed by a non-government job – this is not ideology this is a simple economic fact.

The only jobs being saved or created are government jobs

This is unsustainable. It isnt the governments role to create jobs… if private job creation was a serious goal of this “stimulus” they would remove the obstacles (financial hurdles) that are in place. Instead they are giving incentive to the banks to horde money.

7 Andrew March 31, 2010 at 6:07 pm

Bill does a fine job explaining the recalculation/Austrian theory. Apparently the government is all over it and I’m mistaken in thinking that the regime economists are all about labor. I missed the memo where the regime suddenly acquiesced to our way of thinking, but I welcome the news from Bill.

8 DanC March 31, 2010 at 6:48 pm


If George Mason cut spending by 20% how long would it take to see a serious degeneration in the school. What would be first impacted? Employment drops as the school lives off past infrastructure investments. What signals would George Mason need to start increasing investments? Where would they first increase expenditures>

9 spencer March 31, 2010 at 8:26 pm

Maybe you need to look at this data that shows from 1961 to 1974 RGDP growth averaged 4.25% while productivity growth was 2.8%

In the 1975-96 low productivity era RGDP growth averaged 3.0% and productivity growth was 1.5%.

Since 1995 RGDP growth has been 2.9% while productivity growth has been 2.6%

Over these three distinct eras productivity was
68%, 50% and almost 90% of RGDP growth.

Employment and/or hours worked is the difference between the ratio of RGDP and productivity growth.

This strongly implies that we are seeing a strong, long run decline in the amount of employment a given growth rate

Comparing the early era with the recent 15 years implies a long term structural downward shift in employment to RGDP growth.

The chart can be seen here http://1.bp.blogspot.com/_Zh1bveXc8rA/S5V2Hln_HqI/AAAAAAAABDo/GoL4LW40a8k/s1600-h/Clipboard01.jpg

10 JonF March 31, 2010 at 8:54 pm

Most people make well over the minimum wage, so a minimum wage hike should have effect only at the lower margins of the labor market. And blaming unemployment insurance is bizarre– a conflation of cause and effect. If people were simply sitting around being lazy we would see jobs going begging and a far lower ratio of job openings to job seekers than the near 1 to 6 we now have. Moreover all a prospective employer would need do to attract applicants is outbid unemployemnt insurance– which is extremely easy to do as UI pays a sub-poverty stipend in most states.

11 Thomas March 31, 2010 at 9:56 pm

mulp, I think you’re confused about the difference between tax receipts and tax rates, and that misunderstanding flows through the rest of your comment.

Bill, do you think that the sectoral reallocation you believe is necessary for employment recovery is made more likely by increases in marginal tax rates?

12 agm March 31, 2010 at 11:47 pm

I can tell you a good chunk of why #1 is so. After cutting to the bone, which puts the fear of god into the survivors, companies push employees to do more, with the same or fewer resources, under threat of replacement with someone who will get the job done. This is hardly a difficult analysis to understand – in the academic world, it is how many professors in many fields treat their grad students.

13 mgunn April 1, 2010 at 2:42 am

The U.S. has been systematically expanding subsidies for unemployment through (1) extending unemployment benefits (2) Obamacare (3) mortgage forgiveness targeted at unemployed. And the U.S. has been raising taxes, explicitly and implicitly,on employment.

When you subsidize unemployment, you get more of it. If you tax employment, you get less of it. So why is the high unemployment rate surprising?

14 Chris April 1, 2010 at 9:32 am

I’m not sure I see strength in the healthcare sector as a convincing argument. Most of the uncertainty from healthcare reform comes from its affects on the cost of labor – as we have recently seen from the write downs from large companies.
The reform also has some pretty severe costs for small businesses.

This isn’t to say that I’m sold that regime uncertainty is the cause of slow job growth, I just don’t find your evidence convincing.

15 DanC April 1, 2010 at 10:22 am

“Employment almost always lags output in a recovery, and so alost all recoveries are jobless recoveries when they get started”

Yes but why is this one of the longest recessions and why has employment stayed so low for so long? Why are employers uncomfortable to expand?

In other comments, perhaps the banking sector is more liquid and can quickly adjust. Or perhaps the banks were never in as bad a shape as the panic indicated. Or the banks and shadow banks think they have friends in Washington who will never really do anything to hurt them. What do you think Mr Soros, Mr Rubin?

The Bill standard – anything he claims is self evident, anything else must be proven beyond a shadow of a doubt.

Ignore the massive and growing deficits that mean either higher taxes or higher inflation. Or both. I mean why should businesses or individuals care about the future, we are all dead in the long run and we really don’t like our children that much.

Ignore an administration that mocked Palin for comments like drill baby drill, but then reverses itself to advocate for more drilling. Just another flip but who really cares?

Ignore the advocacy for pro-union policies. What employer cares about that?

Ignore energy policy changes, and energy taxes, because what business is subject to energy costs?

I do wonder why Bill things that what happens in Washington has no impact on main street. Of course he says it is so, so we must all agree with him.

Perhaps Bill can answer the George Mason question. George Mason must reduce spending by 20% because of a drop in endowment. They react by cutting spending on infrastructure and some labor. On paper it looks like they have suddenly become more productive. Expenditures per student educated has dropped dramatically. We rejoice that we are so productive during tough times. But how long can we continue on this path?

The Federal government starts to talk about capping the salary of educators, demands that instructors may only teach using outcome based teaching studies, limits expenditures per student, demands that all colleges admit any student regardless of previous education, and forbids capital expenditures without government approval. The long term funding for education is based on George Mason successfully implementing these new regulations. Political support to increase funding for education through higher taxes is in uncertain.

Would George Mason ignore the new government mandates and do administrators just skip across the campus singing que sera sera in Bill world?

16 DanC April 1, 2010 at 10:39 am


Bill does the size, complexity and huge expenses involved have zero impact. Historic change happens every day, Bill says with a shrug.

17 liberty April 1, 2010 at 11:00 am

The survey response can be seen here: http://economicliberty.net/problem.jpg

18 Gabe April 1, 2010 at 12:21 pm


Your simplistic assumption that policies are just shifting to teh “left or the right” with each administration are a source of error. The government is growing with each administration, corruption and capture is growing as each new administration expands the scope of government. The question is, has the parasite grown so strong that it will now kill the host? As Carrol Quigley explained in his book on civilizations. When the institutions of a civilation age they evolve away from protecting the instrument of expansion into become focused on self-expansion…this instrument of expansion decays and then eventually the civilization declines. That is where we are.

The two parties are not that different, to come on here and assume that this is a left-right argument and start throwing stones at your perceived tribal enemy and the propaganda outlet of the puppets on the right is sadly childish.

19 Elrod April 1, 2010 at 1:03 pm

You’re living in a libertarian utopia. I’m living in the world of history dating back to Alexander Hamilton and the first great governmental intervention in the economy. Libertarians have argued that we’ve crossed the point of no return for ages. And yet, the economy adjusts and we move on.

We don’t live in, and never have lived in, a purely laissez-faire capitalist system. And I would argue that such a system would collapse under its own weight.

Yes, the government can and should kill off some business. Methamphetamine manufacturing comes to mind.

20 DanC April 1, 2010 at 2:48 pm


Thank you for the clarification. So using the power of government to reward friends and punish enemies is a good and noble way for governments to act. You are glad that they started putting a bigger and bigger share of the economy under the control of the government. Why? Because government is your very special friend who protects you from – again what? Everything?

I guess I missed that part of the Constitutional debate.

I am curious though, in the ebb and flow of governments, which ones support meth labs?

Actually, thank you. I needed a good laugh today

21 Joshua April 1, 2010 at 3:01 pm

I’m no economist, but I think if I was an employer I would have some uncertainty. Health insurance is a significant portion of the cost of hiring an employee. If I have a lot of employees, that could significantly impact my bottom line if changes are made – see ATT 1 billion dollar writedown & that’s just for retirees!

Also, the administration is talking about significant changes to the cost of energy. If I was afraid my energy costs might double in the next year or two, that would make me hesitant to grow or make any changes that increase my energy usage.

The administration also seems to have flip flopped on a lot of the agenda, war, gitmo, etc. so again, I would have uncertainty as to what they actually ARE going to do.

22 Craig April 1, 2010 at 7:48 pm

The government has ALWAYS had its hand on the till. Blaming governmental uncertainty NOW over other factors is ideological.

No. Though you are correct that both parties meddle too much, it is not ideological to recognize that the current administration’s policies are the most expensive we have ever seen. It is, at the least, counterintuitive to claim that business is not quaking in its figurative boots over Obama’s stated agenda.

23 Jeremy Bell April 3, 2010 at 4:38 pm

Tyler Cowen makes a strong argument concerning about the slow economic recovery in America. Saying the government’s regulations do have an effect on the recovery of job is true. Plus, while there are not any regulations for the labor market, the rapid influx of currency and increase in the uncertainty in the government’s regulations truly will slow the economic recovery. Businesses look in to the future to figure if expansion is ideal. It is obvious for any business owner or economist that if the future is cloudy and not clear, businesses will not likely expand jobs or infrastructure. There is still too much risk for expanding when no one knows what the economy or what the government will do in the incoming months. Additionally, during recessions businesses that are not efficient will fail. This action will allow for change and growth to the economic system
The phase in the business cycle know as recession keeps our economy in healthy. To prevent recessions, would to prevent mismanaged businesses to remain in operation. Eventually keeping these inefficient businesses running would destroy the foundation of our global economy. Just look at the shift in the market for more fuel-efficient cars. There is a demand to phase out inefficient cars off the road to allow our transportation infrastructure to remain operating for everyone. The same occurs in recessions, businesses become more efficient with the workers they employ. By making businesses more efficient, businesses are able to keep the economic infrastructure of our country. Losing businesses altogether is not ideal just like loosing the use of cars altogether is not ideal.
So is the economy recovering slowly? I believe it is not. It is demonstrated by the increase in GPD and leveling of unemployment rates. Rather the economy now has to start allowing for growth for new businesses. For example, if cars remained inefficient, less people would be able to afford operating a car. Instead cars are more efficient, which allow more people to buy and afford operating a car. The national economy is the same way. Businesses are becoming more efficient and losing employees but at the same time it opens up new growth, which is similar to the new market for more efficient cars. As old cars are still being bought, new efficient cars are developing a new market. This market would never have been seen in the 1990s.
So while some people will look for jobs in the same job market, many will look for a new job market because that is were the new growth occurs. For example, some people will want to buy a car with low MPG but many will look at new cars such at Prius and similar cars to meet the new demand. There are new cars for the new demand and there will be new jobs and businesses for the new demand. But like the upward trend to increase fuel efficiency, it takes time to create the new demand. Thus, it will take time to create the new jobs.

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