Is policy uncertainty the problem?

Pete Boettke says "policy is the problem."  Ezra says he can't find evidence that policy is the problem.

I hold the intermediate view that policy uncertainty is a problem but not the problem.  On one hand, policy uncertainty probably has been greatest for the health care sector, yet job growth in that sector has been relatively robust.  Furthermore, Obamacare may bring uncertainty, but part of the uncertainty is about whether employers can get away with dumping their workers onto the subsidized exchanges.  Arguably that should help hiring rather than hurt it.

I expect electoral gridlock by November yet no one seems to be welcoming that "certainty" very much.

Perhaps most importantly, deleveraging recessions usually take a long time to recover from in any case and there's not a lot of good cheer along the way.

I would be more convinced by the uncertainty view if it were combined into a larger, coherent story, consistent with reported corporate profits being fairly high.

Do the implicit volatilities embedded in option prices show a lot of expected uncertainty?  Maybe, but again I'm waiting to see the evidence.  If so, this one should be staring us right in the face.

On the other side of the ledger, the tax code remains highly uncertain, to our detriment, and monetary policy is some mix of uncertain and baffling (though see the above point on implicit volatilities). 

There is also behavioral economics.  An image or speech or proposed law can crush a mood, whether or not that is rational.  I can't cite a lot of systematic evidence for this having happened, but I know from talking to people how many of them think, rightly or wrongly, that Obama is very very bad for the American economy.  I believe that is a factor in our slow recovery. 

Be careful to separate your positive and normative views here.  Maybe the audience is "at fault," rather than the messenger, but still some people are very upset.  Every time I read a left-wing writer dismantling "right-wing media" I think they are actually providing another data point for the policy uncertainty hypothesis, although that is hardly their intent.  In many circles there is a perceived problem with our country, regardless how much that is based on fact or not.  If food consumers can be irrational and moody, political consumers (who are also investors) can be the same.  Still, I don't know how significant this factor is.

Temporary hiring is quite high, while permanent hiring is not.  However that need not show that the decisive uncertainty comes from politics.  Furthermore it instead could mean that the fixed cost of hiring labor full-time is high but not uncertain.

A lot of the current uncertainty is about a higher estimate of overall systemic risk, rather than from politics per se.  Such risk worries may be a blend of private and public sector factors, such as worries about Europe or China.  Economic and political uncertainty are not always separable categories.

Overall I don't see a lot of clear evidence on this question but I think policy uncertainty is one factor, albeit an exaggerated factor in many circles.


Comments for this post are closed