Regulatory uncertainty not to blame for our jobs problem

Republican politicians and business groups keep telling us that business investment and hiring is being held back by uncertainty over future regulations and taxation. For instance, 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.”

Her view has been repeated by others – like House Majority Leader Eric Cantor  and the Chamber of Commerce. This story is also being told by some of the dissenters on the Federal Reserve Board’s Federal Open Market Committee, as Mike Konczal recently reported. Nobel Laureate Robert Lucas just made this argument in a Wall Street Journal interview, but he at least had the decency to note, “I have plenty of suspicions but little evidence.”

In a recently released paper, I present evidence that if you examine what employers are actually doing in terms of hiring and investment, this story about regulatory (or tax) uncertainty driving current job trends does not hold up. Private sector job growth has been weak in each of the last three recoveries and the current recovery’s private job growth matches up with the early 1990s recovery and is far better than that of the 2001 recovery. Investment in equipment and software has been stronger in this recovery than in the prior two recoveries. Last, weekly work hours are still substantially below those prior to the recession: uncertainty about future regulations cannot explain why employers do not increase work hours of currently employed workers to meet current demand for goods and services. A reasonable explanation for this work hours puzzle is that those sales opportunities do not actually exist, i.e., demand is lacking.

READ MORE: Regulatory uncertainty: A phony explanation for our jobs problem

If you also examine what employers and their economists are saying in private surveys, you find that what businesses actually identify as their challenges does not fit this story either. In other words, what the heavily politicized trade associations in Washington (like the Chamber) are saying does not correspond to the real challenges facing both large and small businesses.

The National Federation of Independent Business (NFIB), which describes itself as “the leading small business association representing small and independent businesses,” does a regular survey of small businesses. One question that has been asked since 1973 is, “What is the single most important problem your business faces?” The answer choices are inflation, taxes, government regulation, poor sales, quality of labor, interest costs, health insurance costs, the cost of labor, and other matters. Interestingly, the single largest response is “poor sales,” the choice of 30 percent of respondents since President Obama was sworn in (averaging the 10 quarters between early 2009 and Spring 2011). That seems to accord with slack demand as the key concern of small businesses.

However, I was on a radio panel discussion with an economist from the Heritage Foundation who acknowledged this fact, but then highlighted that taxes and regulation were the next highest concerns identified in the NFIB surveys—evidence, he claimed, that tax and regulatory uncertainty were also preeminent. And, he correctly cited the data. In the Obama years, some 13.9 percent of small businesses identified government regulation and another 20.8 percent identified taxes as their primary problem, the leading answers after “poor sales.” I was fortunate enough to obtain the entire historical series (back to the fourth quarter of 1973) on this question from the NFIB so I could put this in historical perspective, constructing the averages for each presidential term as shown in the figure below:

Click figure to enlarge

It turns out that small businesses have always complained about regulation and taxes and not especially so under Obama. For instance, the share concerned about regulation under Obama (13.9 percent) is not substantially higher than under George W. Bush (9.9 percent and 11.0 percent) or Ronald Reagan’s second term (12.8 percent). There is also less concern about regulation under Obama than under Bill Clinton or George H.W. Bush. Recall also that there was rapid employment growth in the second Clinton term, so high concerns about regulation (which rose steadily from Reagan’s first term to their highest level in Clinton’s first term) are not necessarily associated with poor employment growth.

There’s a similar story on taxes. Sure, there are 20.8 percent of respondents on average in the Obama years who see taxes as the primary problem facing their business. Yet, that intensity of concern about taxes is not all that different than under George W. Bush and is less than the presidential terms from the first Reagan term through Clinton’s second term. It is hard to find a recent spike in concern about regulations or taxes that supports a story of escalating uncertainty or fears of regulations holding back the economy.

  • Bob

    It is clear that the economic pie, worker wage purchasing power, has been shrinking for 4 decades. The reasons are many but at the top of the list are outsourcing, automation and dependence on imported oil. The solutions do not appear to be acceptable considerations for either political party —

    Phase in of an import tariff of at least 30% on everything except raw materials, food and clothing over a period of five years.

    Conversion to a four day, nine hours a day work week with the same weekly wages (I.e. Overtime for anything over 36 hours).

    Drastic reductions in our military expenditures for securing Middle Eastern oil with investment of these savings in conversion to natural gas and electric transportation as well as renewable energy.

    Unless we take steps like this, we will continue to see the US and global economic pie shrinking with increased polarization and demagoguery.

  • Stuartboynton

    If only Bob were dictator…!

  • John

    There is even more scientific evidence against the argument that uncertainty about policy is holding back the economcy. There are
    two recent working papers explicitly analyzing the effect of policy risk on the
    business cycle. Both provide scientific evidence against the popular claim that
    political uncertainty matters a great deal.                                         

    In a recent paper (
    Born and Pfeifer find that a two standard deviation policy risk shock decreases
    output by a mere 0.02%. While they find considerable evidence of policy risk in
    the data, they show that the “pure uncertainty”-effect of policy risk
    is unlikely to play a major role in business cycle fluctuations.


    ( study the same issue. While they
    give their results a somewhat different spin (the narrative of uncertainty
    being the main culprit just sounds too nice), in their baseline case fiscal
    uncertainty is responsible for a peak output drop of 0.03%.


    Hence, both studies indicate
    that the case for political uncertainty as a major drag on the economy is most
    probably overstated. Politicians in D.C. should focus on the real

  • Laurie Johnson

    A critical point to make about this graph is that concern about regulation went down precipitously under the Clinton years, which is precisely after the sweeping 1990 Clean Air Act Amendments were passed. This should be hammered over and over again, given the current attacks on the Clean Air Act.

    Laurie Johnson, Chief Economist, Climate and Air Program, Natural Resources Defense Council

  • bones327

    the leftist bias of this column is staggering. Why?

    “It turns out that small businesses have always complained about regulation and taxes and not especially so under Obama. For instance, the share concerned about regulation under Obama (13.9 percent) is not substantially higher than under George W. Bush (9.9 percent ”

    Concern under obama 13.9%
    Concern under Bush   (9.9%)
    Change = 4%

    4/9.9 = 40.404% increase in concern about impact of regulation and uncertainty.

    Only a leftist could say a 40+% rise in a and area of concern to businesses is “not substantially higher.”

  • Rmcnall

    One more set of facts to support my observation that Republicans have become the party of half truths if not outright falsehoods. There is very little that they do or say, including the names of many of their organizations, that shouldn’t be followed by NOT!

  • Jwebster1

    Brilliant but as we all know the FACTS get in the way of the Ignorance and Fear mongering arguments by those in the GOP who have been taken over by the Tea Party. We no longer have the word compromise in congresss or rational dialogue or debate. Clearly the only conclusion is to vote all of these antagonists out next year and have a Congress willing to work together.