Clive, don’t change the subject

Clive Crook blogs on my paper, Regulatory uncertainty: A phony explanation for our jobs problem, and finds it “clever and interesting but not all that persuasive.” He reports that the paper finds “Trends in investment (this recovery, weak as it may be, has been “investment-led” by historical standards), in hiring, and in hours worked all suggested that lack of overall demand is the problem,” and does not dispute any of the conclusions. Crook just thinks I should have written a different paper:

“First, the focus on regulatory uncertainty seemed too narrow. What about other kinds of policy-induced uncertainty? Second, its target–the idea that regulatory uncertainty as opposed to weak demand is the cause of slow growth–is a straw man. Who is denying that weak demand is a factor, or even the larger factor of the two?”

Well, I do think there are a ton of important people denying that there is any demand problem whatsoever, or at least one that can be addressed by policy. How else can there be an essentially uniform view among the Republicans that the initial stimulus had zero effect? How else to explain that the program of each candidate for the Republican presidential nomination has an exclusively ‘supply-side’ approach which basically boils down to fiddling with the structure of taxation? How else to explain the recent contention by the top four Republican leaders in Congress that the Federal Reserve should take no further policy actions to expand demand? It is hard not to notice that conservatives and Republicans are seeking immediate reductions in federal spending, which can only exacerbate any demand-side problem. Perhaps Crook should supply some examples of leading conservative economists and Republican leaders saying there is a demand problem, that it is a ‘larger factor’ than uncertainty, and of the proposals they are advancing to address the demand shortfall.

That my analysis focused on regulatory and tax uncertainty was not arbitrary, of course; this is what conservative economists, business trade associations and Republican politicians are saying is the sole reason for high unemployment, and I offered several (of numerous possible) examples. They do not talk about other types of uncertainty when trying to explain persistent high unemployment and slow job growth. They focus on regulations and taxation because they are claiming that Obama administration policies and proposals are inhibiting job growth. In fact, just last week, House Republicans “dared President Obama and other Democrats to support two bills that would delay two pending Environmental Protection Agency (EPA) rules, a move they said would have a more immediate effect on jobs than anything Obama has proposed.” I am confused why Crook does not understand that examining the employment and investment impact of tax and regulatory uncertainty is a key question in current policy debates.

Crook suggests a broader uncertainty lens, which to me is changing the topic. He points to a recent paper by Scott Baker, Nicholas Bloom and Steven Davis which attempts to measure uncertainty and finds:

“Index values are high in recent years and show clear jumps associated with the Lehman bankruptcy, the 2010 midterm elections, the Euro crisis and the U.S. debt-ceiling dispute. … Greater policy uncertainty in 2011, relative to 2006 levels, lowers GDP by about 1.4 percent and employment by about 2.5 million…”

I am not persuaded that the measurement of uncertainty in this paper is worthwhile since their metric relies heavily on news citations; consequently, when the conservative echo chamber screams about a topic their index captures these claims as real economic concerns. Nevertheless, it is interesting that the paper’s results in no way support the conservative/Republican/business association claim that Obama’s policies have inhibited job growth. Note that the paper’s conclusion estimates the impact of uncertainty from 2006 to the first half of 2011, so it covers much ground before Obama was even elected. If you look at the paper you will see that the main spikes in policy uncertainty (see their Figure 1 below) are due to the Lehman implosion, the TARP legislative debate and the banking crash, all of which pre-date Obama, and that by far the largest spike in uncertainty under Obama was the ‘debt ceiling dispute.’

Click to enlarge

Now, in my view and I think in most objective observers’ views, the debt ceiling fiasco was a crisis totally manufactured by Republican politicians. So, if uncertainty hurt job growth, then one should point at those responsible for the financial crisis and the debt ceiling debacle. Crook has clarified one thing for me. Anyone claiming uncertainty is holding back the economy needs to identify the particular types of uncertainty and who’s responsible for those uncertainties—Obama, Republican policymakers, both or neither. The case that Obama’s policies are generating job-killing uncertainty has not been substantiated and the intense emphasis by conservative/Republican/ business association leaders on tax and regulatory uncertainty is a counterproductive distraction from advancing the demand-side policy changes necessary to move the economy forward.

  • Ed

    Crook is like most other pundits who got caught embarrassingly short after taking the plunge with WSJ et al into bond vigilantism, confidence fairy, austerianism, and other analytically lite ideologically heavy pronouncements.

    Now that the demand side story is the only reasonable account left standing after the dust of their ideological posturings has settled — even for those who have trouble distinguishing the x-axis from the y-axis — they are trying to reinvent themselves as reasonable guys who never would have said something as silly as “demand doesn’t matter; it can only right itself if we cut back spending and don’t otherwise [!] tinker with it” — except when they did.

    And then, of course, when they do try to disingenuously confect this new narrative, since their real agenda all along has been “I’m smarter than you DFHs” — except they weren’t — they retreat to rearguard sniping, or simply not mentioning at all the sources of their new found and however begrudging acceptance of the fact that fiscal stimulus matters.

    Mishel, De Long, Thoma, Konczal, and of course, Krugman are the intellectual Voldermorts for them whose names must not be mentioned for fear that the reader might actually be driven to ask the question: “And why exactly should I pay attention to anything you have to say?”

  • Travisknop

    I found the original argument very informative and persuasive. However, if Mr. Mishel is trying to debunk an argument, I think the burden is on HIMSELF to provide links to actual economists or industry groups making the uncertainty argument. Otherwise, you are running the risk of making straw man arguments.
    And I don’t really buy the source as “Republican politicians.” To say that Republicans don’t believe there is a demand shortage implies that their public statements are sincere (not just politically opportunistic grandstanding). No one with the patience to study economics should be silly enough to treat politicians as honest, objective observers.

  • James Buchanan

    The uncertainty that has been created by Republicans after the near government shutdown of December 2010 and the debt ceiling crisis of June/July/August/September…2011 are indeed causes of economic concern within the business community. As a freelance writer that specializes in business writing, especially with regard to methodologies and technology, I can trace the ebb of my business to these events as well as to the Lehman failure and subsequent crash.

    Additionally, the failure to adopt policy to address the overriding economic concerns of business (demand and economic growth) and the public (employment and wage growth) has been intentional on the side of Republicans. After watching Republican behavior over the past two and a half years there is only one conclusion that can be drawn, they are intentionally tamping down the ability of the economy to recover. There is absolutely no doubt in my mind of this.

    Though, I do think that while this is being decided at a relatively high level in the party, its backers (economists in particular) are struggling to create empirical arguments to refute the need for monetary and fiscal policies. They are not in on the strategy and grasping for straws to show that their people (Republican politicians) are actually following an agenda to help the economy/country recover rather than sabotage it.

    They are also struggling to win the fact-based, empirical debate over the cause of the collapse (de-regulation, etc.). They can win in the arena of public opinion, but not where facts must be considered.

    – James Buchanan

  • Anonymous

    it’s not that hard to figure out.  is it merely a function of preconceived round holes not taking square facts?

  • John

    Please also note that the paper by Baker/Bloom/Davis cannot answer the question of causality. It could simply be that the financial crisis hits and drives down economic activity while simultaneously increasing economic uncertainty. Uncertainty and GDP will then be correlated, but that does not mean uncertainty is causal! (There is a paper by Bachmann/Moscarini that it might actually be the case that uncertainty is endogenous to the business cycle.) In the VAR Baker/Bloom/Davis use, there is no way to distinguish this from uncertainty being causal. Their identification essentially assumes that uncertainty is causal, but an assumption is no substitute for a result.

  • Steve

    Crook was just trying to bolster his “I am not a liberal” credibility by pooh-poohing the EPI study. He might just as well title everything he writes, “I Am Not a Liberal. Really I’m Not.” In that he is just doing what most of the press corps does.