One Thing We Know for Certain About the Economic Crisis
Kevin Drum debunks one of the sillier memes the right has been pushing to explain why the economic crisis shows so few signs of improvement:
Why does the economy continue to suck? The LA Times is hosting a symposium on the topic today, and USC business professor Ayse Imrohoroglu says the answer is uncertainty:
Businesses don’t know what will happen to interest rates. They have trouble calculating what new workers will cost in light of potential new healthcare mandates and costs. They don’t know what will happen to tax rates, which could rise dramatically. They are uncertain about increasing financial regulation and the possibility of a carbon tax. And as if that isn’t enough, the soaring deficits and national debt raise very real questions about the federal government’s long-term ability to meet its debt obligations.
The uncertainty meme is just mind boggling. Businesses always have a certain amount of financial and regulatory uncertainty to deal with, and there’s simply no evidence that this uncertainty is any greater now than it usually is. (It is, of course, entirely believable that business owners who spend too much time watching Fox or reading the Wall Street Journaleditorial page might believe otherwise, but that’s a whole different problem — and one that Imrohoroglu should spend his time debunking, not promoting.) The only significant realuncertainty that American businesses face right now is uncertainty about whether there’s enough customer demand to justify hiring more workers and buying more equipment. PPACA and carbon taxes rank very far down the list.
Uncertainty is a part of life, and as Matthew Yglesias points out, it’s certainly a part of the business cycle (emphasis is mine):
… Keynes himself put uncertainty front and center in his diagnosis of the business cycle and more modern “Keynesian” accounts tend to leave it out because it’s (a) hard to model and (b) not clear what difference it makes (see Brian Weatherson, “Keynes, Uncertainty, and Interest Rates” [PDF]).
Policymakers can’t make it cease to be the case that the future is uncertain. Policymakers can observe, however, that if economic actors’ level of uncertainty about the future increases that would manifest itself as an increased demand for money. Increased demand for money is a funny beast. Normally if demand for one kind of good or service falls, demand for other goods or services has to rise. But if what people demand is money itselfthen we find ourselves mired in a general glut, a shortfall of aggregate demand. Which is to say you’d be in just the normal Keynesian situation and you’d want to get out of it in just the normal Keynesian way—looser monetary and fiscal policy to bolster aggregate demand, soak up the excess capacity, and return us to a low-idleness equilibrium.
So if for whatever reason businessmen or politicians or media figures or anyone else feels more comfortable expressing the situation as one caused by “uncertainty” that’s fine. But the name of the game is still fiscal and monetary expansion. But instead the proposed cure typically seems to be “shift public policy in a more rightwing direction.” That wouldn’t do anything about uncertainty or a shortfall in aggregate demand. It’s just a faux-sophisticated way of saying “I’m a rich businessman who wants politicians to cater to my interests more.”
Direct hit. The idea that businesses still aren’t hiring because they need “certainty” about the inherent uncertainties of governance, legislation, and public policy, is bogus on its face. It’s past time to stop taking it seriously.