Regulatory Uncertainty vs. Economic Uncertainty

Jared Bernstein:

I’ve avoiding adding my voice to the uncertainty chorus—the idea that what’s holding back growth and hiring is uncertainty about the future of health care, tax, or environmental policy. It’s neither what businesses themselves say nor what economic theory would dictate as the cause of the current slump—that would be weak demand for their goods and services. Show me a business person who would leave profits on the table because of what might happen to health care reform in 2014 and I’ll show you a business person who will soon be busted.

But I’m coming around. Reading Fed speeches this week, looking at the upcoming fiscal slope and debt ceiling fights, watching Europe bumble along, and just trying to read the economic tea leaves—“uncertainty” is a pretty good word to describe the way a lot of people are probably thinking and feeling about the current economy right now.

I get what Jared is saying, but I wish he hadn’t said it quite this way. There are two kinds of uncertainty here: regulatory uncertainty and economic uncertainty. Conservatives complain about the former regularly, but there’s simply no evidence that regulatory uncertainty is, or ever has been, a significant issue for American businesses. In fact, all the evidence says exactly the opposite.

Economic uncertainty is a whole different thing, and there’s really nothing here to come around on. That’s been holding back investment and hiring for a long time, and it’s always been one of the strongest arguments in favor of further fiscal and monetary stimulus. And the primary argument, as Jared suggests, is that it’s good insurance. The upside is pretty strong, since the global economy is weak and full of risks, but the downside is negligible. There’s virtually no risk to being more aggressive with either fiscal or monetary policy for the next couple of years. Interest rates are low, inflation is well controlled, and hiring still hasn’t picked up. There’s essentially zero chance of overheating. The fact that we’ve continued along our current tight-spending/tight-money path anyway is just plain crazy.