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Uncertainty, legislation and the market

My quest to find some shred of empirical evidence for the claim that businesses and investors are holding back because of policy uncertainty continues. I asked Dylan Matthews to work up the following chart: It's the Dow Jones Industrial Average since the beginning of the Obama administration. There are marks for when major pieces of legislation passed. Behold!

dowchartlarger.jpg

Ignore the "column B" in the legend. That's an Excel artifact. What we can see from this chart is that the stimulus plan -- which the business community, including the Chamber of Commerce, supported -- passed amid the market bottoming out. Shortly thereafter, the market began to recover. Health-care reform didn't interrupt market gains. Financial regulation caused a hiccup, but gains quickly resumed their trends as if nothing had ever happened. Conversely, you can see real, serious drops around the "flash crash," the Greek debt crisis, and some of the jobs reports, where we don't quickly get back on trend.

There are all ways to question this chart, of course. The obvious one is that the market priced in all of the uncertainty long before the bills passed. But it's hard to see any major effect even if you look backward to some of the bills' milestones. Conversely, real economic and financial events have had huge impacts on the market.

Which is all to say that though I keep hearing about how policy uncertainty is holding us back, I still haven't heard, or been able to generate, any compelling data to support that argument.

By Ezra Klein  |  August 13, 2010; 11:18 AM ET
 
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Comments

Why compare to the Dow? How about jobs?

http://keithhennessey.com/wp-content/uploads/2010/02/projectedpayrollemployment.png

Posted by: marteen | August 13, 2010 11:26 AM | Report abuse

By definition, passing legislation reduces uncertainty, so it's not clear why you would expect to see a market dropoff immediately following passage based on "uncertainty".

If you want to see uncertainty at work, check out how many coal plants were 'near construction' at the beginning of this year. Energy is where uncertainty is a disaster right now.

Posted by: eggnogfool | August 13, 2010 11:31 AM | Report abuse

Well I feel better now. Ezra Klein reports, "No sign of forest; just a bunch of trees."

Posted by: daveredhat | August 13, 2010 11:34 AM | Report abuse

"My quest to find some shred of empirical evidence for the claim that businesses and investors are holding back because of policy uncertainty continues"
.......................
I really don't think that tracking 30 large cap stocks is a good indicator on whether investors (or business' for that matter) agree or disagree with policy.

Posted by: marteen | August 13, 2010 11:41 AM | Report abuse

Its not "uncertainty", its "reality".

Obama's policies directly damaged the economy by destroying capital in place of welfare transfers.

The term "uncertainty" is used by spineless economics professors who are still afraid of The Great Liberal Taboo Of University Economics, whereby economics professors have to pretend that liberals aren't just stupid and there still is a reason to pretend that we don't know that government harms the economy.

The saddest thing is that psuedointellectuals like you take this Taboo as a sign that economists actually endorse your liberal ideas. They don't, they just don't want to deal with the social taboos that you set up.

Posted by: gorak | August 13, 2010 11:42 AM | Report abuse

Since it's so obvious that Obama's policies are destroying America, I'm sure we'll hear exactly how they're responsible any moment now, right?

But it's kind of hard to take serious a party that's still trying to argue that Obama was responsible for the crash that occured months before he took office.

Posted by: lol-lol | August 13, 2010 11:46 AM | Report abuse

gorak, for your theory to be true, stocks (pick any index you want) should be lower than when obama took office. if the discounting mechanism of stocks is so broken that the market can't recognize 1.5 years of wealth destruction, it's pretty damn broken.

or you're full of it, that's the other option.

as to "uncertainty," in the long history of moronic right-wing tropes about the economy, "businesses aren't hiring because of uncertainty about the regulatory and tax environment" is running neck-and-neck with "tax cuts raise revenues" for the stupidest.

businesses always face uncertainty: always have, always will, but the uncertainty that influences hiring has very clear roots: can the marginal revenue that results from the marginal worker's product exceed the worker's cost? that's the only relevant question any entrepreneur asks, and the answer today, due to demand insufficiency, is, by and large, "no."

so yes, uncertainty does loom large, but it's demand uncertainty....

Posted by: howard16 | August 13, 2010 11:47 AM | Report abuse

The aggregate value of 30 industrial companies in a speculative market is a poor indicator.

What you need to look at is the cost of hiring a person. When that cost goes up, it is harder to hire a person. The minimum wage in China is about 1/10 of the minimum wage in the US. No one knows what is going to happen to health care costs under the ACA, but most business people I have spoken with believe they will rise as the restrictions on plans that lower costs for everyone, such as Health Savings Accounts increase, demand for services increases faster than supply. No one knows really how well the stimulus worked, but everyone knows we will be paying interest and principal of the debt it caused for a long time, which will have to be paid for with tax dollars, which means we have to save more money for the future since we will be taxed more then. We also know that it propped up wages, exacerbating a core problem.

So, one uncertainty is I see is more about the cost and risk associated with having full time employees. To see if this is true, one should look at the stats to see if more contractors, part time, and temporary employees are being hired.

The second uncertainty is about how much of my money I am going to be allowed to keep. If my taxes go up 3-5% with the federal rate going to 39.5%, I am going to need to invest 3-5% less in my business to maintain my projected personal spending. This means less hiring, and greater recognized profits. Not sure how this translates to the "big business" world, but it would seem that the reduced hiring is driving the greater short term profits which are driving the market values of the company- at the expense of longer term growth that would be provided by investment.

Posted by: staticvars | August 13, 2010 11:58 AM | Report abuse

Passage of legislation would generally be an uncertainty-reducing incident, although the effect would be gradual as markets would begin to price in leading up to enactment the perceived chance that a bill will carry and whether specific provisions would be included. In each of the recent major pieces of legislation, there remain great swaths of regulatory uncertainty about how regulators will interpret and implement the law, but those known unknowns are not changed materially by final passage, so long as markets understand they exist, ex ante.

Moreover, for your benchmark, you've chosen the Dow -- 30 blue chip, low-growth stocks. They would have be considered BENEFICIARIES of uncertainty, as uncertainty tends to prompt a flight to safety.

Proving or disproving a counter-factual is always a difficult, and often an impossible, task to undertake. But it's made significantly harder if you start with assumption that are the opposite of reasonable.

Posted by: raylehmann | August 13, 2010 11:58 AM | Report abuse

You just have to understand that whenever the market goes down, traders are building in expectations of Democratic Nazi Socialist wealth destruction. And when it goes up, they are building in expectations for Republican-led free market GDP growth.

There need be no chronological correlation between events and market reaction at all. If the market ever goes up or down, that's undeniable empirical proof for Republinomics.

Posted by: eggnogfool | August 13, 2010 12:02 PM | Report abuse

daveredhat just chiefed you hard!!

Afternoon post featuring a magic 8-ball and dylan matthews asking whether he is going to get laid this semester?

Posted by: cdosquared5 | August 13, 2010 12:09 PM | Report abuse

Whether passage of legislation increases or reduces uncertainty depends on how certain the legislation is, that is, how much it actually resolves uncertainty. Both health care and fin reg did resolve some issues (mostly what would not be in the bill) but both require a host of implementing regualtions, and so the details are more uncertain than is usually the case.

That said, the market is usually considered to be a discounting mechanism that reflects the consensus of where conditions will be in about 6 months. People were getting optimistic, now less so.

The reluctance to hire seems to me to be caused primarily by uncertainty about future DEMAND, particularly consumer demand, and desire to make the most profit from existing workers before hiring new workers at the lowest possible wages. The uncertainty about demand probably plays a much bigger role than uncertainty about whether taxes will go up a couple of percentage points at the margins, because it is the difference between being able to sell inventory or not.

As has been observed many times, much of the speculation is really just a fairly transparent form of lobbying--people who want lower taxes cite uncertainty as the problem because they want Congress not to let the Bush tax cuts expire.

And in a world where business keeps trying to squeeze out costs, hiring temps and cutting benefits, it's hard to see demand really increasing any time soon. It is a vicious circle.

Posted by: Mimikatz | August 13, 2010 12:15 PM | Report abuse

I think that there is real uncertainity in some markets that is stifling growth. I work for a company that builds power plants. However, utilities are not building any new plants because they don't know how future legislation (price on carbon) will affect their businesses. They can't decide whether to buld nuclear, or wind, or retrofit exisitng coal plants because they don't know what the market will look like in the next few years. But they know that something, whatever it is, is coming. That is killing their ability to do long term planning and therefore they are playing a waiting game. Meanwhile, nothing is getting build, infrastructure is failing farther into obsolescence, and my company has no new work. Many utilities were actively pushing for climate legislation if only to remove the uncertainity and allow them to get on with planning for future energy needs.

Posted by: jwweitzel | August 13, 2010 12:17 PM | Report abuse

There are so many faulty assumptions underlying the use of the market price of the DJIA to explain why business and investors may be spooked by uncertainty (and policy uncertainty is only the tip of the iceberg of uncertainty plaguing this economy) that I hardly know where to begin.

Perhaps if the question posited had been whether or not investors who invest in the companies that comprise the DJIA are spooked by policy uncertainty, the chart might be of some value.

But as a measurement of what's going on in the minds of the business community or investors at large, it won't wash.

Posted by: bgmma50 | August 13, 2010 12:25 PM | Report abuse

This isn't an "argument." It's just throwing stuff against the wall to see what sticks.

It is really very simple. If there was demand businesses would invest. There is no demand because people are out of work, wages have stagnated, and nobody is doing anything about it. It is the certainty that demand will not increase anytime soon that is holding investment up, not any uncertainty about future regulations.

Posted by: AuthorEditor | August 13, 2010 12:35 PM | Report abuse

Yeo Fool ! You've got it A.. backwards but then you're a fool. Doubly so for including the key indicator of stupid, the word Socialist. The markets have done better under Dem Pres than Repub ones.
http://www.usatoday.com/money/perfi/columnist/krantz/2005-12-02-presidents_x.htm

Posted by: Falmouth1 | August 13, 2010 12:36 PM | Report abuse

jwweitzel: just to pick up on your point, sure, there is regulatory uncertainty about power plants.

but this is a long-term problem, it's not some new development specifically related to obama that is somehow keeping hiring; it's simply a standard part of the power plant business.

Posted by: howard16 | August 13, 2010 12:43 PM | Report abuse

@AuthorEditor:

Obviously the solution to creating demand is cut government spending, lay off hundreds of thousands of government employees and cut taxes for the rich.

Posted by: lol-lol | August 13, 2010 12:46 PM | Report abuse

It is incumbent on the people arguing that legislation passed under President Obama has caused uncertainty in the market to support their arguments with data. It is not Ezra's job to find the data these people are supposedly basing their beliefs on. Since they haven't provided any data to support their arguments, we're left to guess, as Ezra does here. If these people said, "Ah, well I'm basing my arguments on the Dow!" we'd all say, "That's a really bad measure!" and Ezra would make this chart showing that even if it's a bad measure it also doesn't seem to help them.

Show your work, conservatives.

Posted by: MosBen | August 13, 2010 12:49 PM | Report abuse

If the uncertainty is now primarily related to taxes (the financial regulatory reform bill has passed and, in any event, many businesses are not effected by reg reform) and we know the outer limits of the tax hikes being considered, perhaps you can look at historical trends on biz activities (and the stock market) following tax legislation. Have economists found a material correlation between tax hikes of the variety being contemplated and a slowing down of biz activities (cap ex, hiring of employees, etc) in the past? The outer limits of the hikes proposed by the Dem's are known and relatively modest so is it plausible that businesses would be holding back if they thought there were commercial opportunities rather than proceeding on the basis of conservative forecasts which assume the Dem proposals were adopted?

Posted by: wswest | August 13, 2010 1:29 PM | Report abuse

"It is incumbent on the people arguing that legislation passed under President Obama has caused uncertainty in the market to support their arguments with data."

Unfortunately, there are no data which can confirm or deny counterfactuals.

At best, we can use common sense and listen to what business people are saying.

Policies which are negative for business will reduce business expansion, ceteris parabus. Uncertainty surrounding the extent of the negative should reduce business expansion further, unless businesses are not risk adverse.

What do businesses say? From the NFIB small business report from this January:

"Washington is offering nothing but higher taxes and fines and fees and more regulation. Congress is passing bills with thousands of pages of hidden bombs that will go off as the legislation is passed and implemented."

http://www.nfib.com/Portals/0/PDF/sbet/sbet201001.pdf

The report also laments the weak sales trend and continued tight credit conditions. All play a role, but it's hard to avoid the conclusion that the attitudes of business owners in response to legislative environment are irrelevant.

Sales are certainly the largest problem, but remember that millions of people are hired every month, and so decisions at the margin are very important. All it takes are for job gains to change from 4.3 million/mo to 4.7 million/mo to go from -100,000 payroll losses to +300,000 reported payroll gains. To the degree uncertainty is reducing hiring plans by a mere 4%, that's ~200,000 jobs not created each month.

http://www.bls.gov/news.release/jolts.nr0.htm

Posted by: justin84 | August 13, 2010 1:36 PM | Report abuse

It's nonsense. It's a classical "demand" recession and until we start getting demand back up, the supply side can't return in response. If you want to beat your political opponent, and you don't have any really workable ideas, then you have to beat the drums instead, and chant about "fear", "uncertainty", "resentment", and "incompetent leadership".

This stuff is as old as Cicero (in ancient Rome, 100 BC) and probably a lot older. We see some voters and commentators here buying into it, because half of them don't know economics, and the other half are paid campaign operatives working for the blog-comment management departments of the major Washington political public-relations firms.

After the election, we'll have new phony memes. Just watch Fox News and the editorial departments of the major newspapers, and you'll see it happen right before your very eyes. Presto change-o! You betcha!

Posted by: Lee_A_Arnold | August 13, 2010 1:52 PM | Report abuse

Why not ask someone who runs a business?

Gee willikers, when empirical evidence abounds, the JournOListers search elsewhere...

Posted by: rmgregory | August 13, 2010 1:56 PM | Report abuse

justin84, come on, that's kind of a cop-out. As wswest suggests, how about identifying other time periods where similar "uncertainty" has existed and make arguments comparing that time to ours. How about comparing our recovery to other countries in which there isn't this "uncertainty"? If we're talking about the tax rate changes, how about any number of mounds of data about how changes in tax rate affects business behavior? What about some kind of indication of the degree to which repeal will "calm" uncertainty and a discussion of why repealing already-passed laws doesn't itself create uncertainty? And there should be an argument about how the alleged decrease in uncertainty from repeal will more than balance out the positive aspects of those bills. Or why not an argument about why there's nothing that can be done to decrease uncertainty other than repeal? (if it's regulatory uncertainty, why not a push to get the regulators to settle on new rules quicker?)

As far as I can tell now, these arguments are bald assertions with occassional support from a few annectdotes. They're talking points, and I don't think we should be satisfied in repealing major legislative accomplishments based on a talking point that the person can't even support.

Posted by: MosBen | August 13, 2010 1:57 PM | Report abuse

"Washington is offering nothing but higher taxes and fines and fees and more regulation. Congress is passing bills with thousands of pages of hidden bombs that will go off as the legislation is passed and implemented."

This is truly funny. Taxes are at the lowest rates in decades, and there is no support whatsoever for the notion that the past year and a half has been a period of higher-than-average regulatory legislation. On the contrary, we have seen tax cuts, direct corporate welfare, and efforts to stimulate consumer demand for what businesses have to sell.

The sentence itself is a non-sequitur..."passing bills...as the legislation is passed" (bills either have either been passed or are yet to be passed).

This is simply the constant rhetoric of the business lobby in support of lower taxes and reduced regulation. "Uncertainty" is not a factor in hiring, demand (and expectations of impending demand) are all that matters.

Posted by: Patrick_M | August 13, 2010 2:04 PM | Report abuse

justin84, that is a truly hilarious piece of tripe.

the idea that today there is some unique kind of uncertainty that would keep an entrepreneur from hiring someone on whose marginal product he or she could make a profit only conceivably makes sense in a regime where people can't be fired.

as it happens, this is not that world: if indeed the climate turns worse for a given business, and the newly hired workers are no longer profitable, they can be let go (and, in fact, will be!). you do not leave a dollar on the table today because you're worried that the marginal tax rate on that dollar is going to change a few percent next year. it's ridiculous on the face of it.

Posted by: howard16 | August 13, 2010 2:14 PM | Report abuse

I'd like to add that the fact that the FHA is STILL backing 3.5% down loans that doesn't give me a lot of confidence that we know what the future of the housing market holds- especially as FHA (aka taxpayer) backing is being extended to people buying $3M condos. Also, the AMT is going to start hitting a lot of people's mortgage interest deductions...

http://www.bloomberg.com/news/2010-08-13/manhattan-luxury-condos-embrace-federal-help-in-game-changer-for-sales.html

Posted by: staticvars | August 13, 2010 2:15 PM | Report abuse

Patrick,

the phrase "higher taxes" only denotes that they're going up, not where they're at in relation to any period in time. Uncertainly breeds hesitation. Its a fact of life and buisness and there's more uncertainty now than there's been in a long time.

Posted by: visionbrkr | August 13, 2010 2:15 PM | Report abuse

Maybe things like this affect it too?

http://voices.washingtonpost.com/company-beat/2010/08/why_business_is_worried_about.html?wprss=company-beat

Posted by: staticvars | August 13, 2010 2:20 PM | Report abuse

--"Which is all to say that though I keep hearing about how policy uncertainty is holding us back, I still haven't heard, or been able to generate, any compelling data to support that argument."--

Klein will be starting up his own business then, soon, I guess. Might be an eye opening experience for him.

Oops. Klein is the guy who had to ask his readers for help in finding a suitable charity to give to. I guess he's not got the right stuff for entrepreneurial endeavor, though he sure can't understand why other people are reluctant in such regards.

Posted by: msoja | August 13, 2010 2:22 PM | Report abuse

Patrick_M, the business man, will no doubt honor us with tales of his own financial derring do in these troubled times, while meeker, more partisan, ignorant types, prevaricate in their own business dealings under various pretenses.

Posted by: msoja | August 13, 2010 2:25 PM | Report abuse

@howard16:

It's a general problem with the industry, but it's much, much worse right now. "It's always that way" in no way explains an 80% decline in new construction.


@Justin84:

"What do businesses say?"

Nothing. Businesses are inanimate abstract entities.

We can ask business executives, and they will assumptively support a policy prescription that increases after-tax compensation and reduces oversight for business executives.

We can ask stockholders, and they will assumptively support a policy prescription that increases after-tax income for stockholders and increases stockholder control of boards.

Neither of them have any particular interest in increasing employment; policies that allowed them to reduce payrolls while maintaining revenue should be expected to be endorsed by both.

We hit this fallacy all the time. The purpose of the healthcare system is to improve our longevity and quality of life; the purpose of the education system is to educate our kids (and adults in some cases); the purpose of our businesses is to produce products people want and jobs for people to work at. These institutions do not exist for the benefit of doctors, teachers, stockholders, or CEOs, each of whom will endorse policy to the extent of self-benefit.

Posted by: eggnogfool | August 13, 2010 2:27 PM | Report abuse

visionbrkr,

Capitalists and entrpeneurs are (by definition) risk takers. There is no such thing as absolute certainty. I go through a budget exercise for my own business every year that requires me to make forecasts about the near and long term. If I retreated in my planning based upon "uncertainty" about anything, let alone secondary factors like policy in Washington DC, I would have to wind down the business.

The fact remains that taxes during the Obama administration have been at historic lows, and that the Democrats' policy initiatives have been aimed at helping to directly revive business activity. The fact that historically low taxes are expected to eventually rise, does not create "uncertainty" or explain weak hiring today or during the past year.

A lack of orders for goods and services is why our economy continues to operate well below capacity. Unemployment subsides when businesses need more labor to fill orders. Period.

Posted by: Patrick_M | August 13, 2010 2:32 PM | Report abuse

@Patrick_M:

" "Uncertainty" is not a factor in hiring, demand (and expectations of impending demand) are all that matters."

Completely false.

Demand has virtually no effect on long-term investment. Certainty has a massive effect.

Posted by: eggnogfool | August 13, 2010 2:33 PM | Report abuse

@Patrick_M:

Clarifying,

you could argue that demand + expectations of future demand complete the picture,

but "expectations of future demand" in some industries (energy) depend entirely on the passage or lack of passage of specific legislation. In this case, "regulatory uncertainty" and "expectation of future demand" are entirely interchangeable phrases.

Posted by: eggnogfool | August 13, 2010 2:41 PM | Report abuse

"you could argue that demand + expectations of future demand complete the picture"

You *could* argue that, but only if you did not own and operate a business (and are being intellectually honest about the reasons that you hire).

If demand for your product requires that your add 10 people to fill the orders, you will interview and hire ten people tomorrow. That will happen whatever your "uncertainty" level may be about future taxes or regulations. You won't return your customers' checks and say to them "sorry, I would like to grow my business and fill your orders, but I am nervous about the possibility of higher taxes or increased regulations."

Employment levels are directly related to demand and to expectations about demand, eggnogfool. Any other purported explanation is mere noise.

Posted by: Patrick_M | August 13, 2010 2:59 PM | Report abuse

"justin84, come on, that's kind of a cop-out."

Sometimes there just isn't any data.

The only way you can tell if attitudes really matter is to be able to re-run the experiment without the uncertainty. Other factors are too different to reach a conclusion, especially when I'm suggesting the effect is actually quite minor. A 4% difference in the number of people hired is the difference between a weak and robust expansion. Does policy uncertainty make zero difference? That doesn't seem plausible. Is the actual impact on hiring 0.37% or 5.13%? I have no idea. There is just no reason to think that uncertainty isn't a negative.

"As wswest suggests, how about identifying other time periods where similar "uncertainty" has existed and make arguments comparing that time to ours."

Can you name any? The only other period with extreme policy uncertainty was the early 1930s, although uncertainty was more extreme and pretty much nothing else was held constant. As for one example, in the spring of 1933 the U.S. went off gold - a huge monetary shock. The annualized rate of CPI inflation from May 1933 to August 1933 was 20.5%, vs -3.1% for the previous three month period and -14.3% for the one before. To the extent you think money and prices matter, it was a wildly different monetary experience. This is just one example. There are far more variables in need of control than there are observations.

Aside from all of that, the data itself is contains significant measurement error and is often heavily revised.

I can point to the run-up to the Iraq War and note that GDP growth slowed dramatically from early/mid 2002 (+2.53%) to late 2002/early 2003 (+0.85%). The three quarters after the war had started were much higher (+4.56%). How much of this was uncertainty? How much the Bush tax cuts? How much a million other factors? I don't know. But I think it's reasonable to conclude the war was a negative, despite not being able to measure the magnitude.

"How about comparing our recovery to other countries in which there isn't this "uncertainty"?"

Such as where? It's a global economy. We can't contain our uncertainty. In any case, there are too many variables to control for. Germany and the U.S. might have different levels of uncertainty, but Germany's experience is not a guide to how the U.S. would perform under equal levels of uncertainty.

"If we're talking about the tax rate changes, how about any number of mounds of data about how changes in tax rate affects business behavior?"

We're not talking tax rate changes in isolation. We're talking all of the major legislation and regulations passed or that might potentiall pass.

"And there should be an argument about how the alleged decrease in uncertainty from repeal will more than balance out the positive aspects of those bills."

By the way, I'm not pushing for repeal - just that uncertainty is a partial explaination for the weak recovery.

Posted by: justin84 | August 13, 2010 3:06 PM | Report abuse

Patrick_M: "Demand (and expectations of impending demand) are all that matters."

Patrick_M: "You *could* argue [that demand + expectations of future demand complete the picture], but only if you did not own and operate a business (and are being intellectually honest about the reasons that you hire)."

Uhhh...have you considered reading what you post?

Posted by: eggnogfool | August 13, 2010 3:16 PM | Report abuse

@Patrick_M:

Anyway, beyond that you are missing the point. When people say "investment" they don't mean hiring a few extra cashiers to handle the Christmas season.

Uncertainty is about not starting construction on a new widget plant, planning to start production in 2013, if you expect congress to outlaw widget production in 2012.

This isn't about rich people turning away bags of money (which as you say, they don't do), it's about rich people not flushing bags of money down the toilet (which they prefer to avoid).

Posted by: eggnogfool | August 13, 2010 3:19 PM | Report abuse

"This is truly funny. Taxes are at the lowest rates in decades"

I thought we were discussing uncertainty surrounding future tax rates, not current ones. Future taxes will be higher by an uncertain amount, and will take uncertain forms.

"and there is no support whatsoever for the notion that the past year and a half has been a period of higher-than-average regulatory legislation."

Maybe you feel this way because your particular business isn't in the cross-hairs. If you work in healthcare/insurance/banking/energy you might feel differently.

-- The Dodd-Frank Act requires 67 studies and 243 new rules to be created, according to law firm Davis Polk & Wardell LLP. --

What could go wrong? What are the odds that these 243 new rules will be a net plus? What better than a bill which promises a ton of vague new rules while probably doing nothing to prevent the next crisis?

http://www.bloomberg.com/news/2010-08-09/crash-of-2015-won-t-wait-for-regulators-to-buckle-wall-street-safety-belts.html

"On the contrary, we have seen tax cuts, direct corporate welfare, and efforts to stimulate consumer demand for what businesses have to sell."

And we have nothing to show for it but a huge pile of debt. In any case, the uncertainty is not in the rear view mirror. Uncertainty by its very nature surrounds the future. At some point, the free goodies have to stop and the bill has to come due.

"The sentence itself is a non-sequitur..."passing bills...as the legislation is passed" (bills either have either been passed or are yet to be passed)."

The statement from the NFIB is poorly constructed. It refers to bills that have passed (PPACA, FinReg) and bills that might pass (Cap/Trade, etc).

"This is simply the constant rhetoric of the business lobby in support of lower taxes and reduced regulation. "Uncertainty" is not a factor in hiring, demand (and expectations of impending demand) are all that matters."

Only in the production line world. Tens of millions of employees show up as G&A on the income statement. Overhead operations aren't nearly as dependent on current demand.

Posted by: justin84 | August 13, 2010 3:43 PM | Report abuse

""What do businesses say?"

"Nothing. Businesses are inanimate abstract entities."

But I thought corporations were people! (j/k)

"We can ask [people in operation or ownership roles] and [they will support what's best for them]."

That's fine. My point of this is that you aren't going to be able to tease out the precise effects of uncertainty by looking at data. There are really only two options:

1) What does common sense suggest?

2) What do the people involved say?

Per your comments, 2) might not be a great option. That leaves us with 1).

Increasing business uncertainty to the downside - how does it impact business expansion plans?

1) Large positive effect
2) Small positive effect
3) No effect
4) Small negative effect
5) Large negative effect

I think we can rule out 1 and 2. Given the importance of other factors, I think we can rule out 5 as well. Absoultely no impact on decision making is potentially possible but I'd place my bets on 4.

But when we're talking about losing 100,000 jobs on net in a month when 4,300,000 people were hired, a small change can really matter.

Posted by: justin84 | August 13, 2010 3:57 PM | Report abuse

eggnofool, i just spent 10 minutes trying to find any source that would validate your 80% decline number. i found lots of information about uncertainty throughout the '00s leading to lots of cancellations of announced projects, but nothing that would tell me that we have suddenly, in the last 1.5 years, seen an 80% drop from where we were in january, 2009.

perhaps before we go further you could provide your source data?

Posted by: howard16 | August 13, 2010 4:02 PM | Report abuse

"I thought we were discussing uncertainty surrounding future tax rates, not current ones. Future taxes will be higher by an uncertain amount, and will take uncertain forms."

If you are referring to the expiration of te Bush tax cuts, we have had the knowledge of their expiration date for a decade. So the only uncertainty is whether they will expire (as we always expected) or whether some part of them might be preserved (which is a happy sort of uncertainty for taxpayers).

Beyond that, future changes in taxation is never knowable, that is a constant uncertainty.

"Maybe you feel this way because your particular business isn't in the cross-hairs. If you work in healthcare/insurance/banking/energy you might feel differently."

Virtually every business is in the cross hairs in an era of weak demand, my own included. As for the sectors that you mention, health care is a done deal, and the new law only brings more customers into the system (higher demand). Banks were bailed out (good news for them). Energy? If you are a coal mining company and there are customers awaiting your coal, you will employ the needed number of miners to meet that demand. You may feel uncertain about future carbon regulations, but you react to demand with your current hiring. If anything, uncertainty about future regulations will motivate you to capitalize upon any current opportunities.

"Uncertainty by its very nature surrounds the future."

Untangle this thought, justin84. The future, by it's very nature, is uncertain. Always. Business reacts to present demand and anticipated demand. To the extent that "uncertainty" impacts employment, it is only with respect to uncertain demand expectations. If I am an "alternative energy" company that makes windmills, I may not be hiring today, awaiting the uncertainty of whether climate legislation will be passed (which will result in a better environment for windmill sales), but again that is simply my uncertainty about another avenue to increased "demand" for my product.

"Only in the production line world. Tens of millions of employees show up as G&A on the income statement. Overhead operations aren't nearly as dependent on current demand."

Nonsense. Every employee in every business is paid as a direct result of business revenue, which comes in the form of the demand for that business's goods and services. When the demand dries up for buggy whips, the Acme buggy whip company may first lay off their production line, but if demand does not return they will not be able to maintain any of their managerial and back office operations. It does not matter where any employee "shows up on the income statement" -- every private sector job is the direct result of demand.

When demand falters, jobs disappear. When demand is strong, business hires. Common sense, my friend.

Posted by: Patrick_M | August 13, 2010 4:10 PM | Report abuse

"I'd like to add that the fact that the FHA is STILL backing 3.5% down loans that doesn't give me a lot of confidence that we know what the future of the housing market holds- especially as FHA (aka taxpayer) backing is being extended to people buying $3M condos. Also, the AMT is going to start hitting a lot of people's mortgage interest deductions..."

staticvars,

Why put down 3.5% when you can put down 0% and only pay $1,000 in closing costs? Way to go FNMA... the only good news here is that the program is currently too small to matter.

http://washingtonindependent.com/93795/the-return-of-the-1000-down-mortgage

Posted by: justin84 | August 13, 2010 4:21 PM | Report abuse

"Uncertainty is about not starting construction on a new widget plant, planning to start production in 2013, if you expect congress to outlaw widget production in 2012."

If you expect widget production to be outlawed, you expect the demand for widgets to fall to zero.

But what are the widgets about which we are so uncertain? Please specify what nervousness about potentially "outlawed widgets" explains our 9.5% unemployment (as opposed to weak demand)?

"This isn't about rich people turning away bags of money (which as you say, they don't do), it's about rich people not flushing bags of money down the toilet (which they prefer to avoid)."

And "rich people" (along with those that aspire to be rich) make the determination about whether to invest in new operations (that will employ people) by reacting to current demand, or estimating future demand. It does not matter if it is hiring additional cashiers for the Christmas season, bringing out the Chevy Volt, or opening new branches of your gigantic too-big-too-fail bank in a new region. Your decision to invest is based upon expectations of profitability, and the first question you must answer to make that estimate of potential profit is D E M A N D.

"Uhhh...have you considered reading what you post?"

Uhhh...yes, I do that, because I like to make certain I stay on substantive discussion and avoid ad hominem remarks.

Posted by: Patrick_M | August 13, 2010 4:23 PM | Report abuse

@Howard16:

For example:

http://www.netl.doe.gov/coal/refshelf/ncp.pdf

Table 1.

Generally speaking, they are always announcing far, far more projects than actually go anywhere for many reasons. That's 'normal', and announced projects aren't that relevant. The real pipeline, permitted projects, near construction projects, and under construction projects, are seeing new plants come out of the pipeline (9 new in '09) but a dearth of new entries (i.e., new investments) into the pipeline.

Posted by: eggnogfool | August 13, 2010 4:30 PM | Report abuse

@Patrick_M:

"If you expect widget production to be outlawed, you expect the demand for widgets to fall to zero.

But what are the widgets about which we are so uncertain? Please specify what nervousness about potentially "outlawed widgets" explains our 9.5% unemployment (as opposed to weak demand)?"

The first part is just wrong; outlawing production would only affect the supply curve, and should have no effect on demand. You've misused and abused the term 'demand' throughout here, but it's getting nonsensical. In practice, maybe I could still import and sell widgets. But the investment in the production line would be a total loss.

For the second point, (A) Consensus numbers predict that an extra 73 weeks of available unemployment benefits should increase measured unemployment rate by around 2-3% and (B) The 'outlawed widgets' would be coal plants, and more broadly, anything having to do with energy, utilities, green technology, the auto industry, the steel industry, etc.

Posted by: eggnogfool | August 13, 2010 4:51 PM | Report abuse

@Patrick_M:

"Uhhh...yes, I do that, because I like to make certain I stay on substantive discussion and avoid ad hominem remarks."

Again, please read what you said, because you basically quoted yourself and called yourself intellectually dishonest.

Just giving constructive criticism.

Posted by: eggnogfool | August 13, 2010 5:10 PM | Report abuse

For all of those who are looking for data, perhaps this might help.

Economists have been puzzled by the recent breakdown in Okun's law.

"In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun's law. If Okun's law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year."

In essence, this means the decline in demand was not enough to explain the rise in unemployment using a model which has worked for decades.

How much did unemployment rise? 2.6%, from 7.4% to 10.0%. The decline in demand suggests an unemployment rate of 8.7% for Dec09.

"Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy."

To the degree Washington is contributing to uncertainty, it is probably a negative.

The breakdown of this relationship doesn't make sense in a widget producing economy, but does make a lot of sense in a Garrett Jones economy where many workers are considered more organizational capital than traditional labor.

http://www.frbsf.org/publications/economics/letter/2010/el2010-07.html

Posted by: justin84 | August 13, 2010 5:20 PM | Report abuse

eggnogfool, as it happens, i did look at that report in my previous 10 minutes: i still have no idea where your 80% comes from.

in addition, the issue at hand is new uncertainty since january, 2009: there isn't enough actual information in this report to tell how much the slowdown of projects in the pipeline is financing related, how much entitlements related, how much demand related, and how much (if any) uncertainty over whether cap-and-trade (or some other factor) will pass.

Posted by: howard16 | August 13, 2010 5:42 PM | Report abuse

eggnogfool,

Do you have any data to show that coal companies (or energy companies generally) have laid off significant workers? Is your explanation for 9.5% unemployment really that we are not opening coal mines at a fast enough rate? Is "uncertainty" in the energy sector really the explanation for our stagnant economy overall?

I suppose the coal industry might expand a little if the industry was "certain" it would never be taxed or regulated, but still it would only enlarge to the degree needed to meet the demand for coal.

Nobody is proposing that we "outlaw" coal. Virtually everyone recognizes that we are likely to more heavily tax and regulate fossil fuels over time, and that we shall migrate toward alternative types of energy. There actually is very little uncertainty about what we may expect in the energy sector.

If I am an investor, either as an owner, a venture capitalist, or the purchaser of a single share of common stock, I will invest based upon my estimation of likely future profitability, in either (or both) the near and long term. The first question I must always answer to determine likely profitability is whether there will be demand. If the answer to that question is no, that the answers to all other questions are inconsequental.

If I choose to invest in a coal company, it is likely because I recognize the strong exisiting demand for coal, and I expect that I can take a profit in the short term. If I invest in a windmill company, I am likely to recognize that current demand may be quite soft, but that the business has an excellent potential for long term growth.

But in either event, I don't suffer from fundamental "uncertainty" about the broad trends and consequences of future energy policy, and to the extent that the details and timing of policy implementation on energy (or any other particular widget) are uncertain, that is not the reason our economy is in a hole. At any given time, certain "widgets" are entering a sunset phase (that government might hasten), while other widgets are on the rise (and subject to a faster rise with potential government incentives), with a bit of uncertainty all around them.

"Uncertainty" in some sectors is a normal and constant part of economic and social progress. But if you ask someone who has lost their job in the last two years whether they were let go because their employer was feeling uncertain about the future of cap and trade, the answer will be no, millions of times over.

Posted by: Patrick_M | August 13, 2010 5:43 PM | Report abuse

"Again, please read what you said, because you basically quoted yourself and called yourself intellectually dishonest."

I am sorry that you were unable to follow the meaning of the remark, so I will try again.

I mean to convey that a business owner (such as myself) will tell you that he or she will grow their staffing when demand requires, and they will lay off workers when demand subsides and the existing workforce is becoming idle.

If a business owner states that there is any reason to hire rather than to meet demand (or expectation of demand) for increased business activity, or that he or she will lay off good employees for any reason other than falling demand, that business owner is being intellectually dishonest.

Every business owner frets over uncertainties about the future -- always. But hiring is not driven by anything other than growth in present or anticipated demand.

Posted by: Patrick_M | August 13, 2010 5:55 PM | Report abuse

@howard16:
(1) over 80% reduction in "Near Construction" plants, 2010 vs. 2009. the reduction in total pipeline projects is less, but those are ongoing, and i'd argue the change in new projects is more relevant, especially as a metric for the current market climate. you could also argue that my "80% reduction" understates how bad things are, as in addition to a lack of new projects, far more ongoing projects were canceled than usual.

(2) "Delays and cancelations have been attributed to regulatory uncertainty (regarding climate change)... "

Posted by: eggnogfool | August 13, 2010 10:19 PM | Report abuse

@Patrick_M:
I can guess what you meant to write based on context, but I'm just politely suggesting you use words that have the meaning you intend,

instead of words that say your own post is "intellectually dishonest".

Posted by: eggnogfool | August 13, 2010 10:25 PM | Report abuse

@Patrick_M:

"Do you have any data to show that coal companies (or energy companies generally) have laid off significant workers? Is your explanation for 9.5% unemployment really that we are not opening coal mines at a fast enough rate? Is "uncertainty" in the energy sector really the explanation for our stagnant economy overall?"

Please read my previous post. The real historically comparable unemployment rate is close to 7%.

Of that 2-3% excess relative to healthy conditions, I'd guess around 1% is due to construction.

The uncertainty I'm acknowledging, relating to energy/carbon/climate change legislation, has a major effect on the energy/technology/auto/steel industries, which account for a sizeable number of jobs.

As for "where are the numbers for their layoffs", this shows another fallacy. The job market is an equilibrium. Hires - Separations = "Jobs created". You don't fire people when you don't build a power plant, you just don't hire them in the first place. Separations are actually fairly low right now, but so are hires. That's the problem.

"Nobody is proposing we outlaw coal", but some of the proposals under consideration would make certain types of coal plants unable to produce energy at a profit, which has the same effect.

As to your statement about Demand, the answer is in fact "yes", there will be demand for energy in 2015 and the shape of the demand curve is well known. So the question moves on to whether coal, or solar, or wind, or whatever will be able to sell energy at a profit given that demand curve, and that is a function of the associated costs to produce each of those energies, and that is in turn dependent on what subsidies/taxes will be relevant for each, which are completely unknown at this point.

Posted by: eggnogfool | August 13, 2010 10:47 PM | Report abuse

eggnogfool, i assumed you were reading more carefully.

look, there were 7 projects near construction in january, 2009: there are 22 currently under construction. neither you nor i have any idea whether those 7 are now under construction or not (the follow-on table is not very clear).

in fact, 8 projects became operational during this period.

the only thing we can say for sure is that there are fewer projects in the pipeline today than there were, but there's nothing in this chart that tells us that there is an 80% dropoff.

in addition, there is no data supporting the reference to uncertainty due to climate change, but considering that cap-and-trade was a republican proposal 2 short years ago, it's hard to think that the regulatory environment is dramatically different than january, 2009.

like i say, i assumed you realized all that but you must be looking too quickly for data to support your incorrect number.

Posted by: howard16 | August 14, 2010 12:31 AM | Report abuse

"You don't fire people when you don't build a power plant, you just don't hire them in the first place."

...and that's my point, eggnogfool.

Sure, once the Congress passes some form of energy legislation, or further economic stimulus that incentivizes "clean energy" then some investment and hiring in some segments of the energy sector might follow (and that growth may well be offset by disinvestment and contraction in other segments).

I have still seen no solid data in your posts (or anywhere else) that indicates that any measurable number of persons have been put OUT of work due to "uncertainty" about the outcome of policy debates in Washington. Energy companies continue to conform their operations to the status quo, like all businesses must always do, and they will expand or contract if and when circumstances change, like all businesses must always do. Therefore, I can't find any reason to connect our current high unemployment rate to "uncertainty."

Posted by: Patrick_M | August 14, 2010 2:46 AM | Report abuse

Does this guy work for a newspaper or the White House?

CK

Posted by: ckessler55943 | August 14, 2010 11:51 AM | Report abuse

Dear Ezra;

Don't be so coy. I'm sure you and your Journolist friends can come up with and/or support any talking points the Democratic party has for it's press cadre.

Posted by: Towson_Tiger | August 15, 2010 9:37 PM | Report abuse

Dear Ezra;

Don't be so coy-I'm sure you and your "Journalist" cadre can work up numbers to support any Democratic talking points the party demands.

You are just so modest: "though I keep hearing about how policy uncertainty is holding us back, I still haven't heard, or been able to generate, any compelling data to support that argument."

Or is it just that you are somewhat dense? Or you think we are?

Posted by: Towson_Tiger | August 15, 2010 9:40 PM | Report abuse

haha, Ezra Klein is seriously getting schooled by these comments.

Posted by: emily04 | August 16, 2010 9:05 AM | Report abuse

Ezra,

In England, where they have already implemented some austerity measures, uncertainty increased (business confidence decreased) due to government budget cuts:

Cutbacks hit business confidence (Financial Times article from today - http://www.ft.com/cms/s/0/5ae9652c-aaa3-11df-80f9-00144feabdc0.html)

And the original poll

Bank of England poll (http://www.bankofengland.co.uk/publications/agentssummary/agsum10aug.pdf)

Posted by: chrisgaun | August 19, 2010 12:56 PM | Report abuse

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