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Where was the policy uncertainty in 1993?

By Ezra Klein


Kevin Drum takes a few whacks at the argument that policy uncertainty is really holding back American businesses. There's just not that much to be uncertain about, he argues. And what there is to be uncertain about isn't new, and shouldn't be particularly relevant to short-term investment decisions.

Here's my question: How does the policy uncertainty story fit with 1993? President Bill Clinton was pushing a health-care reform bill that was much more ambitious than anything Obama proposed. It carried an employer mandate that would've forced businesses to pay up to 80 percent of the cost of insurance for their employees. The legislation would have reorganized the entire insurance industry and changed how almost every working American received coverage. And that's not all: Clinton's 1993 budget raised taxes. The administration was pushing an energy tax that was not only larger than the Waxman-Markey cap-and-trade bill, but also likelier to pass. The projections saw large and persistent deficits in the coming years.

That's not just identical to the policy uncertainty that some say is paralyzing businesses now -- it's worse. Taxes were actually going up, health-care reform would actually have upended the existing market and imposed a substantial new burden on American businesses, and an energy tax actually looked likely to pass. And were businesses hiring? They were. The unemployment rate fell from 7.3 percent at the beginning of 1993 to 5.5 percent at the end of 1994. Was the economy growing? It was. GDP grew by 2.9 percent in 1994 and 4.1 percent in 1994.

So where was the policy uncertainty then?

Photo credit: Mark Ralston/AFP/Getty.

By Ezra Klein  | November 15, 2010; 9:32 AM ET
Categories:  Economic Policy  
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Think how much better it would have been without all that uncertainty :)

Posted by: fuse | November 15, 2010 9:42 AM | Report abuse

Well, Duh: Clinton's plan never got passed, so no one had to really worry about it. The uncertainties are in how the law will be IMPLEMENTED. Will we, in fact, have to file 1099s for every purchase of $600 or greater? Does our company health policy meet the new federal requirements? What are the new requirements? When will we know what they are? How much will my insurer raise my rates to pay for them? When will the rate increases go into effect? Etc., etc., etc.

These are all very expensive questions, so I better not spend the money to increase my business right now. I may need it to pay for all these changes.

Posted by: dmarney | November 15, 2010 10:10 AM | Report abuse

The policy uncertainty argument is a by-product of the solipsism of people in general, and the inside-the-beltway crowd in particular. They cannot help (even if they should know better) view the world at large quaking in fear as to which i might be dotted or which t might be crossed next. Or, perhaps, they are all waiting for a tax credit before hiring?

The reality is, the businesses sense there were opportunities being lost because they lacked manpower, they would hire. It's overall economic activity, and perceived potential economic activity, that keeps businesses from growing. They don't have the business now and/or they don't see any growth in future business (or opportunities to expand the business), and thus aren't going to commit cash reserves, or go into debt, to attempt to expand their businesses.

It's also worth noting that when businesses are hiring like gangbusters, it's often a product of perceived future growth and expectations that they can go into debt (or spend every dollar they make) to grow now, in the expectation that future returns will more than justify it. However, as with stock market manias or real estate bubbles, much of those overly optimistic expectation eventually have to face reality. And then those businesses crash, and those folks lose their jobs, and then unemployment goes up. It's called the business cycle. Clinton didn't defeat the business cycle, and neither will Obama.

While policy uncertainty may have a real impact on elections, whether or not XYZ company hires a new employee has a lot more to do with whether or not the feel they can put that employee to use profitably right now. Frankly, if policies turn out to make it necessary to lay people off, then they can do that when the time comes. If they needed to hire somebody to work a shift or service a client, they'd do it. They just don't see the need to. Folks are buying enough to justify expansion, period.

Posted by: Kevin_Willis | November 15, 2010 10:13 AM | Report abuse

Not sure what you're getting at.

Remember the Bill Clinton of today is not the Clinton of 1993 (when you were 9). He was a much reviled failure at that time, who had only won the presidency by plurality, not majority.

The GDP growth was the result of the brand new internet related industries, which like the advent of the railroads, produced a massive lift to the economy. Also 1994 saw the implementtion of NAFTA and the resultant lowering of labor costs for many businesses.

You can thank the double agent Larry Summers, who Dems keep trusting long after he has been exposed, for NAFTA. He was also the leading traitor in Clinton signing Gramm-Leach and the CFMA, both of which guaranteed the current economic crisis. But that is tale for another thread.

Posted by: 54465446 | November 15, 2010 10:33 AM | Report abuse

BTW the only post Civil War presidents who came to office with less of a popular mandate than Clinton's 44% were Nixon's 43% in 1968 and Wilson's 41% in 1912

Posted by: 54465446 | November 15, 2010 10:41 AM | Report abuse

You can do the same analysis for the recovery under Bush.

At the same point in the economic cycle -- five quarters from the recession rough --
real GDP, employment and hours worked are all stronger now than at five quarters into the recovery under Bush.

So what was the major source of uncertainty under Bush that made the recovery weaker under Bush than it has been under Obama?

Posted by: seerrees | November 15, 2010 10:46 AM | Report abuse

While I tend to agree that claims about policy uncertainty are rather silly (especially when used by people to justify changing existing policy), I think this type of comparison falls into the "post hoc ergo propter hoc" category and does not really tell us much about how policy uncertainty affects GDP. Perhaps under Clinton, GDP would have grown by twice as much if policy had been clear, or perhaps because of any number of confounding variables, policy uncertainty is a problem now but wasn’t a problem in 1994.

Posted by: Levijohn | November 15, 2010 10:57 AM | Report abuse

Let's face it, it's only 'uncertainty' if it's the other side's agenda that's getting through and not the one advocated by the GOP.

Who in their right mind would look at any period of Republican ascendancy in the past 20 years and wax nostalgic over the level of certainty flourishing back then?

Posted by: leoklein | November 15, 2010 11:00 AM | Report abuse

Agree, it's not policy uncertainty, it's fiscal uncertainty. We know current spending levels are unsustainable and don't know what is going to happen when they are cut back, but we can guess. In short, fiscal stimulus is not stimulative when everyone can see that it's temporary. (and when we've already been doing crazy deficit spending during the dark times known as the Bush years, to no good effect.)

We also know that the cost of having employees is going to be rising significantly, as minimum health coverage regulations go into effect. This just makes it more attractive to hire someone in another country that allows a market system to control those costs.

Posted by: staticvars | November 15, 2010 11:09 AM | Report abuse

why some think the government is all powerful? it seems conservatives think that everything that happens that is bad is from there. even when its painfully obvious why the private sector is tentative. demand for almost every thing is down. consumers aren't buying much as they are getting used to fewer jobs paying less. and they drive the private sector. without them, the private sector will do nothing. and exports are hard to do when your currency is strong, but we can't devalue it enough to do any thing (and other can do that trick too). and it leads to even less demand and fewer jobs and lower incomes.

Posted by: willid3 | November 15, 2010 11:13 AM | Report abuse

It's demand uncertainty. Surveys show businesses would expand if demand justified it.

Posted by: pjro | November 15, 2010 11:23 AM | Report abuse

I heard an owner of a restaurant chain on NPR bemoaning the new health care law and stating that he was refraining from building new restaurants because of the uncertainty surrounding it. The interviewer never asked any specifics and they just sort of left the conversation as it was.

I call BS.

If there was a good market to open a restaurant, of course you would open one even without knowing what HCR was going to do. In fact, with a chain, I think you'd be more likely to do this because you sense a vacuum and you want to fill that vacuum before a competitor does - even if it means prices go up after a few years or something to that effect.

The fact is, we have a weak overall market at the moment and this person isn't building restaurants because he senses that they won't do a good business. He may not like HCR, but the idea that he would sabotage his own business over an ideological point is antithetical to business thought. Any one of his competitors could easily swoop in and claim these markets that are absolutely clamoring for more chain-restaurant bacon-guacamole burgers with chili-seasoned fries (all for $8.99 and a free alka-seltzer).

I think a lot of business groups are using the poor economy as an excuse to pin the blame on HCR and Obama. As soon as aggregate demand picks up, they will begin building again.

Posted by: klautsack | November 15, 2010 12:38 PM | Report abuse


We've disagreed before, but there's a lot of sense in your post today.

Posted by: 54465446 | November 15, 2010 2:12 PM | Report abuse

good Barry Ritholtz on the uncertainty thing

Posted by: bdballard | November 15, 2010 2:56 PM | Report abuse

54465446 -

I've given up disagreeing with you. I can tell when someone is a lot smarter than me.

Posted by: klautsack | November 15, 2010 11:48 PM | Report abuse

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