Regulatory Uncertainty and Our Weak Economy

Over at the Economist’s Free Exchange blog, Grep Ip offers an excellent, balanced analysis of regulatory uncertainty and our weak economy. Here’s a short excerpt:

How much of our economic malaise can be blamed on regulatory uncertainty? Conservatives argue that a wave of Obama administration regulations and the threat of more to come are the primary hindrance to business confidence and hiring. Liberals say that the weak economy is far more important and that any regulations being enacted more than pay for themselves in economic terms.

I’ve been struggling with this question for months and have found the debate frustrating: the terminology is wrong and the subject poorly framed, the evidence fragmentary and unhelpful, and generalisations are rampant. So what follows are a few thoughts that I think clarify the debate, though without necessarily resolving it.

First, it is not “uncertainty” per se that bothers business. Whether uncertainty is unwelcome depends entirely on what’s at stake. What would you prefer: 100% probability of dying next year, or 50%? Most of us would choose the latter. Similarly, business would prefer zero probability of a burdensome new rule, but if that’s not possible, would certainly take 50% probability over 100%. The administration’s decision to delay implementation of a new ozone standard perpetuates uncertainty. Business welcomed it nonetheless because now they do not have to spend money to meet it for at least two years, and perhaps forever if in the interim a new president chooses never to implement it. Does the Federal Reserve create some uncertainty when it undertakes quantitative easing? Probably, but in the process it makes the stability of inflation around 2% much more certain, and that, most businesses would say, is a reasonable trade-off.

Second, “regulation” doesn’t capture the breadth of government activity that affects business confidence, investment and hiring. The threat that America might default must surely have been one of the most toxic sources of uncertainty America’s political classes have yet inflicted on the economy, something you’ll see mentioned in the Federal Reserve’s latest beige book. This speaks to a more deep-rooted alienation between business and Washington.

Read the whole thing, it’s the best treatment I’ve seen.

One thought on “Regulatory Uncertainty and Our Weak Economy”

  1. I think that there is a piece missing from this discussion: Why are profits high? I don’t believe that the reality is that there are tremendous opportunities for growth and companies are failing to invest in them. On the contrary, I believe that many companies (including those of my own industry, which I have a clear picture of) are failing to make routine investments to drive future revenues. In other words, profits are high because we are reaping the benefits of past investments without plowing money back in to maintain the business, which will, of course, have severe consequences in the future. In some cases, this is due to uncertainty. Take, for example, the energy industry. A company might need to invest for future electricity production, but not know whether to (1)Spend a lot of money on a very expensive environmentally sound plant (which will not be economically viable if competing against a dirty plant) or (2) Invest in the dirtier plant, which might be closed down by new regulations… As a consequence, they do nothing – High current proftis, future economic disaster.

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