The Economist
Uncertainty and economic recovery
Partisan animal spirits
MITT ROMNEY officially threw his hat in the ring yesterday. That "Barack Obama has failed America" by exacerbating and prolonging the recession is emerging as a main theme of Mr Romney's campaign. Last week I reported on Mr Romney's speech in Des Moines, in which he pressed hard on the claim that Mr Obama's policy initiatives have retarded recovery by sowing uncertainty precisely when certainty about "the rules of the game" was most needed. In a Bloomberg column earlier this week Stephen L. Carter, a professor at Yale Law School, offers some anecdotal evidence in favour of the "regime uncertainty" argument collected from a guy he sat next to on an airplane:
The man in the aisle seat is trying to tell me why he refuses to hire anybody. His business is successful, he says, as the 737 cruises smoothly eastward. Demand for his product is up. But he still won’t hire.
“Why not?”
“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”
He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.
(I propose we call this move—writing a column based on a conversation predicated on the authors' position of privilege—the "full Friedman", in honour of Thomas Friedman and his fearlessly hard-hitting reporting from golf courses, luxury hotels, and first-class-cabins the world over.)
Now, I think the regime-uncertainty argument is plausible, and I've made it in the past. Paul Krugman does not think it's a plausible argument. Perhaps I can sift through the evidence pro and con some other time. The key to the issue is intelligently estimating how many people with the power to hire have the same attitude as Mr Carter's seatmate? If there are enough of them to make a difference, then their hesitancy to hire makes a real difference, whatever the source of that hesitancy. Now, as the behavioural economists never tire of reminding us, real economic players are at best distant kin to homo economicus. Real people are moved by all manner of animal spirit, including ideological prejudice. "Recessions have complex causes," Mr Carter notes in conclusion, "but, as the man on the aisle reminded me, we do nothing to make things better when the companies on which we rely see Washington as adversary rather than partner". Of course, whether entrepreneurs and small-business types see Washington as an adversary or partner is not entirely a matter of in-the-trenches business experience. It is at least partly a matter of political identity. This thought put me in mind of a set of graphs in Andrew Gelman and friends' excellent book "Red State, Blue State, Rich State, Poor State":
What you see here is that "managers and administrators" as well as "owners and proprietors", the groups that do most of the hiring, are significantly and increasingly more likely than average to vote Republican. This raises a fascinating possibility: that Republican-leaning businesspeople freak out when Democrats are in power. Let's call this "partisan regime uncertainty". Now, maybe there is a good reason Democrats in power make Republican businessfolk afraid to make a move, which would help explain the relatively dramatic flight of owners and proprietors away from the Democrats. Or maybe individuals most likely to run a business are also most likely to fall for empty, right-wing free-market rhetoric, and this has made them increasingly likely to see Democrats as forces of socialising chaos. I don't know. In either case, we get partisan regime uncertainty.
If this is a real phenomenon, and I would love to know whether it is, there are a couple of important implications. First, Mr Romney's regime-uncertainty argument against President Obama could make him popular with nervous Republican burghers who, like Mr Carter's seatmate, believe this message to be true. Second, and this is the humdinger, a Republican president could accelerate the economic recovery simply by virtue of being Republican.
As I was googling around for Mr Gelman's graphs, I found that I'd been well and truly scooped by Ezra Klein, who flirted with this idea last summer. Still, I don't think Mr Klein fully conveyed the weirdness of the possibility that partisan regime uncertainty has hampered, and is continuing to hamper, the recovery. He concluded:
What gets difficult in all this is separating things that are actually hurting businesses from things that Republican-leaning business owners, for reasons of ideology or personal self-interest, simply don't like. And because there's virtually no data on this question, there's really no way to tell the two apart.
Mr Klein's right about the lack of good data on the question. But how much does that matter? If Republican-leaning business owners aren't hiring or expanding for objectively idiotic ideological or self-interested reasons, it remains that they aren't hiring or expanding. In that case, the partisan idiocy of America's conservative business class is hurting the economy, not Mr Obama's policies. But it might remain that, holding policy constant, we'd be better off economically with a Republican president. There's a maddeningly unfair "heads I win, tails you lose" quality to this possibility, but it seems to me a real one and well worth considering.
http://www.economist.com/blogs/democracyinamerica/2011/06/uncertainty-and-economic-recovery
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