"Uncertainty is seen to retard investment independently of considerations of risk or expected return. Introduction of uncertainty can be associated with slack investment, resolution of uncertainty with an investment boom"
Hensarling connected this uncertainty to policy and government action, and asks Bernanke whether he's familiar with the passage. Bernanke was - it was from his dissertation, which is here. Bernanke then goes through the motions. He makes a joke. He provides a synopsis of the dissertation. He acknowledges the importance of uncertainty, but dodges any effort to pin it down and quantify it. He also raises the mixed signals the economy is giving right now about its confidence. All fine.
It would have been nice to tell Hensarling what you can figure out quite quickly from Bernanke's dissertation: it has nothing to do with policy regime uncertainty. It's all about uncertainty regarding the profitability of investment and the performance of the economy. I imagine Hensarling is thinking that policy is the only uncertain thing out there, so he tells his staff "go find something for me that Bernanke wrote about uncertainty is bad so I can use it to show him that I'm right and even he said so". If that was his goal, he seems to have picked the wrong document. Bernanke shouldn't have been so deferential (I didn't see the testimony - I'm counting on the fact that Real Time Economics would have reported if he said anything like this). He should have said "Representative, the policy regime uncertainty that you cite is obviously a relevant factor, but my dissertation talks about business uncertainty about the future, completely independent of policy - and that is primarily what they're concerned about and uncertain about now".
This whole "policy regime uncertainty" meme is real, but the way it's being presented is a distortion of what firms are actually worried about right now. They're worried about demand and economic performance. One of the biggest proponents of this "policy regime uncertainty" argument is the National Federation of Independent Businesses, the self-styled "voice of small business". The NFIB makes a lot of claims on news programs that concern about Obama's policies is strangling business right now. The problem is, this doesn't even match up with their own survey data. If you look at the most recent NFIB confidence survey, here, that becomes clear. On page 7, for example, businesses are asked to state the most important reason for their outlook on the expansion of their business. On page 20, they are asked to share the single most important problem for them. In both questions, it is the economic outlook responses and not the policy responses that dominate. This comes up in consumer surveys too, and most other confidence surveys I've seen over the last couple years. Don't get me wrong - the portion that is concerned about policy isn't trivial. But considering that their primary concern is economic performance and demand, a substantial share of them are probably concerned, like me, that policy isn't stimulative enough.
The bottom line is that Hensarling acted opportunistically with Bernanke's dissertation or at least didn't understand at all what Bernanke was saying. Bernanke was talking about a different kind of uncertainty, and survey after survey suggests that it is not policy regime uncertainty that is the primary concern of businesses. This is really spectacular - we just had the biggest health care legislation in decades. The fact that policy didn't register higher as a concern is notable in light of that. Part of this may be that there is no longer any uncertainty when it comes to health reform - they know what's going to happen and can plan for it. Part of it is inevitably a vote of confidence in the policy itself. Whatever it is, all the policy uncertainties that you could think of add up to less than the economic uncertainties.
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"...they know what's going to happen and can plan for it."
ReplyDeleteOr it is out of their control and four years in the offing, and thus is not immediately something to be concerned with. The fact that it does not come to fruition until 2014 took much of the sting out of the law. Most people in other words are concerned about the immediate future ... something that kicks in four years from now is not something to be immediately concerned with.
For most of the economy uncertainty is not the issue.
ReplyDeleteThere is policy uncertainty in the energy sector. A utility plant built today will still be in operation 50 years from today. Energy needs to know how much penalty will be given to coal so they can calculate future costs and compare against the alternatives. With the alternatives, subsidies have been promised but not enacted. With Dirty coal and oil, subsidies have been threatened but not withdrawn. Most of the economy is not fraught with this level of uncertainty. We need to go big with a big plan and big vision and all we get from Obama is incrementalism and the GOP is trying to block all alternatives and keep the dirty energy subsidies. Policy is having a huge distortion on the energy sector.
jonny bakho