Sunday, August 5, 2012

The uncertainty paradox

Via DeLong, Glenn Hubbard has been making the point that uncertainty hurts the economy. Here's what he had to say in the WSJ:

As a consequence, uncertainty over policy—particularly over tax and regulatory policy—slowed the recovery and limited job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4% in 2011 alone, and that returning to pre-crisis levels of uncertainty would add about 2.3 million jobs in just 18 months.

(Matthew O'Brien points out that this uncertainty was driven by the debt ceiling crisis and the European crisis, but that's somewhat off-topic for this post.)

Without getting into the weeds here (or mentioning how close the idea of fear of uncertainty affecting the economy comes to sounding like Keynes talking about animal spirits), my question here is how have Romney decisions affected uncertainty. I'm sure Hubbard would argue that Romney has a good chance of winning in November which would mean we would have a good chance of seeing Romney's policies implemented, but Romney has been extremely reluctant to release specifics.

If you need to make a business or investment decision that depends on tax policy, you have no way of accurately evaluating that decision until the election is decided and, in the event of a Romney victory, actual proposals are made in 2013. We're talking six months here, closer to to twelve if you include time for the legislation to pass and the dust to settle.  Therefore doesn't Hubbard's point about uncertainty imply that Romney is hurting the economy by refusing to supply essential information to businesses and investors?

(Much of this applies to Paul Ryan as well.)

I can imagine valid arguments for keeping policies broad and open-ended early in the process and I can imagine valid arguments for the need to reduce uncertainty.

But for the life of me, I can't imagine a valid argument for both.


  1. "1.4% in 2011 alone," huh? This quote sets off alarms for me in two ways:

    (1) The number just seems too damn big, it reeks of the sort of overcounting that is used to estimate the size of the economy controlled by the Mafia and other such iffy statistics.

    (2) The "in 2011 alone" bit has the sound of misleading rhetoric, implying that if you added up other years it would be more. But of course the number is a percentage, so adding in new years could increase or decrease it.

  2. At some point one has to presume that economies have grown under conditions of much greater uncertainty in the past (consider WW2, the Cold War, Victorian England). Perhaps we should be asking why people think our economy has grown so fragile?

  3. Just to review, Hubbard is trying to make the following argument:

    The possibility that Obama might return us to Clinton era policies and tax rates is causing sufficient uncertainty to greatly slow economic growth and the best way to alleviate this is to elect Romney.

    O'Brien and DeLong have done a good job dismantling the first part of the argument but I haven't heard that many people point out the hypocrisy of making this case while actively trying to add to that uncertainty.