That Uncertain Feeling

September 5. 2011
Posted by Jay Livingston

(A shorter version of this is posted at Sociological Images

Long before the Freakonomics guys hit the best seller list by casting their economic net in sociological waters, there was Gary Becker.  If you want to explain why people (some people) commit crimes or get married and have babies, Becker argued, just assume that people are economically rational.  Follow the money and look at the bottom line.  You don’t need concepts like culture or socialization, which in any case are vague and hard to measure.*

Becker wrote no best-sellers, but he did win a Nobel.  His acceptance speech: “The Economic Way of Looking at Behavior.” 

In a Wall Streeet Journal op-ed Friday about the recession, Becker started off Labor Day weekend weighing in on unemployment and the stalled recovery.  His explanation:  in a word, uncertainty.
 These laws [financial regulation, consumer protection] and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.
It’s the standard right-wing, anti-government line, and Becker has impeccable conservative credentials, so I shouldn’t be surprised.  Still there’s something curious about it.  He pushes uncertainty to the front of the line-up and says not a word about the usual economic suspects – sales, costs, customers, demand.  It’s all about the psychology of those in small business, their perceptions and feelings of uncertainty,  Not only are these vague and hard to measure, but as far as I know, we do not have any real data about them.  Becker provides no references.  The closest thing I could find was a small business survey from last year, and it showed that people in small business were far more worried about too little demand than about too much regulation.


Compared with Regulation, twice as many cited Sales as the number one problem.  (My posts on uncertainty from earlier this summer are here and here.)

Desperate for data, I looked at unemployment rates.  Which sectors should be most plagued by uncertainty?  I turned to Becker:
political leaders wanted to reformulate antitrust policies away from efficiency, slow the movement by the U.S. toward freer trade, add many additional regulations in the medical-care sector, levy big taxes on energy emissions, and cut opportunities to drill for oil and other fossil fuels.
OK, got it.  The financial sector, medical care, and mining/fuel-extraction.  That’s where we should find the highest uncertainty, therefore those are the sectors where unemployment should be highest.   

And here are the rates as reported in the BLS August report


The three most uncertain sectors are also the three that are suffering the lowest rates of unemployment. 
If financial regulation has Wall Street shaking in its boots with uncertainty, that trepidation doesn’t show up in the employment numbers.  As David Weidner writes in the WSJ (here)
The securities industry still employs about 800,000 people nationwide, according to the Securities Industry and Financial Markets Association. That is only 7.8% fewer than the all-time high, and roughly the same as in 2006, when Bear Stearns Cos. and Lehman Brothers Holdings Inc. still roamed the earth.
As for other businesses, with both taxes and interest rates at an all-time low, the time to invest and hire should be now.
[The uncertainty-about-taxes-and-regulation argument] would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all.  (Mark Thoma quoting an e-mail from Gary Burtless. )
Surely there must be some data showing the importance of uncertainty.  This is the US economy, not a Bob Hope movie.  I can’t imagine that a Nobelist like Becker would pull unsupported ideas out of the air.  

Personal note: As I mentioned in an earlier post, my family is trying to sell a condo in Pittsburgh.  We could put more money into fixing the place up – hiring workers to trim the garden, fix the loose tiles, replaster and paint that moldy spot on the wall where the leak was.  This hiring would be our own small contribution to economic recovery.  But when we’ve discussed it, none of us has ever mentioned uncertainty about Pennsylvania taxes or regulations.  Instead, we talk about the demand, specifically the demand for truly elegant, spacious, ideally situated condos in Shadyside. 

UPDATE, Sept. 10:  A day after I posted this, Greg Ip had much better post on this topic at The Economist.

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* This is an oversimplified version, but it will do for present purposes.

5 comments:

Gene Hayward said...

A nice and informative post. One question though---would it not be credible to add "taxes" and "govt regs/red tape" together since they come from the same entity(ies)? This would represent the sum total of businesses concerns about government overall that exceeds their concerns about sales.Thank you..Respectfully submitted.

Jay Livingston said...

Gene, you're right when you phrase it that way. But that removes the most puzzling part of the argument -- uncertainty. For the small business people in that survey, the trouble with taxes, I assume, isn't that they're too uncertain but that they're too high. The same is probably true for "regulations." Matt Yglesias (here) adds some clarity to what I was trying to say.

Anonymous said...

Reminiscent of what Krugman referred to as the "confidence fairy"...

Anonymous said...

You cannot remove uncertainty. We need to change unfair laws. Taxes are too high. Greed is the real problem.

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