A longer version is cross-posted at Montclair SocioBlog.
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 Street 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.
There’s something curious about this. Becker 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.)
In addition, the sectors of the economy that should be most uncertain about regulation – finance, mining and fuel extraction, and medical care – are those where unemployment is lowest.
More, as David Weidner writes in the Wall Street Journal, taxes, interest rates, and regulation at an all-time low.
[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).
If it’s really uncertainty caused by these things that causes a reluctance to hire, the time to invest and hire should be now.
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* This is an oversimplified version, but it will do for present purposes.
Comments 8
Anonymous — September 7, 2011
Yeah, I think political rhetoric about taxes affects perception. Taxes might be at a low rate now, but small business owners fear them going up not only because theirs might rise, but if taxes rise overall, people will have less disposable income to spend on goods and services.
It would all depend on who you're selling to, really, and whose taxes go up. Luxury sector, small grocery store that is located in a low-income neighborhood, selling home improvements to middle-class suburban people?
Yrro Simyarin — September 7, 2011
Uncertainty about regulation has much less to do with how much regulation there is currently, and much more to do with uncertainty about what new regulations might be imposed. Even if taxes were say, 50% higher, a business owner would know what to do with that. It's a much worse situation to hire a bunch of people now and find out six months later that taxes are being raised by 50%... at which point you have to lay all of those people off.
Anonymous — September 7, 2011
Becker 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.
Becker's argument may make more sense in terms of a "classical" recession, but this is not one. A classical recession involves some kind of economic realignment -- some industries shrink, others grow. A textbook example here is the postwar recession, caused in large part by the economy transitioning from wartime to peacetime production.
This most recent recession is different. It was sparked by a debt and banking crisis, where debt increases of the past fifteen or so years have finally caught up to the economy. For the first time since the second world war, consumer spending fell over the course of the recession (others had consumer spending flat or edge upward slightly -- the fall was in other components of GDP).
Your typical household now has a high debt burden, little to no equity in the home (if they even own one), middling-at-best job prospects, and no confidence that things are going to get better. Of course households are going to cut back and reduce their standard of living, and businesses cannot sell products for which there is no demand.
I suppose in a perverse way, Becker is right -- uncertainty is driving this recession. But it's not uncertainty on the part of businesses[1], it's uncertainty on the part of wage-earners and consumers. It's justified uncertainty at that, and the situation isn't going to be mollified merely by optimistic words. Real intervention on job creation or debt management may help, but I'm not sure what that would look like in this political environment.
[1] -- Another way that Becker's argument here is wrong is in business statements. If businesses really were crippled by uncertainty, they'd be obligated to report that uncertainty at the same time they project earnings over the next couple years. They're not doing that, and in fact corporations are still expecting large profit margins.
Larrycharleswilson — September 7, 2011
Life is uncertain.. Get over it.
Is Uncertainty Suppressing Job Creation? » Sociological Images | Free Images — September 7, 2011
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Anonymous — September 7, 2011
Im pretty sure "uncertainty" translates into "having a democratic president"