Santa's Business is Getting Sleighed by Uncertainty

From the folks at Public Notice/Bankrupting America comes this interview with a distraught St. Nick.

Comments

[pancakes]

Now this is just punderful!

[Anonymous]

This "uncertainty" argument is bullshit. If you want to make the case for lower taxes, make the case for lower taxes. But I'm entirely unconvinced that business owners are holding back massive expansion plans because of the GRAVE UNCERTAINTY posed by their personal income taxes maybe rising a whopping 3.6% at some point.

Or earmarks I guess, because why not throw those in even though those have nothing to do with anything! Yeah!

[Jack's Spleen]

Business owners are holding back massive expansion plans because of lack of demand. Minor expansion plans, like hiring one or two more people, are definitely on hold because no one knows what those employees' health care is going to cost, whether the fed's printing presses are going to cause serious inflation, when the economy is going to rebound, how all those same economic factors are going to impact their suppliers and customers, etc., etc. There's a lot of uncertainty in owning a business, and that uncertainty is only magnified when the government is making wholesale changes to the legal framework of running said business. Given that atmosphere, you can either risk it all and forge ahead or wait a little while and see how things shake out.

The fastest way to get the economy back on track is for the pols to stop fucking with it.

[Anonymous]

Oh please. Business owners employ accountants, not macroeconomists. Trying to pretend like hiring decisions are on hold because of TEH FED is idiotic, especially because that's a possibility that's always present.

(And besides, QE2 has turned out to be a fart in a hurricane. If you're worried about inflation you're basing your arguments on talking points instead of the data.)

[creech]

The effect is at the margin, Anonymous.
My employer deals with uncertainty by hiring temps. And by not adding machine tools, bricks and mortar, a new warehouse, etc. Maybe he doesn't not hire, but some of the guys delivering machine tools, bricks, etc. is out of work until the economy picks up. And if the boss is forced to send another 3.6% to the feds, then maybe he contributes less to the local
summer stock theatre or passes up a weekend in New York, which omitted spending has employment consequences.

By the way, if you want to donate another 3.6% of your income to the government, here's how:

Gifts to the United States
U.S. Dpet. of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782.

[Anonymous]

You need to read what I said more carefully. I don't dispute that higher taxes have these effects. What I dispute is that business owners are so stymied by the uncertainty over these taxes.

Two possible tax rates on the highest bracket two years from now?! Verily this must be the Sword of Damocles, for it will require our accountants to use two projections in their spreadsheets!

[Ted]

I like how we go about these uncertainty discussions. Nobody ever cites any empirical evidence (don't cite surveys since what people do and what people say are often very different.)

Now, of course, such evidence does exist. The VXO and VIX series are readily available empirical proxies for "uncertainty." They show no substantial level of uncertainty above the norm - which perhaps explains why nobody making this argument ever cites these implied volatility series.

Furthermore, in a standard RBC model with an uncertainty shock such uncertainty should lead to large falls in productivity growth. The stagnation of the economy is unjustified given the current productivity growth - if uncertainty were the driving impulse.

Honestly, has anyone ever considered that consumers and businesses are just behaving perfectly rationally and our indeed well-informed about future policy and its impacts on them. Maybe businesses have projected their future health care costs and have adjusting employment on the intensive and extensive margins accordingly. Maybe we are just seeing an efficient response to the economic environment rather than any nonsense about "uncertainty."

Also, the argument that the possibility of future tax increases will hurt output makes no sense. If there is a positive probability of a future tax increase, agents should substitute leisure inter-temporally and we should see an increase in output up until when taxes are raised. Same goes for investment given reasonable estimates of capital adjustment costs.

[R C Dean]

The VXO and VIX series are readily available empirical proxies for "uncertainty." They show no substantial level of uncertainty above the norm

These measure volatility in the financial markets, not uncertainty (risk tolerance/avoidance) in the broader economy.

The risk that most businessmen are worried about wasn't the expiration of the Bush tax rates. It is the continued hostility of this administration to private enterprise. That risk is unabated.

[Ted]

Uh, the VXO and VIX series are well accepted as proxies for uncertainty in the literature - because that is largely what they are. They are measuring implied volatility. A high implied volatility series implies that investors anticipate that large movements in either direction are likely. This is the essence of uncertainty - investors don't know what is going to happen. This doesn't mean there isn't uncertainty about future economic policy, but what it implies is that the hypothesized uncertainty is clearly not sufficient enough to be a major consideration within the markets and is thus not having a significant degree of real effects on the economy.

What you are talking about is akin to sentiment or a noisy business cycle where the impulse is noise about future policy. This may or may not be true, the evidence makes things unlikely as a major consideration however (I think Obama's policies are harmful in some ways, but I'm more worried about their future consequences than their current impact). The expectations of the future growth reductions driven by policy needed to justify this recession are implausibly large, unless we also assume implausibly large sunk and investment adjustment costs.

[R C Dean]

Ted, I'm just very reluctant to use financial market measures (however good they may be in that arena) as an indication of the uncertainty/risk perceptions of people who are running businesses instead of hedge funds.

Investors, especially professional investors, tend to have a much, much shorter time horizon than most people running businesses, which makes a big difference in how you process risk. Investors also have an easy exit from their position if risks come to pass, which business owners do not.

And I don't think that the uncertainty that plagues this economy has nearly as much to do with tax rates as it has to do with the kinds of potentially catastrophic regulatory overreach for which this administration is so fond. An investor who sees a new regulation coming down the pike can just sell that sector or (more likely) concentrate whatever he has in the big players.

A business owner worried about that same regulation isn't looking at a few mouseclicks to move capital around. He's looking at a potential disaster. Potential disasters make you hunker down, not hire, not invest, that kind of thing.