Congress is back in session, and corporate America’s favorite excuse is back in action.
Uncertainty is once again hampering executive decision-making and holding back economic growth, Randall Stephenson, the chairman of AT&T and the Business Rountable, told the New York Times in an article ominously headlined “Uncertainty in Washington Poses Long List of Economic Perils.”
This is a common complaint from CEOs. It's a complaint that always gets far more credence than it deserves for two reasons: Reporters and policy makers take the complaints of CEOs themselves as evidence of actual economic harm, and some studies purport to show that uncertainty has in fact hurt the economy.
It turns out, however, that when CEOs complain about “uncertainty,” what they really mean is “more corporate tax cuts, please.” And all the evidence suggests that a common side effect of curing uncertainty -- government austerity -- is far more harmful than uncertainty itself.
Earlier this week the Business Roundtable said its index tracking the economic outlook of CEOs has dropped and now predicts a 2.5 percent economic growth rate next year, unchanged from 2014. In a press release, Stephenson said “the economy ended the year essentially where it started – performing below its potential."
And he offered this predictable prescription: "Congress and the Administration should act now on tax extenders and Trade Promotion Authority to encourage additional business investment.”
That’s an amazingly honest statement: Uncertainty is hurting the economy, therefore we need a fresh round of corporate tax breaks and trade negotiations.
Fascinatingly, more CEOs told the Business Roundtable they were planning on increasing hiring than last quarter. This suggests that, while certain tax-dependent decisions must wait for tax policy to be sorted out, the underlying revenue streams of the businesses represented by the Roundtable are in no way endangered by action, or a lack thereof, in Washington.
Research purporting to document uncertainty's negative effects isn't much more convincing than the worrying from the executive suite. A paper cited by the Times and written by the private research firm Macroeconomic Advisers for the Peterson Foundation -- a group founded by private equity billionaire Pete Peterson that is devoted to lowering the national debt by cutting benefits -- found that uncertainty plus reduced government spending cut 1 percent from economic growth from 2010 to 2013. Reduced spending accounted for 0.7 of that 1 percent. That’s not uncertainty at work, it’s just bad fiscal policy hurting the economy.
And what about that remaining 0.3 percent of annual growth that was supposedly lost because of uncertainty? Macroeconomic Advisers claims it came from lower stock prices and higher borrowing costs. In an email to The Huffington Post, Macroeconomic Advisers' Joel Prakken said "the link between capital costs and GDP is standard macro fare," and that policy uncertainty was "highly correlated with financial risk premiums."
The recovery has had many problems, but a depressed stock market and high borrowing costs are not among them. Sure, there have been some bumps along the way, but major stock indexes have more than doubled in the past five years, while borrowing costs for companies and consumers have stayed near record lows.
And it's quite a stretch to suggest that a few, short-term points shaved off the S&P 500 or a few basis points added to extremely low interest rates for some companies caused a 0.3 percent drop in gross domestic product. The relationship between economic growth and funding costs for corporate borrowers is a standard claim but a tenuous one.
Another paper, by the Kansas City Fed, claimed uncertainty cost the U.S. economy more than 8,000 jobs per month from 2010 to 2013. To quantify uncertainty, it used the VIX, an index that measures volatility in the stock market.
That’s an odd choice: Stock-market volatility does not represent the decisions of people in different sectors of the economy. The VIX is people and algorithms (lots of algorithms) talking to each other about stock prices. It can tell you something, but it doesn’t tell you much about the decisions of, say, a regional purchasing manager at a national grocery chain.
The Kansas City Fed also found that jobs were lost as a result of episodes, like the 2013 debt-ceiling debacle, that led to government spending cuts. But it didn't distinguish whether the job losses were caused by uncertainty or by the spending cuts that ended the uncertainty.
The idea that government spending cuts had a negative impact on the recovery is not new. Former Fed chairman Ben Bernanke repeatedly pointed out that fiscal policy during much of the recovery was "counterproductive.”
The recovery has not been held back by a vague notion of uncertainty. On the contrary, it’s been the certainty with which bad policies have been passed that has hurt the recovery. When it comes to CEOs using uncertainty as a code for more corporate tax breaks, it’s best to take Matt Ygelsias’ advice and stop listening to the policy advice of successful businessmen just because they are successful businessmen.