Slow Job Growth Unrelated to Government Policies

Impact

In my previous articles on PolicyMic, I introduced the idea that there are three myths of the conservative economic examination, and that these constitute the main ideas of conservative arguments for policy action. This piece argues that low demand, not government policy is to blame for slow job growth. 

The "uncertainty" argument is one that has often arisen during discussions of economic policy. The issue posed is that current tax and regulatory regimes are unnecessarily burdensome. If you are looking for the culprit for persistent high unemployment, look no further, the argument goes. While the uncertainty problem feels intuitive and fits nicely within libertarian narratives about “big government,” there are several flaws that must be addressed.

To begin: "Uncertainty" has the potential to, and does, affect the way businesses make strategic decisions about investment, including hiring. The crux of my argument is that – when taken both individually and collectively – business behavior, surveys of business leaders, and the reality of the current tax and regulatory regimes (compared to previous administrations), do not indicate a particularly unique uncertainty problem today. There is little evidence to suggest that "uncertainty" is the driving force behind slow job growth.

First, we must put the current tax and regulatory environment in context. The current tax burden is at an historic low, with revenues amounting to just 14.8% of GDP, the lowest level since 1950 (average revenues under Reagan were 18.2% of GDP). Moreover, American corporations enjoy the lowest taxes on corporate income as a percentage of GDP compared to all other OECD member-states. Also, despite the alarming rhetoric, the current regulatory regime isn’t dramatically different from those experienced during previous administrations.

A recent survey conducted by the National Federation of Independent Businesses shows that small business owners are equally concerned with taxes and regulations under the current administration as they were during Reagan’s second term and less concerned relative to George H. W. Bush’s term or either of President Bill Clinton’s terms in office. This suggests that even during periods of relatively high concern about taxes and regulation, substantial job growth has occurred; "uncertainty" is not prohibitive for job growth. On the other hand, survey responses indicate high concern over poor sales (low consumer spending a.k.a. low demand). This accounts for the trends of high cash reserves and sluggish investment, as businesses are less likely to expand if they do not anticipate growth in demand. Furthermore, while small businesses report that general economic uncertainty is hampering business growth, they also indicate that they believe certain environmental regulations and standards will be beneficial for small business in the long term.

Even if we entertain the idea that current regulation is the cause of slow job growth, we would expect to see highly regulated sectors relatively more affected, but there is no evidence to suggest that this is the case. If businesses were concerned that tax rates or regulation will increase in the future, then we would expect to see businesses investing now to avoid the future higher relative cost of investment. There is no evidence to suggest that this is occurring either.

I will acknowledge that there may be some American business owners who are primarily concerned about tax and regulatory structures and are basing hiring decisions on those concerns, but the survey suggests this is far from a satisfying explanation of slow national job growth.

One particularly instructive piece from The Economist suggests something that often receives little attention in an uncritical, politicized informational environment: The fact that we have no idea what effect regulation and uncertainty have on job growth. There is no proper gauge or measurement of this effect, and the phrase "government regulation" covers a broad range of policies and rules, each with its own idiosyncratic implementation and widely varying degrees of impact. A generalized claim that “regulation is bad for job growth” fails to acknowledge this complex reality. The article further dispels the "uncertainty" argument by asserting that government decisions to temporarily suspend or postpone regulatory rules actually increase "uncertainty," but businesses prefer this to the certainty of imposed regulation, something paradoxical to the typical "uncertainty" argument.

The argument put forward by "uncertainty-mongers" is that the “crushing weight” of the tax and regulatory burden is driving low job growth is a fallacy. The overwhelming evidence today suggests that low demand, in the form of low consumer spending and doubts about the future economic picture, is driving low job growth. Even if one isn’t sold by this evidence, there is still the problem of proving a correlation between "uncertainty" and low job growth. The evidence just isn’t there. In the case of "uncertainty" driving low job growth, at a minimum, the jury is still out.

Photo Credit: DonkeyHotey