Incidentally, Paul Krugman made an incisive point last week when he wrote:
Here’s a question I haven’t seen asked: If fear of future regulations and taxes is holding business back, as everyone on the right asserts, why didn’t the Republican victory in the midterms set off a surge in employment?
After all, if you really believed that fears of Obamanite socialism were the key factor depressing employment, the GOP victory — with the clear possibility that the party will take the Senate and maybe the White House next year — should greatly reduce those fears. So, where’s the hiring surge?
I even set out to write a blogpost citing this argument with approval — but around the time I was composing it, Krugman followed up with this bit of idiocy, to which a response seemed more urgent.
Now that that’s out of the way, I can come back to the bit about the missing Boehner Boom. It’s a more-than-fair question. How would you respond to it?
Obama care. Supreme Court challenges. House vs. Senate + POTUS. Challenger to Obama appears to be socialism-lite. An upcoming no-holds-barred election with an incumbent whose sense of propriety does not approach the civility of a knife fight. The fact Obama still polls in the 40’s. He has divided — he may conquer.
“How would you respond to it?”
The GOP-victory simply was not big enough. The US is clearly still GOP-constrained. How do I know so? Well, there has been no Boehner-boom. This however is no news, I have been saying this since the beginning: the GOP-victory was simply too small, they need at least a President for one or two terms.
Firstly, on the day of the midterms Republicans were widely given a very high chance of taking control of the House, which the markets presumably had already priced in. Hence, any gains from the subsequent adjusting of beliefs would have been a fraction of the total projected gains of Republican control, and could have been wiped out by other market movements that day. You could try looking back in the months before the election to see if there was a trend as the probability of Republican control steadily increased, but this is complicated by endogeneity (the GOP’s chances were negatively correlated with the performance of the stockmarket/economy, which could more than cancel out any “pricing in” of the projected benefits of Republican control).
Secondly, if the consequences of a Republican Congress were similarly bad as a Democratic one, then the markets wouldn’t move much. But that doesn’t mean that Democratic “socialism” is good or neutral for the economy, just that the Republicans are too incompetent to offer something better.
Finally, there’s the question of whether the stock market is really the most reliable indicator of the state of the economy. Sure, there’s a positive correlation, but there are ways in which they can be negatively correlated – say, if the government confiscates wealth from individuals and non-publically listed firms and gives it to publically listed firms. Perhaps the stock market sees the Democrats are better for the disbursement of rents.
If Sheetwise’s, Martin’s and Henry’s first explanations are sufficient, we should see a correlation over time between stock prices, and the prediction markets’ estimates of the probabilities of a Republican president in 2012.
Do we?
There should also be other evidence (eg, from surveys of businesspeople) that business is concerned about over-regulation.
Is there?
Mike H – as I said, endogeneity can make this tricky to measure. Republican control might cause swings in the market, but swings in the market might cause Republican control. That’s not to say it’s impossible to tease out the relationship, just that we can’t do a five minute simple correlation and be done with it.
The reason we have not seen a hiring boom is partly because the ability of the House of Representatives to unilaterally reduce taxes and regulations is limited and partly because there is little reason to believe that Republicans are truly committed to doing either. They talk the talk, but the last Republican president we had significantly increased spending and federal oversight, and the current Republican party seems to think that “cutting government spending” and “slowing the growth of government spending” are equivalent.
How about: Big businesses can lobby politicians on both sides for protection against competition through regulation no matter what those politicians promise. They can also lobby for tax loopholes or subsidies which help their business at the expense of others.
Most businesses are not big businesses and they fear that no matter what those politicians promise and no matter which side they are on, future regulations and taxes will be a greater burden than they are currently.
The answer is simple; from the baseline of sound economic policy, the two parties look almost identical. We shouldn’t expect much of a difference whether those in power are Republican or Democrat.
1. The US is a federation of states. Not all problems are caused or can be fixed at the federal level.
2. It’s not apparent the Republican victory was great enough to change the balance of power in the federal government.
3. It’s not apparent that the Republicans would follow policies qualitatively different from the Democrats.
4. Economists don’t talk about “regime fear” but “regime uncertainty.” If you know there will be future regulation, and you know what it will be, you can take steps now to mitigate the impact. The more you know about future regulation, the less costly it is to mitigate now.
So in fact when Krugman says:
He sets up a straw man, because future regulations and taxes aren’t a problem. Uncertainty over whether there will be future regulations and taxes, and what form they will take is. Considered like that a partial Republican victory in the midterms is worse than a Democratic consolidation, because it increases uncertainty over future regulatory and tax regimes.
Looking at it logically – we can start with the IF it is the fear of regulation that is holding business back. First lets take that as true.
There was no boom, therefore either:
1) the mid term election results did not reduce the fear, or
2) they did reduce the fear and things would otherwise have been much worse.
2 seems unlikely as two effects would have needed to exactly cancel out at the same time – not impossible, but not the most likely. This leaves us with either:
1) the mid-term election results did not reduce the fear. OR
2) it is not fear that is holding business back.
How could it be that the majority for the republicans would not reduce the fear of Obama’s regulation? Either
1) People think Obama will regain the losses next time
2) The Republicans will also regulate similarly.
2 seems unlikely, but 1 does not seem impossible.
So we are left with either
1) It is not fear of regulation that is holding business back, or
2) People think Obama will do better next election.
Either seems possible, or a mix of all the above.
The fact that the Democrats are wildly wrong about economic things doesn’t mean the Republicans are much better. Bush understood nothing about economics (he expressed surprise when one of his advisers let slip that restricting steel imports would harm the economy) and McCain was, if anything, worse. Until the Obamacare disaster, which won’t be undone unless the Supreme Court steps in, there was very little difference between the parties on economic matters. Even today, the Democrats propose to finance much of their agenda by proposing Medicare cuts that everyone knows won’t happen and the Republicans have become the party of “we won’t change a thing about Medicare.” So why would the prospect of electing a few more Republicans make a difference?
Consider abortion. For most of my adult life, the big difference between Republican and Democratic candidates has been their attitudes toward abortion. Yet what changes when one party or the other wins elections? At most, some rules about parental notification for teenagers.
There are two problems:
1) Over-regulation in the economy
2) Collapse in aggregate demand
Sure, uncertainty is a beotch, but it doesn’t necessarily outweigh (in its dis-utility) actual, certain, guaranteed harms and costs. Such have been piling up on business in America for over a hundred years now. These costs and regulations will need to be gutted and reversed to allow healthy growth – sorry Paul Krugman! The truth hurts, I know. All your well intended regulations turned out to have unintended consequences. Go figure.
On the aggregate demand point, once businesses have more customers and transactions again, they’ll begin hiring again. Democrats seem to have an odd theory on why businesses hire. They seem to think they hire because the government wants them to, and having done so, their level of sales will increase. Instead, as we all know, businesses hire when they need additional help dealing with increased sales. Our fiscal policy should be targeted at increasing demand in the short run, which will lead to those extra sales, which will lead to hiring. Not an absurd “Jobs Plan” full of tricks and temporary gimmicks.
Republicans could make the same argument Democrats made on the Stimulus: if Republicans hadn’t won the House, unemployment would be much higher than it currently is. So there wasn’t a hiring surge between 2009 and now, but there was a “surge” between the hypothetical universe where Republicans didn’t win, and the actual universe. Probably no more convincing an argument than when used by the Democrats on the stimulus.
1. The argument presupposes the GOP really will be substantially better (in the sense of better Krugman is disputing). Unproven and unclear. As sconzey notes, maybe also insufficient: employers need confidence current impedimnets will be lifted not just hat new ones will not be imposed.
2. He assumes that for a year now it has been likely Obama will lose. It is not clear even now.
3. Heat causes paper to ignite. Rub it a bit and warm it with friction; will it ignite? So, heat does not cause paper to ignite?
4. Actual policies not just hopes of policies matter. Actual policies have gotten if anything worse since the election.
5. It assumes facts not in evidence, viz that there has not been hiring based on these hopes. The statistic cited is too blunt to establish this putative fact. It could well be true, but it isn’t a slam-dunk.
I feel conservatives are fighting a losing battle here. Aggregate demand will almost always be a bigger potential factor than regulation. My god, its freaking demand! You are only missing supply to describe almost all of economics.
I’ve always found the argument of regime uncertainty to have relatively little evidence to support it. Lower sales are much more problematic now. However, this does not necessarily lead to Krugman’s preferred solution of massive stimulus as the correct prescription.
Krugman, who demonstrated that he can think in terms of varying degrees when we said that $800 billion of stimulus wasn’t enough, thinks in absolute terms about a Republican mid-term election win?
I agree with others that the power shift wasn’t enough. It was enough to retard even more damage from being done (which may be why things haven’t got much worse), but not enough to undo the damage that was already done.
For me, it’s really not about the election results but what the election results represent in the minds of voters. It’s not all that clear yet whether enough voters will have the fortitude to vote for the ‘get the gov’t out of the way’ crowd. The margins on the polls suggest about a 50/50 chance of continued gridlock with no repeals. If Obama’s, big gov’t Republican and big gov’t Democrat poll numbers started dropping to the 25% – 30% range I think we would start to see things shake loose.
I just noticed Jonathan Campbell stole my thunder — clearly had it not been for the midterms unemployment would be 15% now. Go ahead and prove it wrong!
@sconzey, Yes, it’s all about uncertainty but there’s less uncertainty when there’s a divided government. Gridlock discourages action, thus there is less to be uncertain about. Krugman’s argument works there.
But his argument doesn’t work because, as he points out, Republicans might very well take the Senate and the Presidency in 2012. So we’re back to a unified government, we’re back to “who knows what crazy nonsense will be passed now??” Add in the uncertainty from existing major legislation (Dodd Frank, health care, austerity measures) and you see uncertainty everywhere.
Draco and a few others recognized the answer–need for more demand.
Companies are not really worried about rules and regulations because they apply to everyone–so changes are equally (un)fair to all. So, all would change policies/procedures/prices the same because it is the lowest-cost way of meeting the new rules.
More important is a different question–one not asked.
Why was there essentially zero job creation 2001-2008? Can’t whine about govt regs there…. Employment needed to reach 147-million in 2008 to maintain the existing job-creation trajectory (2-million additional jobs/year). Yet job creation “flatlined” starting in 2001 and later. It tried to recover in 2005-2007, then died again. Yet, those new entrants to the workforce were created–where did they go? We know they did NOT go into the workforce OR unemployment….
This is what I thought at the time, and still do. The 2010 victory improved the odds that no further damage would be done to the economy, given what seems like a unified Republican House. Clearly any new pro-investment legislation would not pass. But most new damaging legislation has already passed. So all it did was maybe put a temporary stop to new bad laws.
For smaller government interference types,however,the big problems were already created starting in 2008. The 2010 elections can do nothing about them. Here is a small list of 3 other problems.
1)Obama has Bully Pulpit to demonize, if not “pre-criminalize” actions disliked by the administration (Boeing, Bank of America, EPA threats on CO2 enforcement–etc.)
2)Even if the Republicans sweep, the difficulty of overturning any entrenched law. Arguably, plausibly impossible.
3) The continued belief that “climate change science is settled” among enough republicans to perhaps pass more of that legislation
I actually do not believe PK is a serious person in his columns. I do think he has a moral outlook which tends toward strong equality of outcomes and he uses his credentials to imply objectivity in his commentary when he is really a propagandist. There is nothing wrong with his values per se—I disagree with them—but to pretend he uses valid economic arguments in most of his columns seems to me as a waste of time.
Before it became a mortal sin to utter the word Hitler, I used to say “even Hitler loved his dog”. Yes, PK can write comments and questions which have validity, but his intent is overwhelmingly ideological. I wish he would just say so. Like “I prefer greater equality even if the bottom quartile is less wealthy, as long as the upper quartile is even more unwealthy.
It all comes down to the Fed. The are the last mover. NGDP will be what they decide it should be. Pols can affect how much of that will be real vs nominal, which won’t show up in prices.
Congress has painted itself into a corner, and doesn’t actually control the levers of powers to reduce regulation anymore without a supermajority in the senate. The executive now has the power due to his control over the executive agencies and being able to create regulatory law without permission of congress.
On the other hand, I agree with him that uncertainty isn’t the problem. I think that the problem is risk of bad regulation. Businesses know what the future regulation will look like, they just know it is going to hurt.
Perhaps this is a bit off-topic, but with all the Krugman-bashing, I thought you might be interested in this article: http://krugman.blogs.nytimes.com/2010/12/06/trade-does-not-equal-jobs/
It includes such claims as “Yes, protectionism reduced world exports; it also reduced world imports, by the same amount” and “If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses.” So, he is claiming not merely that trade doesn’t necessarily increase jobs, but that it CAN’T increase jobs. He also says that “if the jobs we gain are higher value-added per worker, while those we lose are lower value-added, and spending stays the same, that means the same GDP but fewer jobs.” So, apparently, if we maintain the same standard of living while working fewer hours, that’s a BAD thing. Then there’s this completely dishonest statement: “But it does nothing to increase demand.” He’s clearly playing on the public’s ignorance of economic terms. Freer trade may not affect the demand CURVE, but it most definitely does increase the AMOUNT demanded.
This guy won a Nobel Prize? Seriously?
@sconzey : PK : If fear of future regulations and taxes is holding business back, as everyone on the right asserts
He sets up a straw man, because future regulations and taxes aren’t a problem. Uncertainty over whether there will be future regulations and taxes
Does the right in fact assert that business is held back by uncertainty about regulations, or that they are held back by fear of regulations?
And what does business in fact say they are held back by? Don’t they say they are held back by insufficient demand?
Wouldn’t individual businesses almost always, under 99% of economic conditions, complain of “insufficient demand”?
Employers are being careful to hire as they evaluating the potential for Europe to blow sky high any day now.
I would respond that the GOP is not sufficiently different from the Dems for it to matter. The GOP wants to increase regulations in plenty of areas that impact job growth. For example they want to tighten immigration laws. How they do this may very well impose a huge set of uncertain requirements on hiring for business.
IMHO tinkering with the rules creates regime uncertainty. It doesn’t really matter which side does the tinkering.
Mike H.
“And what does business in fact say they are held back by? Don’t they say they are held back by insufficient demand?”
Govt *anything* is external to the corp–so they can piss and moan about it without fear of being criticized.
Demand, on the other hand, is really a test of management and how well they are performing. When demand is down, that means management failed–and thus stakeholders and the board *should* be looking at how to improve managerial performance. Do you see that happening? We do NOT–because the one thing management wants to do is divert ALL attention to anyplace BUT management–because the use method of “improving” management is by replacing it…..
The “raise-the-debt-limit” kerfuffle probably added to the uncertainty, also the Greek crisis (not that I want to find excuses for the GOP).
“Wouldn’t individual businesses almost always, under 99% of economic conditions, complain of “insufficient demand”?”
Do they?
But what about on aggregate? What if you factor out the trend to see what is holding business back now, that’s different from, say, 1999 or 2006? What do you get?
Bob Murphy responds:
http://consultingbyrpm.com/blog/2011/10/boehner-boom-baby.html
(a) Why concentrate on fear of future regulations and taxes when weight of current regulations and taxes is obvious?
(b) The non-boom demonstrates that the expected value of throwing out the current rascals and replacing them with new me-too rascals is close to zero.