Don’t Blame Uncertainty for the Weak RecoveryChris Farrell
A refrain among critics of the Obama administration and the Federal Reserve Board in recent years is that a rise in economic uncertainty accounts for the tepid recovery from the Great Recession. The idea is that uncertainty has reached unusually high levels thanks to the government’s policies, such as the Affordable Care Act, and the Fed’s unconventional quantitative easing. Lacking clarity about the future cost of doing business, CEOs have held off on hiring and investing, dampening growth.
Seems sensible, doesn’t it? A shared sense of uncertainty—pessimism, really—does tend to rise during tough economic times, while uncertainty declines—hello, optimism—when the economy is flourishing. Still, on reflection the argument that heightened uncertainty is behind the anemic recovery isn’t persuasive.
For one thing, there are more powerful reasons for a less than robust economy. It takes time for households to recover from the bursting of an historic real estate bubble and get out from under record debt burdens. Taken altogether, the “2008 housing bubble burst and the ensuing global financial crisis destroyed an unprecedented 22 percent of accumulated American wealth,” estimates John Makin, an economist at the American Enterprise Institute. “Little wonder, in view of the unprecedented 2008 wealth loss, that the global financial crisis produced lasting effects on American consumption, saving, and investment, along with record levels of monetary and fiscal stimulus aimed at easing the pain.” Uncertainty in this view is a lingering byproduct, not a cause, of the Great Recession and financial crisis.
Also, while the term “uncertainty” certainly sounds bad, it’s also in the nature of modern capitalism. When has business ever felt sure about the effect of government policy? A small but telling example: The Tax Foundation in Washington notes that the number of tax expenditures—deductions, credits, exclusions, exemptions, and other tax preferences—has increased 96 percent since 1991, to more than 200 provisions. Some stability.
Even more important, uncertainty is normal in an economy defined by the twin forces of upheaval—globalization and technological advances. You could say that uncertainty and innovation are in fact two sides of the same capitalist coin. “Thus, as John Maynard Keynes was the first to see, the uncoordinated nature of the modern economy’s entrepreneurial projects spawns a future unfolding in ways and magnitudes that are very indeterminate,” writes Nobel laureate Edmund Phelps in his new book, Mass Flourishing. “About the future, Keynes wrote, ‘we simply do not know.’” In other words, the past will always appear much more understandable and predictable than the future.
We don’t know how high and fast interest rates will rise as the Fed starts tapering back. We don’t know who the president will nominate to next head the Federal Reserve. We don’t know how much emerging markets will slow down in coming months. We don’t know how efficiently the new health insurance exchanges will operate once they open for business in October. The list of known unknowns and unknown unknowns is long. Yet markets and consumers seem to be taking the uncertainty in stride, with economic confidence (Gallup poll measure) holding up well (despite dipping from its May high) and the Standard & Poor’s 500-stock index hitting it’s annual peak in August.
Until now. War is different. War is bad for the economy, and, at a minimum, the prospect of U.S. airstrikes aimed at Syria has dramatically raised the uncertainty level. The history of military strikes is full of miscalculation. In the case of Syria, the risk of an escalating catastrophe is large with Egypt, Libya, and other Arab nations in turmoil; jihadist groups feeding off regional strife; and the deep tensions with Israel. The expression the “fog of war” is a reminder that from Kosovo to Iraq to Afghanistan, military conflict is hard to contain. Remember when the invasion of Iraq was supposed to be short? Of course, a surgical strike could accomplish its goal of punishing Bashar al-Assad for using chemical weapons on Syrian civilians with little spillover effect. But there’s no way to be sure.
Here’s the thing: There is a strange, disturbing disconnect between the rumbling of U.S. military action in Syria and talk of a debt-ceiling crisis in October or even a government shutdown. (Mid-October is when the government should run up against the debt ceiling.) The debt-ceiling face-off is a self-inflicted crisis that risks damaging confidence under ordinary circumstances. Now, with the Syria conflict unfolding by the day, any talk of government shutdown and debt-ceiling leverage is deeply perilous. Congress—really, House Republicans—should take a dramatic step to give investors and business at least a modicum of certainty at a dangerously uncertain time: Take the threat of a debt-ceiling crisis and a government shutdown off the table. The pledge would be good for the economy, and, to say the least, it would be the responsible thing to do.