President Beaux Zeaux and his fellow Proglodytes have achieved yet another first: “the worst economic recovery in history”.
Historically, the vigor of an economic recovery is inversely related to the severity of the preceding recession. For example,
The Great Depression started with major economic contractions in 1930, ’31, ’32 and ’33. In the three following years, the economy rebounded strongly with growth rates of 11%, 9% and 13%, respectively…
In the early 1980s, the economy experienced a double-dip recession, with contractions in both 1980 and ’82. But growth rates in the subsequent two years averaged almost 6%. The high growth that persisted throughout the 1980s brought the economy quickly back to the trend line.
Even though Beaux Zeaux claims he did not know how bad the recession was (despite oceans of economic data available to any modern President or even the risible, pointless, and narcisisstic institution called the “Office of the President-Elect”) simple historical precedent would have predicted that the US economy would come roaring back. But it hasn’t.
So what’s up?
Almost two years ago, I wrote a post entitled “Uncertainty: The Poison in the Economic Well“. I’m no economist, but I have been a rather serious student of human behavior. And it’s no secret that uncertainty is a major driver of human behavior. Uncertainty freezes.
“There are too many kidnappings in Mexico to travel there.”
“I’ll buy that stock after I see the outcome of the lawsuit.”
“Did you hear that noise?”
“Don’t go down in the basement!!!”
Uncertainty can also drive behavior. It drives us to buy insurance (what if the house burns down?). It drives consumer behavior (we’d better go to the store before the storm hits), and it can drive investment and saving choices (should I buy gold?).
The behavior that uncertainty freezes is growth-oriented and outward-directed. The behavior that uncertainty drives is “hunkering down”, it’s hedging — it’s defensive. Defensive economies don’t grow.
In 2010, I offered two contemporary quotes:
“We have to pass the [Obamacare] bill so that you can find out what is in it…”
– Nancy Pelosi
“No one will know until this [Dodd-Frank banking bill] is actually in place how it works.”
– Chris Dodd
Both those Acts are still major sources of uncertainty today.
Well, thank heaven some real economists have gotten into the act. Baker (Stanford), Bloom (Stanford), and Davis (Chicago) did some excellent work developing an economic index of policy uncertainty. Their index was constructed by combining three types of uncertainty:
- the frequency of newspaper articles that refer to economic uncertainty and the role of policy,
- the number of federal tax code provisions set to expire, and
- the extent of disagreement among forecasters about future inflation and government spending.
Some events – e.g., 9/11, Katrina, the Japanese earthquake, and the Arab “Spring” – inject economic uncertainty, but they do not inject policy uncertainty. Non-policy events may cause anxiety and/or sudden drops in equity markets, but the historical data show they do not generally depress economic growth over a sustained period. The chart below shows a plot of the Baker-Bloom-Davis (BB&D) policy uncertainty index, and it’s easy to see that policy uncertainty is at historically high levels.
And what are, according to BB&D, the sources of uncertainty?
- vitriolic political attacks on “the rich” and businesses
- lack of will on deficit spending and entitlement reform (debt limits and public pensions)
- political intransigence on energy policy (“green jobs” and fossil fuel policy)
- labor disputes (the Boeing South Carolina plant dispute)
- health care (still don’t know what in it, or even if it’s Constitutional)
- Dodd-Frank regulations in limbo (1+ yr overdue)
- “taxmageddon” (2013/4’s across-the-board tax cut expirations)
That’s more than enough uncertainty to choke a horse, or even a hippopotamus; it’s enough to choke the world’s most dynamic economy. Business is hunkered down. Families are hedging their bets. According to Rasmussen, our most accurate pollster, only one-quarter of survey respondents think the country is on the “right track”, and two-thirds believe our best days are in the past.
If we can rid ourselves of the poison – i.e., Beaux Zeaux and the Proglodytes – in November and get some policy sanity, BB&G estimate that businesses would create an additional 2.5 million jobs over the next 18 months.
It ain’t rocket surgery, people. It’s just simple sanity.