The Republican narrative on the economic recovery — or, as some are calling it, the “uncovery — is simple: It’s not Europe, or deleveraging, or lack of consumer demand. It’s government. Businesses, Speaker John Boehner has said, have been “slammed by uncertainty from the constant threat of new taxes, out-of-control spending and unnecessary regulation.” It is, for conservatives, a convenient narrative, as it argues for deregulation, tax cuts and spending cuts — policies that they have supported all along. But is it true?
A new paper by Larry Mishel, president of the Economic Policy Institute, attempts to test the proposition. Mishel proposes three ways of seeing whether an unusual amount of regulatory uncertainty is holding back the recovery: the growth in business investment; the growth in business employment; and what businesses themselves are saying. The story fails all three tests.
In the first case, Mishel looks at the growth in business investment as a percentage of GDP during the past four economic recoveries. It’s hard to spot much of a difference. “The data show that investment has increased more in this recovery than in the prior two recoveries and roughly the same as that of the 1980s recovery,” he writes. Here’s the graph:
Job growth has undoubtedly been weaker than we would like, but not as compared with the previous two recoveries. As Mishel writes, “there is certainly nothing special about job growth in the current recovery that stands out from the 1991 and 2001 recoveries to indicate a special regulatory-caused job problem.” The 1980 recovery featured substantially faster job growth, but that recession was the product of the Fed raising interest rates to break inflation, and so the Fed had the power to drive the recovery by lowering interest rates again.
Two other ways to make the same point: If fear of regulations was exerting some unusual influence on hiring decisions, you would expect to see a gap opening between GDP growth and job creation. But as a recent analysis by Goldman Sachs concluded, “the link between the growth rate of real GDP and the change in the unemployment rate, known as Okun’s law, continues to be very tight.” Similarly, if employers saw opportunities in the economy but didn’t want to hire more workers, they might be increasing the hours of the workers they have on hand. But there’s no evidence of that, either. Employees are working fewer hours, on average, than they were before the recession.
Finally, Mishel looks at what businesses are actually saying by calling up the small-business surveys conducted by the National Federation of Independent Businesses. Here, too, it is clear that concerns over sales, rather than concerns over regulations or taxes, are what have really changed in recent years:
“In conclusion,” Mishel writes, “when looking at both what employers are doing in terms of hiring and investing and what they (and their economists) are saying in private surveys, it’s nearly impossible to make the argument that uncertainty about regulations is holding back the economy.” Conversely, it is quite easy to tell a story in which concerns about demand and future economic shocks — say, from a default in Greece — are holding back the recovery.