EPI’s Paper on Regulatory Uncertainty, AEI’s Respond and Small Businesses Freaking Out

There are a variety of arguments you see on the “supply-side” argument on why the economy is so weak. The one that generates the most heat is “regulatory uncertainty” – a way of explaining what is wrong with the economy that fits nicely with the Republican and conservative agenda of repealing the healthcare and financial reform bills specifically and regulation generally.

Larry Mishel has a great paper over at EPI – Regulatory uncertainty: A phony explanation for our jobs problem – which debunks this claim using three points. Ezra Klein has a summary.  Here is the key graph:

As asymptosis points out, this story requires that uncertainty is driving business to be “investing more in equipment and software — which is a permanent sunk cost – than in any recent recession, but they won’t hire workers, who they can fire if necessary?”

I was curious what kind of blowback this paper would get from conservative wonks.  Over at EPI’s spiffy new blog, Larry Mishel responds to an American Enterprise Institute review of the paper by James Pethokoukis, Why Business Uncertainty Really Is Killing Growth, noting that there’s no there there.  Pethokoukis:

EPI points out, for instance, that a recent survey of small businesses found “poor sales” to be their single-most commonly cited problem. So time for Uncle Sugar to borrow/spend more money pumping up consumer demand, right? Maybe not. While it’s true that 25 percent blamed “poor sales,” 37 percent blamed either regulations (19 percent) or taxes (18 percent.)

Another piece of EPI evidence: Private sector employment is up 1.1 percent during the 25 months of this recovery vs. a 0.6 percent drop during the “jobless” recovery following the 2001 recession. But go ahead and contrast the Obama recovery, instead, to the Reagan recovery where private sector jobs grew 9.9 percent during its first two years. One difference then: taxes and regulation were on a pro-growth trajectory—unlike today. (EPI credits Fed easing rather than Reaganomics.)

Maybe EPI should run its own survey and ask entrepreneurs whether they would like to operate in an economy where government spending was running at 28 percent of GDP, revenues 24 percent, and big budget deficits extended as far as the eye could see. That is, by the way, exactly the fiscal scenario EPI recently concocted.

I’m pretty certain of how business would answer.

Pethokoukis has just joined AEI, presumably based on the strength of his recent Commentary magazine article against the stimulus, an article which had a brutal takedown by Ezra Klein right after it came out and to which Pethokoukis hasn’t responded.  (Seriously, it’s a brutual takedown.  It’s the econ wonk equivalent of “Why are you hitting yourself?”)

Three things.

1.  There’s an important nugget buried here about right-wing arguments on the economy in this Lesser Depression.  Notice how Pethokoukis’ evidence is actually an hypothesis.  For he’s making an argument: that businesses are responding to growing uncertainty on budget deficits, taxes and uncertainty, and if you asked them it would be obvious.

Mishel does ask them by observing their aggregated behavior in the marketplace – their choices concerning sunk-cost business investments – as well as their answers to business surveys, etc.  Pethokoukis simply repeats the hypothesis but stronger, and believes this is some sort of actual piece of data.  But “businesses hate the budget deficit” is a theory, not a conclusion and especially not a piece of evidence.  Where’s the evidence?

2.  I really should just join the right-wing.  Here’s how Pethokoukis, if he wanted to, could structure the Small Business’ Single Most Important Problem data to try and refute Mishel.  Here’s the Single Most Important Problem, with four relevant data points.  December 2007, when the recession started.  April 2010, when it became clear that Obama was going to be successful in passing Health Care and Financial Reform.  November 2010, when the GOP routed the Democrats out of the House and reform was dead and it looked like Obama might try to tack to the center, and now:

(Data: Here’s May 2010, covering April; December 2010, covering November; September 2011, covering August; January 2008, covering December 2007.)

Instead of posting all the data you post just a little bit of it, and here’s what you type at the AEI blog:  “As you can see from these two data points [Regulation, April 2010 and now], when you compare regulation concerns between when Obama passed Health Care and now, regulation concerns have gone up!  Also Poor Sales is declining since then, so liberals are destroying the economy.”

You don’t mention regulation concerns only went up since the GOP took over, you forget to mention that there’s a separate “cost/availability of insurance” index which is down, you especially don’t mention that taxes as a concern is down in 2011, and you extra especially don’t point out the massive changes between poor sales and labor quality/cost from the beginning of the recession to now.  Just sneak that one gotcha datapoint there so there’s some data to back up your idea.  Now where’s my oil company funded right-wing scholar position in DC?

3.  I actually haven’t looked at the small business data in a while.  And wow, it had a terrible August.  Business confidence is plummeting in real-time due to, yup, demand problems.  Check this out:

Confidence in the future of the economy crashed in August, taking the Small Business PESSImism Index down 1.8 points to 88.1. This was the sixth monthly decline in a row. The expansion is officially two years and two months old, but the small business half of the economy is still in the “tank”. Expectations for real sales growth and business conditions were the major contributors to the decline for the second month in a row.

Confidence has been declining for six months, with a big drop in August due to sales and general business conditions, not regulatory issues or cost of labor. Here’s their confidence metric:

And here you can see future expectations of sales in the next three months plummeted as well:

Bad times on the horizon, and efforts to combat Too Big to Fail aren’t causing them.