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  • The Uncertainty Factor

    Liberals are trying to take a big victory lap today over the stimulus. They proudly proclaim that the stimulus created more than two million jobs. They base these findings on models that simply multiply government spending by a multiplier to produce the net growth to jobs and GDP. Digging a hole in the ground is good for the economy as long as the government is paying for it in these models.

    Yes, the labor market has stabilized. Job losses are not as big, but job creation is slow and sluggish. Liberals can blame themselves, since businesses will delay hiring as long as possible due to the heavy-handed policies being tossed around in Washington. Businesses will be subjected to more regulation and higher costs as the government expands its reach into the private sector. And it’s not just policy wonks at think tanks that are worried about this. Key policymakers are concerned about the chill that Washington has thrown over the labor market.

    Businesses are unable to calculate the price of labor, because businesses do not know which proposals will pass. Health care could still pass, which would bump up labor costs for many businesses. So right now, it is impossible for a business to calculate how much a worker will cost in a few months. Businesses will not hire until they know that an additional worker will be profitable.

    Narayana R. Kocherlakota, president of the Federal Reserve Bank of Minneapolis, worried about this point in a recent speech:

    I see two areas of concern. First, there is a great deal of uncertainty related to major policy initiatives under consideration in Washington. Congress is considering proposals for enormous changes in health care and in the structure of financial regulation. These proposals have generated a great deal of uncertainty, for the capricious winds of politics seem to change them on a near-daily basis. As bankers, you know that too much uncertainty in a business plan makes for a risky loan. The same is true for the economy as a whole. I see this kind of political uncertainty as problematic for the prospects of rapid recovery.

    Cross-posted at The Corner.

    Posted in Economics [slideshow_deploy]

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