Regulatory Uncertainty in the Obama Administration: Part II

Source: U.S. Bureau of Labor Statistics, Heritage Foundation

Last week, I published an article showing four examples of how the Obama administration’s regulatory uncertainty has had a negative effect on the economic recovery. In that piece, I noted that private sector growth sharply decelerated following the passage of the Patient Protection and Affordable Care Act (PPACA) of 2010.

The most common criticism was that the private sector job growth’s sharp deceleration primarily reflected sluggish GDP growth due to lackluster demand. Some further argue that compared to sagging demand, the effect of the PPACA’s passage was immaterial.

While I would agree that weak demand was primarily responsible for the continued job growth deceleration by early 2011, the data does not appear to support this thesis during the first two quarters of 2010. This period had the two highest GDP growth rate-quarters during Obama’s presidency.

The chart below shows private job growth decelerating immediately following the PPACA’s passage in March 2010, despite a strong quarter of 5.5% GDP growth before the PPACA became law, and a solid 5.4% GDP growth in the quarter after.

Source: Adapted from the Heritage Foundation, BEA

If one layers the S&P 500 over the same period, there is nothing but an upward trend through July 2011.

Source: Adapted from the Heritage Foundation, BEA, Yahoo! Finance

It so happens that most corporations have plenty of cash, yet they are not hiring. Instead, they are reacting to an era of policy and regulatory uncertainty by buying back stock and paying investors dividends. In fact, 2010 was the fifth-largest year for share repurchases since at least 1985. Corporations bought back $325.8 billion of stock in 2010, more than double 2009 levels. According to The New York Times, American corporations reported their highest profits ever in the third quarter of 2010 (as of November 23, 2010), and had grown for seven consecutive quarter up to that point. The New York Times attributes the increase in profits primarily to “strong consumer spending.”

So much for attributing 2010’s job growth deceleration to weak demand.

It is still unclear just how much passage of the PPACA led directly to a deceleration in job growth. That said, to claim it had no significant effect whatsoever, flatly ignores available data.

About Sean Patrick Hazlett

Finance executive, engineer, former military officer, and science fiction and horror writer. Editor of the Weird World War III anthology.
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22 Responses to Regulatory Uncertainty in the Obama Administration: Part II

  1. I think you’re misreading the lack of hiring as being caused by policy and regulatory uncertainty. The real cause(s) are market uncertainty and increases in worker productivity, which have allowed companies to produce more with the same or less labor. Policy and regulatory uncertainty may be annoying, but I think it’s hardly the reason businesses are holding back. That’s a fallacy promoted by people like the Koch brothers.

    • pino says:

      I think you’re misreading the lack of hiring as being caused by policy and regulatory uncertainty.

      Consider roulette.

      Red, Black and Green.

      18 of the first two and 2 of the last one. You know the odds.

      Can you imagine how disruptive to the game if, after you bet and the wheel spun, the number of Red, Black and Green slots changed at random? Or worse yet, changed at random with a trend AWAY from the color you selected. Not only would the number of players diminish but the amount per bet would as well.

      Or better a buck on “heads-or-tails” and in the middle of the toss, you were told that to win, you needed to win twice in a row.

      THAT is what happens when all of a sudden a President makes a rule that says “yeah, those people you hired? 35% more expensive. And if you fire ’em, you have a penalty too.” Guess what?

      Few people gamble.

      to claim it had no significant effect whatsoever, flatly ignores available data.

      Fantastic analysis Sean! All I can say is “Yeah. What HE said!”

    • Chuck,

      I think you are ignoring the data here. While I agree that productivity growth is certainly part of the equation, there is no way it explains the dramatic deceleration of hiring that coincides with the passage of the PPACA. The effect you see here is very similar to what physicists refer to as an impulse function. Productivity gains happen over time, not nearly instantaneously.

      In turns of market uncertainty, the S&P 500 shows a hockey-stick like trend upward. Plus, businesses had record profits and plenty of cash on their balance sheets. Yet, still they dramatically decelerated their hiring. Healthcare policy clearly played a part here, particularly regarding the uncertainty of future employee costs.

      Koch conspiracy or not, the data shows a high correlation between a hiring deceleration and passage of the PPACA.

      Policy matters.

  2. sam sanders says:

    Is it possible corporations are hiring, just not in the U.S.? Are cheaper international labor markets/globalization trends playing a bigger role in this equation than legislation? I understand they killed it by killing its funding. Is it possible legislation like the PPACA is just a convenient scapegoat for those who stand to gain the most from the poor state of our economy? (Is it also possible these types of legislation are just for show and the president and dems know full well they will become impotent but just throw them out there to pander to the voters?)

    The above graphs show a correlation but the causation argument seems a little on the subjective side. I’m not much for conspiracies, but money does have a compelling way of speaking (e.g., What happened to the Dodd/Frank bill and Elizabeth Warren, who were going to hobble Wall Street?). Policy matters, but enforcement of policy is really what it comes down to. I still hear arguments about how we have too high a corporate tax rate. True, we have one of the highest corporate tax rates in the world. Thing is, the big dogs have spent billions over the past thirty years so they don’t have to pay it. Now they get money back. Like most economists, I don’t know economics well enough to know whether this is good for the economy or not, but I think it is dangerous to ignore the influence of corporations in making and neutering national regulatory policy before we blame policy.

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  4. “Is it possible corporations are hiring, just not in the U.S.? Are cheaper international labor markets/globalization trends playing a bigger role in this equation than legislation?”

    Sam, you raise an interesting point. Since the PPACA increases the cost of American labor, it stands to reason that if large multinationals had to hire, they would be more inclined to hire offshore than in the United States due both to the higher corporate tax rate here and cheaper labor costs overseas. In fact, it is possible that more corporations may have decided to offshore in reaction to the bill (though I have not looked for or found any evidence to support or refute this point).

    “The above graphs show a correlation but the causation argument seems a little on the subjective side.”

    I am not suggesting that the PPACA was the sole cause of this rapid hiring deceleration, but I think it was an important catalyst. The economy involves such a complex set of inputs, outputs, and positive and negative feedback loops, that no one will ever know for certain what effect or to what extent passage of the PPACA actually had on hiring. The best we can do is argue about the data we do have. Heck, historians and economists still cannot agree on whether FDR helped or hurt the economy in the great depression.

    Ultimately, I believe that good policy helps smooth the function of free markets. Bad policy distorts and hampers them. My opinion based on the only data available (which is admittedly meager), is that businesses reacted negatively to the PPACA’s passage by being more conservative about hiring people.

  5. You should know the danger of looking for correlations: what about bad weather (tornadoes in the mid-west), rain floods, droughts in the southwest, cold weather in the north? I’m willing to bet you could find a “correlation” between the lack of hiring and the mating patterns of Beluga whales if you looked for them. My point is that coincidental data points aside, there is no empirical evidence that potential regulatory and policy changes has had any effect on hiring.

    • What’s your explanation then? Did Americans become 3x more productive in one quarter?

      When businesses expect the cost of labor to rise or don’t know how much it will cost, they delay hiring. The explanation follows the basic principles of economics, and the data seem to point to it. You can talk about Beluga whales all you like, but the fact is that you cannot provide a compelling alternative to explain the data that coincides with your worldview that policy has no impact on the economy.

      • No. That is not how it works.

        You are asserting that signing a bill -> increasing unemployment. You have to substantiate it. You can’t tell everyone who challenges your assertion to prove a negative.

        To substantiate your argument (in your previous post), you have cited exactly one bit of data: a survey taken in May, 2010, where 1 in 4 employers surveyed thought that the ACA would raise costs by three percent or more in 2011. That’s it.

        You have deep in your bones an unmovable belief that the ACA is bad. And that’s fine. But you can’t substitute that belief in your bones for a substantive argument, not if you intend to convince anyone. The unemployment rate moves in response to a whole bunch of factors, chiefly economic growth. That’s why it’s important to note that growth has slumped in the US, and the world, since the signing of the ACA. Maybe Chinese exports fell in response to the US enacting a moderate, deficit-reducing, Heritage-Foundation -based health insurance reform policy; but I doubt it.

        An example: When Ronald Reagan was sworn in, the unemployment rate was under 8 percent. By 1983, it exceeded ten percent. There it is, proof positive, by your argument, that Reagan’s tax cuts caused unemployment.

        • But GDP growth was not weak when the hiring deceleration began! And therefore your argument collapses on its face.

          The hiring deceleration started when GDP was at it’s highest rate during Obama’s presidency! GDP was growing, not shrinking! You are arguing that corporations weren’t hiring because of low GDP growth, when GDP growth was strong.

          Let me get this straight: do you believe 5.5% and 5.4% GDP growth are weak?

          You, my friend, have an unshakable belief contradicted by the data, that policy has no impact whatsoever on economic growth.

        • Sigh.

          You have still not offered any causal mechanism whatsoever by which a law that mostly takes effect in 2014 would result in a decline in employment today.

          You cited one study. From a year and a half ago. A survey finding that 1/4 of firms thought that the ACA would increase prices by 3 percent or more.

          That is it.

          That’s the only reason you’ve ever offered to “substantiate” your fixed, unmovable belief that ACA Is Bad, and is causing unemployment.

          The unemployment rate moves in response to a whole bunch of factors, chiefly economic growth.

          You need to do something, anything, to establish that the changes in hiring have anything to do with the ACA.

          In the alternative, you can explain how much you think we should raise taxes, in light of the experience of 1981 and your heartfelt contention that famous legislation is 100% responsible for movement in the unemployment rate.

          • Fair enough. You’d like to see some causal mechanism linking the data explicitly to PPACA and hiring. I will do some digging tonight when I get home. My guess is that the US chamber of commerce is probably the best place to start.

          • I just finished a post that will go online at midnight Pacific time. Most of it involves sworn Congressional testimony on the impact of PPACA on hiring. Much of it concerns future hiring. One or two examples mention some specific reductions or pauses in investment in direct response to the bill. Ideally, I would have liked to have found a broader survey specifically about businesses’ responses to the bill, but the closest one is McKinsey’s and it does not address jobs at all. Its focus is more on how many employers will simply drop insurance coverage once 2014 arrives.

        • Here is a compilation of studies on how the ACA will impact employer-provided insurance:

          Maybe you’ll find something in there.

          • Thanks for pushing me on this topic. There is enough for me to write another post on it, so I will. Hopefully, I will publish it early tomorrow morning. Attacking this issue using a bottoms-up vs. a top-down approach takes a lot more time. I am currently wading through some Congressional testimony on the topic….Arrgh! 😉

  6. Vern R. Kaine says:

    “Is it possible legislation like the PPACA is just a convenient scapegoat for those who stand to gain the most from the poor state of our economy?”
    At the S&P500 levels, I’m sure it’s part of their posturing to do just that – “stand to gain the most”. Respectfully, however, the fact that your comment is a question tells me that you haven’t actually spoken with the small business owners that Obama classifies as “rich” and have asked them how much the ACA has impacted their hiring decisions. Businesspeople don’t gamble in that way, and believe it or not we don’t like to hire a bunch of people on a hope only to have to face them six months later and lay them off. If anything, these are the times where we’re wanting to get rid of our dead weight that’s hard to do when we’re busy.

    Sure, businesses take risks but taking those risks and making investments requires a foundation of certainty in terms of government policy first, and that simply isn’t there. It’s not just Obamacare that’s uncertain, it’s interest rates, it’s the tax code, etc. etc. etc. and it all adds up to the smart move being “status quo” rather than new hires.

    All business have to worry about right now is riding out the next 15 months. If they’ve made it this far, they’ll likely make it the rest of the way until they find out if anything happens to the tax code, interest rates, Obamacare, etc. Until then almost all of the small business owners I know (we talk to at least 10 a week) are “on hold” as far as new hires are concerned.

  7. Pingback: Regulatory Uncertainty in the Obama Administration: Part III | Reflections of a Rational Republican

  8. sam sanders says:

    “Respectfully, however, the fact that your comment is a question tells me that you haven’t actually spoken with the small business owners that Obama classifies as “rich” and have asked them how much the ACA has impacted their hiring decisions.”

    Aside from the fact that I’ve done nothing to earn your respect, I think this statement hits on something that I’ve been observing. There is this cultural lumping together of small business and big business. There is a huge differences between small business and large corporate entities. Yet, they are often lumped together when talking about policy for “business.” In terms of policy, I hear both democrats and republicans talk about helping small business, but it seems more the case that policies that come from either party tax the small businesses and somehow allow the large corporate structures to get around it. This is intentional. Corporations generate wealth. Good for them, good for us. Thing is, so do small businesses. The current political philosophy from both sides, however, is to put the tax burden on the small business and not the larger entities. Thirty years ago corporations were responsible for sixty percent of federal tax revenue. Now it’s less than thirty percent. Small business is picking up the difference. This ties into the unemployment rate because, while international corporations can simply outsource jobs to cheaper labor forces and use loopholes to prevent paying anywhere near the thirty five percent corporate tax rate, small business has to hire more expensive labor and pay the full tax rate. I’m not pointing fingers, if I was a large corporation, I’d do the same. It’s just smart business practice. But, if we are having a debate about how to increase employment rates here at home, I think we should start to delineate more clearly the differences between small business and large corporate structures.

  9. Pingback: Proving Obama Is a Failed President | Reflections of a Rational Republican

  10. Disgusted Again says:

    I just love how you say President Obama has done little to nothing for private sector job growth in your commentary trying to blame him for unemployment, but you change your tune and use the improvement in private sector job growth as evidence against the health care bill here. I can’t get you to acknowledge private sector job growth improved by more then 50,000 jobs/month, but here you’re own graph shows improvement of 70,000 jobs/month in President Obama’s first year and a half. Now why would someone who calls himself “rational” fail to acknowledge numbers he was fully aware of and try to argue an assumption without facts to support that assumption. You honestly believe employers want to hire people today, but aren’t because of a policy that won’t be fully implemented for years? Using your kind of logic, the blind make the best drivers because they rarely ever get in car accidents.

    • Sigh.

      Again, you are being intellectually dishonest here. I have argued on numerous occasions that the stimulus bill did help spur job creation over a short period of time. I also argued that passage of the healthcare bill discouraged businesses from hiring. One cannot have it both ways. Either government policy has an impact on hiring or it does not. Many conservatives think it only has a negative impact, while many liberals think it only has a positive impact. I thnk reasonable people will tell you that it can have either positive or negative impact, which is precisely what I have argued here and in the past.

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