Why is Uncertainty So Unbelievable to Paul Krugman?
As the presidential campaign winds down, some economists have been playing down the role of economic and political uncertainty in hamstringing the U.S. economic recovery.
Now, the New York Times’ liberal firebrand Paul Krugman is out with a column, “The Uncertainty Scam”, that cites analysis from Goldman Sachs’ chief economist, Jan Hatzius, and his team to support Krugman's claim that business uncertainty about the economy is, well, not a certainty in what is holding back economic growth and hiring.
Krugman says in his column: “One of the central talking points of right-wing economists is that ‘uncertainty’ caused by Obama is holding the economy back.” He adds: “It’s not at all about Obama,” and concludes that recent research led by Nicholas Bloom of Stanford University instead shows that “the U.S. economy is being held back by Republican extremism, by the GOP’s unprecedented willingness to hold the full faith and credit of American [sic] hostage for political gain. It is not, repeat not, about Obama looking at rich people funny.”
However, Krugman oddly omits what a majority of executives at Fortune 500 companies and small businesses have said in numerous surveys -- that uncertainty is the main reason why companies are not hiring or spending. Just today, United Technologies (NYSE:UTX), DuPont (NYSE:DD) and UPS (NYSE:UPS) have cited “uncertainty” in their profit warnings.
It’s one thing to ignore business executives -- many of whom would agree it’s not “all about Obama,” it’s also about Congressional infighting -- but it’s quite another to make manifold omissions and distort what Goldman Sachs (NYSE:GS) actually said in its research in order to arrive at a jejune, politicized conclusion.
For instance, Krugman fails to report that Hatzius and his team actually do say that business anxiety over the fiscal cliff is slowing down business growth.
“Ultimately, we view policy uncertainty as one more reason to worry that the better recent U.S. economic growth pace may not be sustained,” the analysts write, “in addition to our concerns about the more ‘mechanical’ adverse effects of fiscal tightening on household disposable income and government spending.”
And here’s what the business-executive surveys show:
“More than three quarters, 76.3%, of all executives see economic uncertainty as their chief external risk, making it the most cited concern in a survey of more than 1,000 executives worldwide,” says the September survey of senior executives of Fortune 500 companies by PricewaterhouseCoopers.
“Government policy, particularly ahead of the November U.S. elections, is mentioned as a critical external risk by 62.1 % of all executives,” the consultancy adds.
A vast majority, 87% of 236 business economists, cited “uncertainty about fiscal policy” as the main problem holding back economic recovery, reports the National Association of Business Economics in its September 2012 survey.
“Uncertainty is at its highest level since last year; 49% of small businesses are not sure if their business’s best days are ahead or behind them,” reports the U.S. Chamber of Commerce based on a recent survey conducted online by Harris Interactive of 1,391 small-business executives.
A majority, 84%, “say they are pessimistic about their future operations in light of recent unemployment numbers and low workforce participation,” the Chamber says in a statement.
And 83% of small businesses said they are not hiring due to uncertainty, the Chamber says. “Continued uncertainty is the greatest threat to small businesses and our country’s economic recovery,” said Thomas J. Donohue, president and chief executive of the U.S. Chamber of Commerce.
There’s more. Economic uncertainty was cited by 68% of small-business owners surveyed “as the most significant challenge to the future growth and survival of their business,” says the National Small Business Association, based on a survey of its members.
“Hiring Plans Plunge: Small Business Optimism Drops,” read the headline from the National Federation of Independent Business, based on its survey of 691 small businesses, which cite as their two top reasons the rising cost of health care insurance, followed by uncertainty about the economy.
Krugman does note in his column “a spike in uncertainty in mid-2011” due to “the confrontation over the debt ceiling” in Washington, D.C., and that there is “some correlation” between an “uncertainty index and troubles in Europe,” referring to research that delves into whether the recent recession was made worse by policy uncertainty.
But what Krugman keys in on in the Goldman research, to the exclusion of much else, is that Goldman notes that slow economic activity is routine after financial crises, as reported by economists Carmen Reinhart and Kenneth Rogoff.
Specifically, Hatzius and his team found there was “little net increase” in uncertainty since 2006 after they knocked out business headline reaction to Europe’s debt crisis, as well as cyclical factors.
However, Krugman doesn’t cite the fact that Goldman’s team actually did say that “the 2011 debt ceiling crisis...did cause a large rise” in its stripped down uncertainty index, a “large” spike he chooses to ignore. Krugman also ignores the fact that Goldman’s team also says its “purged” business uncertainty index “is on the rise again more recently, perhaps in anticipation of the fiscal cliff of 2013.”
Even more curious, Krugman’s column omits the fact that Goldman’s research notes that the downturn in business capital spending alone denotes deep business uncertainty: “Core capital goods orders have fallen by some 7% over the past three months, even while nondurable goods orders have risen somewhat.”
Gone AWOL in Krugman’s column, too, is that Goldman’s analysts note that, even worse, “six month forward capital spending plans in the monthly business surveys by the Philadelphia and New York Fed have also fallen to levels only seen in or just prior to recessions in recent years.”
Also missing in Krugman’s analysis is what the credit ratings agencies, Standard & Poor’s, Moody’s Investor Services and Fitch Ratings, have also said in their threats to downgrade the U.S. credit rating: “uncertainty” about Washington’s ability to come up with a deal that cuts the $16 trillion deficit due to rancorous fighting is hanging up the economic recovery.