Despite What Geithner Says, Policy Uncertainty Does Matter
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On Sunday, Treasury Secretary Tim Geithner had an interesting exchange with CNN’s Fareed Zakaria on how much uncertainty has played in the holding back the economy:
Fareed Zakaria: You know, there is a very well established narrative now among the business community in the United States that there would be much more robust recover, the U.S. economy would be growing much more vigorously if there were greater certainty and businesses could invest and the reason they are not is a kind of tsunami of regulations, uncertainty about tax policy, uncertainty about the deficit. But, perhaps above all, the sense that the economy is being thrown this huge new wave of regulations in health care and finance and energy and that that's what's keeping the economy back.
Timothy Geithner: I don't think there's much basis for that view, although it is true that we are putting in place very tough reforms in the financial sector. We're trying to improve how the U.S. health care system works, and we're trying to change how Americans use energy. And those are necessary, desirable, very important long-term reforms for the United States, but I think if you look at the evidence we have about how the economy is doing and how the business community is doing in particular, the reality does not justify that sense.
The administration has been trying to make this argument stick for a few months. But it runs counter to the conclusion of a Cleveland Federal Reserve Bank paper authored by Mark E. Schweitzer and Scott Shane that found “statistically significant negative effects of policy uncertainty on small business owners’ plans to hire and make capital expenditures.”
What’s more, what Geithner says are solutions—Dodd-Frank and the health care law—actually create more uncertainty for the business community. These huge, complex laws will translate into hundreds of rules that businesses will have to deal with on a daily basis. As for energy, the administration's rejection of the Keystone XL pipeline and Utility MACT rules that are shutting down power plants aren't encouraging for business.