Uncertainty Index on the Rise – Bruce Yandle (06/19/2019)

Some of America’s largest companies are doubling down on Washington lobbying. Likely concerned about antitrust investigations, Google and Facebook are adding substantially to their already swollen D.C. offices. Just last week, General Motors CEO Mary Barra—already berated by President Trump for closing an Ohio assembly plant—made a special trip to convey to congressional committees her concerns regarding tariffs on Mexican imports. She was part of the vanguard of hundreds of corporate officials lining up to testify, both pro and con, on tariffs. Prior to this, more than 50,000 petitions by firms and organizations were processed through March 18, 2019 by the Department of Commerce for exemptions from Trump administration steel and aluminum tariffs.

Each is an understandable, but nonetheless costly, attempt by citizens and businesses to deal with and influence government-induced economic policy uncertainty. But as costly as lobbying and similar activities can be, it does not enter the calculations devised by government officials charged with estimating the overall costs and benefits of federal regulation. Lobbying costs are hidden, though they are nonetheless real.

What is the opportunity cost—the production we forgo—when a corporation’s attention is diverted from running a business to playing politics? What is the cost to society when Google and Facebook use resources to fortify their Washington presence instead of developing new and improved products and services? How much do American consumers give up in goods and services when 50,000 U.S. firms feel compelled to spend some of their scarce resources on lawyers filing petitions?

As we think about these unanswerable questions, we might visualize the U.S. economy as a picture being painted and maintained by a large group of artists. The picture is contained in a stout frame that represents the government that surrounds and supports it.

At times, the picture may grow faster than the frame. The artists are highly productive. At other times, the frame gets stouter and the picture smaller. Maybe there is a recession, with government becoming more expansive and the economy shrinking.

And then there are times when the artists who normally work on the picture instead turn their attention to the frame. They attempt to influence its shape, color and texture so that the picture they hope to create will be more vibrant and vital, at least from their point of view. The more this happens, the more some of the most noteworthy artists become equipped to work on both canvas and frame. Indeed, some become full-time picture frame designers.

At that point, the picture and frame blend into a mosaic without boundaries; it is simply a political economy intertwined with regulation.

We have no practical way to estimate the opportunity cost that America’s economy pays when managers and owners of businesses and other enterprises, which ostensibly exist to satisfy us customers, instead mount lobbying efforts in the hope of affecting the destiny of our political economy. But we can consider an indicator—perhaps a proxy—that tells us when such efforts may be accelerated.

Every work day, an Economic Policy Uncertainty Index is produced for the United States by a group of economists, who count the frequency of certain words found in a large sample of more than 1,000 daily newspapers. It turns out that higher economic policy uncertainty correlates with financial market volatility, which is another uncertainty indicator.

I provide nearby a Federal Reserve chart showing the weekly index since June 2018 and call attention to the mountain of uncertainty that formed this past December and January. This was a time of government shutdown, a Fed interest rate increase, and an acceleration of the trade war with China. I next ask you to focus on the data points for June 2019. These high uncertainty observations are the result of the president’s proposed, but later suspended, tariffs on Mexican exports.

Consider the politicians and special interests whose actions give rise to these uncertainty mountains. Those who call for more tariffs, more aggressive antitrust action, and other regulations may have solid arguments for doing so. However, they should be aware that more extensive regulation is not produced in a vacuum. Those efforts yield economic uncertainty that will in turn bring on intense efforts to deal with, alongside the associated costs of regulation.

Thus, mountains of uncertainty yield mountains of hidden cost. Lobbyists and leaders make more trips to D.C., feeding expanded D.C. regulatory struggles that lay groundwork for yet more doses of regulatory uncertainty.

The Trump administration has imposed a rule that two existing regulations must be removed for every new regulation imposed on the economy. Unfortunately, the two-for-one rule does not apply to the trade policies consuming much of the administration’s attention. Perhaps this would be a good time for politicians to simply curb their urge to regulate—especially with economically damaging policies like tariffs and border regulations—and allow time for the economy to catch up. Maybe a period of regulatory silence would be just the right kind of nothing for an overregulated economy.

At some point, the artists should get back to working on the canvas. The big picture is more important than the frame that holds it.


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