Obamacare, Jobs, and Regime Uncertainty - Some Evidence

Steven Horwitz

I've been arguing for several months, as have others, that the ongoing sluggishness of the US labor market is the result of regime uncertainty over policy changes both past and potential.  In particular, I have argued that the lack of clarity around the new health care law and its effects on labor costs are a major source of the problem.  Critics have dismissed the regime uncertainty argument as a mere hypothesis with little direct evidence (despite Bob Higgs providing several examples).  But now, thanks to James Sherk at the Heritage Foundation, we have some pretty good evidence that Obamacare has been a job killer and that the route is through employers balking at hiring thanks to uncertainty about its impact.

He offers data that show that job growth was doing quite well up until the spring of 2010, but that growth flattened out considerably after the passage of Obamacare.  Here's his introduction:

Private-sector job creation initially recovered from the recession at a normal rate, leading to predictions last year of a “Recovery Summer.” Since April 2010, however, net private-sector job creation has stalled. Within two months of the passage of Obamacare, the job market stopped improving. This suggests that businesses are not exaggerating when they tell pollsters that the new health care law is holding back hiring. The law significantly raises business costs and creates considerable uncertainty about the future.

And here's the graphical version:

Sherk also cites a talk by Dennis Lockhart, the President of the Atlanta Fed, in which he reports on interview data they collect from businesspeople in their region.  Lockhart summarizes part of their findings:

Here's what doesn't feel normal. In addition to slow and uncertain revenue growth, contacts in this recovery are frequently citing a number of other factors that are impeding hiring. Prominent among these is the lack of clarity about the cost implications of the recent health care legislation. We've frequently heard strong comments to the effect of "my company won't hire a single additional worker until we know what health insurance costs are going to be."

More generally, our contacts cite a litany of uncertainties as reason for a wait-and-see posture toward expansion-related spending and hiring. These include the longer-term fiscal plan at the federal level, the extension of the Bush tax cuts, and the effect of various regulatory proposals. I know it's difficult to disentangle these concerns from mere frustration about weak demand. But the restraining effects of policy uncertainties are repeated frequently and with great vehemence. In my opinion, a first priority is that government authorities bring clarity to matters central to business planning.

It's important to have both the data showing the change in the trajectory of job growth and the interview evidence from the business world to make the case for regime uncertainty.  The data are plausibly interpreted by the regime uncertainty hypothesis, but without the sort of direct evidence that interviews can provide, especially something like the quote that concludes the first paragraph, all we have is correlation with a plausible story.  Put statistical data and interview data together and you've got something.  Sherk's short WebMemo is a very helpful contribution.

For those who have argued that Obamacare is a job killer via regime uncertainty, here's the evidence.

Comments

[Alex]

Doing quite well beforehand? Net employment change was negative for nearly the entire period analyzed. Sure, the rate of decline was improving but the economy was just naturally coming out of the worst downturn in decades... spurious analysis.

[Steve Horwitz]

Okay "quite well" in the sense of the recovery was proceeding as job loss was declining, again what we'd expect. And from an Austrian perspective, frankly, the reallocation that such a level of job loss implies actually is a *good* thing, in the sense that it's a necessary correction.

The question is *why did it slow down so dramatically?* And why does the length of lack of recovery in unemployment in this recession so out-distance other recessions? Your answers?

[Jerry O'Driscoll]

This post complements the earlier one on microfoundations. The macro model is wrong; the stimulus is a failure; but too many people have too much invested to admit they are wrong.

[Martin]

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

"The American Recovery and Reinvestment Act of 2009, abbreviated ARRA (Pub.L. 111-5) and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009."

[Roger Koppl]

I'm not quite seein' it. If I go to FRED and look at the unemployment rate, I don't see the sort of break Sherk identifies:
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=UNRATE&s[1][range]=5yrs

Same thing for civilian employment:
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CE16OV&s[1][range]=5yrs

You can easily change the dates on those charts, btw, to coincide with Sherk's dates.

Presumably, Sherk's numbers work the way the he says for the exact series and dates he used. I guess his data is (yes, *is*) akin to the first difference of civilian employment, which may have a bit of a kink in April. I'm not sure why the uncertainty should kick in only at the moment of actual passage. It's not like no one saw it coming. Anyway, a kink in one time series seems thin gruel given other data and the size of the Great Recession and the many other causes at work.

I think the effect is probably real. As far as I can tell, however, Sherk has not given us compelling evidence on the effect size.

[Jerry O'Driscoll]

It's actually worse than Steve suggests. It's not just that companies don't want to hire, now a new round of layoffs at major firms is in the works. See the article in tomorrow's WSJ.

This pattern of volatilty is very much what happened in the 1930s. FDR was rabidly anti-business throughout the 1930s, creating uncertainty and fear. That cannot be over-estimated.

Steve Winn, the gaming mogul and big-time Democrat, delivered a rant against Obama. He cited in particular Obama's redistribution rhetoric. Obamacare is just a piece of the problem.

[Lee Kelly]

While I do no dispute that regime uncertainty is causing problems, businesses are still reporting low demand as the primary reason for layoffs and few new hires.

The excess demand for money story is still the most convincing. No other story can explain why nominal spending fell and continues to be sluggish. This is not to say the economy doesn't have other problems, by the way. The main problem I see with this story is why the excess demand for money has persisted for so long; perhaps we are stuck in an underemployment quasi-equilibrium (Yeager discusses this possibility).

[FC]

Since no one asked, it seems to me that the untold story is low demand for replacement durable goods. Clothing lasts for years, solid-state electronics for decades, and cars for hundreds of thousands of miles. That is certainly the leading cause of low demand from my household.

[DT]

If firms weren't hiring because of obama-fear, and yet demand was improving, wouldn't they work their existing employees harder, and wouldn't this show up in higher average weekly hours?

This is the type of thing that lefties like Baker love to throw at people who claim regime uncertainty is the cause of poor hiring.

http://www.cepr.net/index.php/blogs/beat-the-press/nyt-tells-readers-that-governors-are-fools-or-liars

[Silvano]

I agree that "the Great Deviation" brings regime uncertainty with itself and I agree that there is also a "lack of effective demand" in a broad sense.
But if I combine the two stories, I simply realise that Government can do almost nothing to improve the situation. Its medium/long term commitments are simply unbelievable and as long as it acts in a discretionary way it increases uncertainty. The idea of fostering the aggregate demand through deficit spending is conceptually very close to a uneffective medical treatment focused only on symptoms. Politicians are simply playing with real goods and this is not what a true recovery requires. Even if we are stuck in an underemployment quasi-equilibribium, the result of deficit spending and planning is simply diverting resources from one sector to another and selling false/unbelievable expectations to people.

[Jerry O'Driscoll]

In today's Wall Street Journal, John Taylor addresses many of the issues raised here. Growth in the 1980s and 1990s was fostered by policies adhering to economic an dpolitical freedom. As moved away from those, growth stagnated.

http://professional.wsj.com/article/SB10001424053111903554904576457752586269450.html?mod=WSJ_Opinion_LEADTop&mg=reno-wsj

[Silvano Fait]

Brought to its logical consequences the concept of "regime uncertainty" is a serious challenge to traditional Keynesian prescriptions ("à la Krugman"). It doesn't question the Keynesian analytical framework, but it attacks the very foundations of interventism.
I mean that if an institution becames a source of errors, there are no more economic reasons to defend its behaviour. To put it simply: if the Government is increasing uncertainty and affecting expectations in a negative way, we are facing a Government failure from the same Keynesian perspective, since it may even strengthen the underemployment (quasi-) equilibrium.

[Lissismore]

I am not convinced. I talk to a lot of business owners and managers in my line of work - and I have never heard a comment regarding uncertainty about the health care costs as THE REASON they are not hiring. I have heard about uncertainty in general as worrisome, but not this issue in particular.

I believe that you are correct, that this weighs on the hiring decision, but I don't see the direct correlation.

[anon]

Seriously guys?

Oh hey! Look! Less pirates = more global warming!
http://upload.wikimedia.org/wikipedia/commons/d/de/PiratesVsTemp%28en%29.svg

The evidence presented in this case is weak at best and willfully misleading at worst. I am disappointed that data of this quality is even taken seriously, especially given the fact that I'm sure none of you are that gullible regarding economics.

[Silvano Fait]

Some reflections about Regime Uncertainty and the American Sluggish Recovery here:

http://ideashaveconsequences.org/regime-uncertainty-and-the-american-sluggish-recovery/leo