“Uncertainty” Not the Whole Story of our Economic Doldrums
As those engaged in the policy battlefield, our focus is often on taking apart arguments used to advanced proposed solutions we disagree with.
But sometimes it is useful to try to do the same with arguments being used to advance policies we happen to agree with. This is because if these arguments are flawed or incomplete, they may very well fail to convince those on the fence that the policy prescription we advocate is the correct one.
An example is the argument that the economy doing so poorly because of “uncertainty.” This is true — but only to a point.
With the thousands of pages of regulations from Obamacare and Dodd-Frank, there is certainly uncertainty about how these will be interpreted. Manufacturers, for instance, are delaying investment decisions while the Commodity Futures Trading Commission determines whether they will be subject to the end user exemption in Dodd-Frank, or whether under the law they will be forced to put up millions more in cash for the margin requirement of a new derivatives exchange.
But in a Wall Street Journal op-ed last week, Clifford Asness, managing and founding principal of AQR Capital Management, made a convincing case that sometimes it is the devil we do know that is the biggest stumbling block to economic growth.
Asness writes: “Imagine assorted government agencies passed more burdensome regulations than we anticipated, increasing both the cost of doing business and the drag of crony capitalism. But all uncertainty was resolved by passing them today.” Resolving this uncertainty would not get the economy going. It would in all likelihood slow it further.
Such was the case with the uncertainty with Dodd-Frank’s Durbin Amendment, which charged the Fed with setting price controls for the interchange fees — or “swipe fees” — that banks and merchants charge to retailers to process debit cards. This uncertainty was resolved when when the Federal Reserve set the price controls in December at a draconian 12 cents per transaction, below the cost of processing debit cards and lower than the law even required.
The uncertainty was further resolved earlier this month when the Senate — with the help of the GOP’s pro-price control Durbin Dozen — came up short of the 60 votes needed to delay the Durbin Amendment. (Although there is still some uncertainty — and hope — that the Fed could write a more reasonable final rule.)
Yet this uncertainty did not calm the waters. Financial stock took deep dives both times, and it didn’t do much to lift the stocks of retailers — the supposed beneficiaries — either. Markets went down on the certainty of massive government meddling in all industries.
As Asness concludes: “Focusing on ‘uncertainty’ takes our eyes off the ball. We should not seek clarity about the many new drags on our economy. We should seek to have the administration cease and desist, then reverse them.”