Does the Tea Party Cause Unemployment?

I’ve done several postings about the theory that regulatory uncertainty causes unemployment.  I’m skeptical of the claim as a general matter, but if there’s any validity to it, one of the major causes of regulatory uncertainty is the Tea Party, along with other libertarians and opponents of regulation.

It’s not hard to see how the prospect of deregulation could cause businesses to delay investments and hiring:

  • Why build a new power plant today when you may be able to build a much cheaper plant with fewer environmental restrictions in a few years?
  • If a hospital isn’t sure of the health care financing model that will be in place in a couple of years, why hire new people now or make investments in new equipment?  Better to wait until you know whether the health-care law remains in effect.
  • If you’re an oil company, why bother to invest in projects now when loosening environmental restrictions may open much more profitable opportunities in the near future?
  • Future tax cuts will make it possible to offer employees lower salaries and still give them the same after-tax income, so isn’t it better to postpone hiring in the hope that future tax cuts will lower your labor costs?  Of course, you could hire people now and cut their wages later, but people tend to respond very negatively to such pay cuts.

In addition, defense contractors and others who sell to governments — companies that make fire trucks, or print school books, or build highways — have to be very nervous about new hiring and investments given the threat of budget cuts without any revenue increases.

In short, if regulatory uncertainty did turn out to be a major job killer, you’d have to assign some responsibility for unemployment to the Tea Party and other advocates of deregulation.

 

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Reader Comments

3 Replies to “Does the Tea Party Cause Unemployment?”

  1. Believe it or not, I actually agree with you here — to a point. Insofar as Tea party-types have been indiscriminate in the sorts of deregulatory initiatives they’ve supported, they have not done much to address concerns about regulatory uncertainty. Whereas some measures, such as REINS Act-type reforms, could reduce uncertainty, the imposition of additional procedural hurdles and regulatory moratoria are likely to do more harm than good.

    One other point to keep in mind: Delaying an otherwise-profitable investment in the hope that it could become even more profitable only makes sense if there is some available alternative. Given current interest rates and the overall economic climate, that’s not the case today. If an investment is likely to generate a significant positive return, there’s little to be gained by delaying that investment in the hopes the return could get even better in the future, because the alternative of keeping the money in the bank is not particularly appealing.

    JHA

    1. I don’t think we’re too far apart on this. I do think there’s a qualification that needs to be added to your final point. Suppose there is a choice between two investments. I can build a new power plant today and immediately receive a 5% return on my investment for the next twenty years. Or I can wait for President Perry, and get a 10% return for the next twenty years (because I won’t have to pay for all that annoying pollution control). I’m only going to build one plant in either event. The second investment could be worth waiting a year or two for even if there’s zero return earned in meantime. There’s also the possibility that an investment could turn out to be worthless if the rules change — for instance, if you spend a lot of money on new systems, hiring and training of people at a health insurance company, only to find that it all has to be redone when health care reform is repealed. (And of course, if you’re a health insurance company, you’ve got to be very worried that the individual mandate will be struck down, leaving you with a really bad adverse selection problem since some people then will only opt in when they know they’re sick or at risk– so you might want to hang on to cash in order to deal with that situation.)

      But I just don’t think these effects — or the ones caused by the fear of future regulation rather than the benefits or risks of deregulation

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Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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