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Thursday, July 12, 2012

Debunking the Term: “Economic Uncertainty” --- Part 1: Attacking the conservative narrative

By Josh Sager

The term “economic uncertainty” refers to a situation where the economic climate in a country is so unstable as to hinder investment. There are numerous situations which create economic uncertainty, including, but not limited to, social upheaval, currency crises, rapidly changing regulations/taxes, and the formation of market bubbles. Individuals who are considering investing capital must weigh potential risks with potential rewards in relation to their prospective investments, and uncertainty is a major factor in determining risk. If an investor is unable to predict the conditions which they will have to operate with, there is a decreased likelihood that the smart investor will invest significant capital.

While market uncertainty is a very real and relevant phenomenon, conservative groups and politicians have intentionally misused the concept of economic uncertainty to gain political advantages. Conservatives raise the specter of “Economic uncertainty” whenever there are discussions of tax or regulatory increases, as well as during debates over the removal of subsidies. They claim that virtually any increase in regulation or tax rates causes crippling uncertainty, thus reducing the growth of the economy and increasing unemployment. Put plainly, these claims are both false, and intentionally deceptive.

A good, recent example of such a use of the term “uncertainty” by a conservative politician is this:

"The number one reason out there why jobs are not being created: Uncertainty. They don't know what's going to happen with the taxes; they don't know what's going to happen from regulation.”; "the Democrats have failed to lead on tax cuts. They're going to want to leave the House without dealing with it. That uncertainty itself is keeping capital on the sidelines and stopping jobs from being created in America."Kevin McCarthy (R-CA-22), 9/26/10
McCarthy’s statement, demonstrates either a profound ignorance of the term uncertainty or a willful misinterpretation of its application. At the time of his statement, virtually every reputable economist considered the crippling lack of demand for consumer products, housing crisis, and damage from the 2008 economic crash as the causes of the lack of investment, not uncertainty. Uncertainty over tax rates (where were at a record low) and regulatory rules were not significant factors, yet his desire to promote the conservative ideology surrounding these issues led him to intentionally misdiagnose the problems (I assume that he is not simply ignorant and without competent staff to brief him). 

While they almost always use it speciously, the uncertainty argument is a major tool of the conservative movement; progressives must take steps to debunk the false narrative of “economic uncertainty” by conservatives and turn it back on them to fight against their extreme tactics. By debunking the idea that regulatory and tax reform cause uncertainty, progressives will erode much of the rationale behind the conservative argument against such reforms – this will not end their resistance to tax and regulatory reform, merely force them to find a new rationale to justify it in within their ideology. Progressives and Democrats should utilize a two-stage attack on the conservative “economic uncertainty” argument in order to debunk its premise and reverse it upon the Republicans.

Step 1: Attack the Conservative Uncertainty Argument

The first step in reversing the conservative “uncertainty” argument is for progressives and Democrats to refute the conservative narrative on which policies cause economic uncertainty. Through a concerted effort, the conservative movement has successfully branded any potential increases in taxes and regulations as inherently increasing uncertainty, and has used this label as a rhetorical bludgeon against those who wish for sane taxes/regulation.

Uncertainty is an ever present factor in an economy and is only dangerous when it reaches a level which stifles investment; investments carry an inherent risk, and there is no real way to completely remove the uncertainty which this risk creates. Dangerous levels of uncertainty are caused by factors which drastically increase the risk of investing and are difficult to predict accurately. When looking at uncertainty, the actual economic or social factors matter less than the predictability and fluctuations for each condition. In essence, it matters less what the conditions of the business climate are, just as long as they are stable and predictable to business interests they will not cause uncertainty. Even if taxes or regulations are high, just as long as they are static and investors are able to work them into their business calculations, very little uncertainty is created.
The conservative “uncertainty” argument is most commonly used in arguments over tax rate increases and tightening regulatory regimes:

Taxes: Conservatives argue that any discussion of increasing tax rates, even simply the removal of temporary tax breaks, will increase uncertainty and stifle investment. This argument assumes that increasing tax rates on the wealthy will cause these people to stop investing due to a decreased return on investment—this assumption is entirely incorrect. 
Wealthy investors will invest as long as it makes them a profit, even if a significant amount is taken out in taxes. It is true that wildly fluctuating and unpredictable tax rates (ex. a rapid swing of capital gains tax rates from 15% to 75%) CAN make the market uncertain, but current discussions of tax rates are nowhere near the level which would create significant uncertainty.
Contrary the conservative narrative, removing temporary tax cuts (ex. Bush tax cuts) and instituting higher, permanent tax rates actually reduces uncertainty. Temporary tax cuts are, by definition, uncertain, can rapidly disappear, and are dependent upon the political climate. Permanent tax rates, even if they are high, are far less flexible than temporary rates and promote a higher level of tax certainty than persistent, yet “temporary”, tax cuts. 

Regulation: Regulations have the potential to stall businesses or even destroy them entirely (ex. a pesticide producer which is put out of business by a pesticide ban), thus they have the ability to greatly increase uncertainty; if there is no way for a business to predict future regulatory regimes, there is no way for said businesses to rationally expand. 

Conservatives use their uncertainty argument to attack regulations by claiming that potential increases in regulations spook businesses and stop them from hiring; this argument is less groundless than the conservative argument surrounding tax increases, but it too fails to pass muster. Current regulatory regimes have been intentionally suppressed by lobbying and are nowhere near adequate. Improvements to inadequate regulation, while damaging to polluters, are necessary for the health of society. The amount of uncertainty which is created by regulatory increases is far outweighed by the benefit to society garnered from the increased regulations. 

Theoretically, the government could promote the ultimate regulatory certainty in investment by removing all regulations of industry. As is evident by past polluting/corporate abuse incidents, the abolishing of regulations would be disastrous to society. The conservative narrative ignores the need for regulations and focuses on the uncertainty which is created when new regulations are being discussed—this is akin to somebody decrying firefighters for causing water damage, yet ignoring the fact that they are trying to put out fires.

In addition to the fact that certainty must be weighed against the public interest, the conservative argument is also flawed due to the fact that regulatory increases only cause uncertainty when they increase. Once regulations are reformed and stabilize at their new level, they produce no uncertainty. 

The arguments which progressives and Democrats must utilize in order to attack the conservative uncertainty argument must be based in economic theory, yet simple and memorable enough for the lay-person to easily digest. Here are two examples of such arguments:

  • Removing the Bush tax cuts will not increase uncertainty. We in the Democratic Party will not reauthorize them again, and individuals making over a million dollars will be paying the same rates which they paid during the Clinton years – of this, everybody can be certain.
  • Enacting sane regulations on the financial industry doesn’t cause uncertainty, it reduces it. If the 2008 financial crash taught us anything, it is that an under-regulated financial industry, combined with human greed, can destroy our economy and create more uncertainty than any possible regulation.

Any argument used to debunk the conservative narrative should be tailored for maximum simplicity and listener recall. Uncertainty, as a concept, is widely misunderstood by the lay-person (partially because of conservatives misusing it in political arguments), and any complex argument will likely go over the heads of the general public.

Once the language which will be used to debunk the conservative narrative is decided upon, progressive and Democratic politicians should repeat it on a national scale. Having numerous politicians repeat the same sentiment across various media networks will get people discussing the uncertainty argument. It is unlikely that every listener will be swayed from the conservative “uncertainty” narrative, but it is possible that a significant portion of the American people will begin to reject it on its face. Ideally, this campaign will weaken the conservative argument, while setting the stage to discuss the factors which truly cause uncertainty.

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