Sunday, April 21, 2013

Tufte’s Short Post # 17: Obama’s policies have created a lot of uncertainty

Obama’s policies have created a lot of uncertainty. This view is particularly insidious. We should not take as seriously the claims of business people that they are unwilling to invest because of policy uncertainty: uncertainty actually raises the value of the option component of equity investments. Nonetheless, I don’t think these people are fibbing, so what are they worried about? Options theory tells us that the same results follow if either a) current prices of investment projects are inflated, b) future values of investment projects are deflated, c) the time horizon has been shortened, or d) the discount rate has gone up. The only one that holds water is (b). In this case, firms are saying that their project is worth more without (say) Obamacare than it is with it. Fair enough (and while I don’t subscribe to this view, it isn’t unreasonable to conclude that the social benefits to Obamacare outweigh those private losses). The thing is, claiming that it is uncertainty that is holding investments back is implicitly a claim that once the policy uncertainty is removed, investment will rush forward. This is a tooth fairy story for Democrats; option theory tells us that if this argument is correct it would have already happened. I don’t think it’s a mistake that the generally compliant media have latched on to this story, since that tooth fairy end game is hopeful for progressives. I also don’t think it’s a mistake that the Democrats in D.C. spend so much effort downplaying that they are creating widespread uncertainty: they can see that stirring up the uncertainty pot has been beneficial for specific industries (e.g. solar) … but that story just doesn’t work for the rest of the economy.

There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation.

Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required.

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