Policy Uncertainty Linked to Less Job Growth

Polls, like the Chamber's Small Business Outlook Survey, show small business owners see policy uncertainty as an obstacle to greater job creation and more economic growth. This isn't just perception. When economists take a serious look at this, they indeed find a connection.

In their paper "Economic Policy Uncertainty and Small Business Expansion," Mark E. Schweitzer, Senior Vice President and Director of Research at the Cleveland Federal Reserve and Scott Shane, professor at Case Western Reserve University's business school, build on the work of Scott Baker, Nicholas Bloom, and Steven Davis who developed a policy uncertainty index. Using statistical tools, Schweitzer and Shane found "statistically significant negative effects of policy uncertainty on small business owners’ plans to hire and make capital expenditures." According to their analysis, "the net percentage of small business owners planning to hire would be 6 percentage points higher if it were not for policy uncertainty." With small businesses accounting for almost two-thirds of job creation, this uncertainty has negatively affected significant numbers of jobs. Now, the first rule of statistics is "correlation does not equal causation." Schweitzer and Shane acknowledge this but write,

"The correlations between the two are strong enough to reject the argument that policy uncertainty is irrelevant for currently weak small business expansion plans. In our view, policymakers should take seriously the widespread anecdotal reports that policy uncertainty is adversely affecting small business owners’ expansion plans." 

[H/t Jonathan Adler] [NOTE: This is cross-posted from The ChamberPost blog of the U.S. Chamber of Commerce.]