The Boehner Uncertainty Principle
In a speech in Cleveland in August, Speaker of the House John Boehner said, “Right now, America’s employers are afraid to invest in an economy … hamstrung by uncertainty. The prospect of higher taxes, stricter rules, and more regulations has employers sitting on their hands.” Stated more formally, the Speaker’s argument, which I have dubbed the Boehner uncertainty principle, holds that government efforts to increase regulation lead small business to delay investment and hiring until the new regulation’s impact is well understood.
It’s certainly a provocative argument, but is it true?
Real options theory supports Boehner’s position. This theory explains investment decision making. It holds that under uncertainty about the future, people will often delay investment decisions to allow the future path of events to be revealed.
New laws have created numerous regulations that demand bureaucratic interpretation before small business owners can figure out how these laws will affect them.
Small business owners appear to be using real options reasoning to deal with uncertainty about regulation. Consider, for example, the response of business owners to the 2000-page Patient Protection and Affordable Health Care Act (PPAHCA) and the similarly sized Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These new laws have created numerous regulations that demand bureaucratic interpretation before small business owners can figure out how these laws will affect them—100 in the case of PPAHCA and 520 in the case of Dodd-Frank, according to the U.S. Chamber of Commerce.
Right now, small business owners are unsure of the amount of time they will have to spend on paperwork to adhere to the PPAHCA or how their healthcare costs will change under the new law. And the financial reform legislation’s impact on small business access to capital is still unclear months after the law’s passage.
Unable to predict the scope or impact of new regulations, small business owners are following real options reasoning. They are simply delaying investment and hiring as they wait to see how bureaucrats will interpret the new financial reform and healthcare laws.
Unable to predict the scope or impact of new regulations, small business owners are simply delaying investment and hiring as they wait to see how the bureaucrats will interpret new laws.
Qualitative data collected by the Federal Reserve Bank of Atlanta supports the Boehner uncertainty principle. In a speech in November, Atlanta Federal Reserve President Dennis Lockhart said, “Our contacts cite a litany of uncertainties as reason for a wait-and-see posture toward expansion-related spending and hiring. These include … the effect of various regulatory proposals.”
Lockhart used the recent healthcare legislation as an example of how uncertainty about new laws is holding back investment and hiring. He said, “Prominent among these [comments] is the lack of clarity about the cost implications of the recent healthcare legislation. We've frequently heard strong comments to the effect of ‘my company won't hire a single additional worker until we know what health insurance costs are going to be.’”
Quantitative data on this question is more difficult to find. But data from the National Federation of Independent Business (NFIB) also suggests the Boehner uncertainty principle. For the past few years of NFIB’s monthly member survey, the share of respondents who said that government regulation and red tape was the single most important problem faced by small business has been negatively correlated with the percentage that had made a capital expenditure in the previous six months. While we do not know why this correlation exists, one possible reason is that as regulation becomes more of an issue, small business owners are increasingly putting off investment decisions.
In short, both theory and evidence support the Boehner uncertainty principle: increased government regulation creates uncertainty about the future, which deters small business owners from investing and hiring.
Getting small businesses to invest and hire again requires reducing the currently high level of government regulation-induced uncertainty. As Lockhart says, “A first priority is that government authorities bring clarity to matters central to business planning.”
Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.
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