The high cost of political uncertainty

Illustration by Peter DeHart

At a presser last month, top Lafayette business brass congratulated state legislators for a sales tax compromise they said brought certainty to Louisiana’s economy and avoided existential cuts to health care and education.

Much was ballyhooed about the need for the state to find certainty to gain its economic footing. But certainty isn’t just about cash flow or balance sheets. Investors and companies want to know the direction a community’s water is moving before they jump in. During the legislative session, that uncertainty revolved around tax policy. Here in Lafayette, the uncertainty is more existential. And that presents a tremendous obstacle to turning the city’s economy around.

The idea behind this makes sense intuitively. The greater the uncertainty the greater the chance that businesses may not want to invest in growth or hiring new positions and that households will interpret political brinkmanship as a threat and therefore spend less as they wait for things to calm down.

And recent research has started to back this idea up.

For example, some research has found that two thirds of the 32 percent plunge in corporate investments from 2007 to 2010 were attributable to policy-related uncertainty.

It’s suggested that heightened fiscal policy uncertainty causes a drop of about one percentage point of real national GDP. If that’s true it would equate to a loss of $150 billion a year nationally and almost $200 million in the Lafayette metro area alone.

Yet policy uncertainty has also continued to grow worldwide since 2007 as measured by the Economic Policy Uncertainty Index, which is an index based on research done at Stanford, the University of Chicago and Northwestern University. This is driven at least in part by the rise of political polarization, which seems unlikely to lessen any time soon.

As this uncertainty increases, it tends to cause investors and the economy to pause. This is in part because Western-style governments typically act in investors’ best interests, so investors expect them to make good policy decisions. When that doesn’t happen, bad news strikes unexpectedly, and that tends to punish markets.

What’s so frightening about this whole line of thinking is a theory posited by Nicholas Bloom, a Stanford researcher who co-leads the Economic Policy Uncertainty Index, that if an individual firm makes decisions based on uncertainty, other firms are likely doing the same. And if you aggregate all those decisions together, uncertainty can be a catalyst of systemic risk.

Uncertainty could equate to a loss of $150 billion a year nationally and almost $200 million in the Lafayette metro area alone.

One final component to consider is that because policy uncertainty means that government is open to policy change, it encourages interested parties to spend more money on lobbying efforts to secure preferential policy treatment. This diverts resources away from more economically productive activities to the unproductive activity of lobbying for preferential tax policy treatment.

Now with all this in mind, let’s turn our attention back to Lafayette, a community awash in uncertainty:

Uncertainty about our economy, which has lost $10 billion since 2012 and has no clear path to recovering all of the ground we’ve lost.

Uncertainty about our state government, which spent months arguing over a half of a half of a penny of sales tax while threatening to close hospitals and cut scholarships.

Uncertainty about our drainage infrastructure and whether it can protect us and our homes from the next big storm, and the next one, and the next.

Uncertainty about if we’ll ever invest seriously in our school system again, or if we’ll ever develop our Downtown.

Uncertainty about how we’re going to fund our parish courthouse, jail and district attorney.

Uncertainty about how our parish government can achieve fiscal solvency, especially if its residents won’t approve any new taxes.

Uncertainty about how our city/parish government will be structured.

Among these unknowns, in the next year there will likely be no fewer than four major new taxes put to a vote without any serious coordination or consensus among our governing bodies to support them. Meanwhile, votes to add new taxes or renew existing ones have been failing to pass left and right over the last few years due to new anti-tax lobbying efforts and the breakdown of trust between our local government and its residents.

The challenge we face is that this staggering amount of uncertainty can be counter-productive to any of our efforts to convince people or businesses to invest their money, time and energy into our community. And as this uncertainty increases and gets more intractable, the problem only gets worse in terms of its impact on our economy.

Lafayette needs less uncertainty from local government, not more. But that’s not the direction we’re going.

Here’s the bottom line: Lafayette needs less uncertainty from local government, not more. But that’s not the direction we’re going. On Tuesday, it took the City-Parish Council more than two hours to debate whether to simply introduce substantial corrections to our charter amendment, and begin public conversation on the move. We had to debate whether to debate the issue at hand: creating separate city and parish councils. Lafayette’s political polarization seems to be at an all-time high.

While some amount of uncertainty is unavoidable, when you live in a state that lurches from one budget crisis to another, and in a country where trade wars are starting left and right, your community’s going to be a lot better off if it can minimize piling on any additional unnecessary uncertainty, especially when you’re trying to dig out of a massive economic hole.

Our elected officials need to wake up to the fact that our community can no longer afford to be held back by politics as usual and measured, risk-averse leadership. What we so desperately need is for our local government to demonstrate bold leadership, make hard choices, find compromise and put Lafayette back on a path that proves it’s a safe investment for job creators and job seekers. Fear-mongering and bickering over petty grievances is simply not productive. And it creates an uncertainty cost that Lafayette can’t afford.