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When CEOs are haunted by memories of past recessions

Jennifer Anzaldi — Tue, 12 Nov 2024 19:43:41 +0000

When CEOs are haunted by memories of past recessions Jennifer Anzaldi Tue, 11/12/2024 - 14:43

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David S. Koo

The economy, we’re often reminded, is cyclical. But we all hope our careers won’t be. That means those of us who make it to the very top—CEOs, for instance—may be unduly influenced by memories of prior economic go-rounds. David Koo, assistant professor of accounting in the Donald G. Costello College of Business at �鶹��Ƶ, has found that memories of past recessions, triggered by recent ones, can weigh on chief executives’ decisions, literally for years.

Koo’s paper, co-authored by Isabel Wang of Michigan State University and Shuting Wu of Cal State Fullerton, is forthcoming in Management Science.

David Koo

The paper was inspired by trends in research outside the accounting field. “In the economics area, they have started looking at how executives’ memories of recessions can affect important decision-making right now,” Koo says. “We are trying to connect these emerging trends to the accounting area by focusing on pessimistic bias in their outlook of the company’s performance.”

The researchers adopted the 2008 financial crisis as a key moment for triggering veteran CEOs’ memories of prior financial downturns. They analyzed annual management earnings forecasts for U.S. public companies for the period 2002-2018, alongside the characteristics and career histories of the CEOs who issued them. “We used the first forecast of the year for each year, because on average these are more optimistic,” Koo explains. “Usually, nobody wants to say anything negative at the beginning of a year.” The final data-set comprised 3,678 earnings forecasts from 466 CEOs.

Koo and his co-authors discovered that CEOs who had previously led companies through at least one past recession issued significantly more pessimistic forecasts post-2008 than they had before the crisis. As a general rule, the more recessions a CEO had undergone in their tenure at the top, the more pessimistic their post-crisis forecasts tended to be.

The same pessimistic pattern was not evident for CEOs who had not experienced a recession before 2008. Translating their findings into economic terms, the researchers concluded that one standard deviation of the memory-triggered pessimism effect was equivalent to 0.23-0.29 percent of share price.

Further, the post-crisis pessimism did not make the forecasts more accurate. It’s safe to say, then, that the memory-triggered CEOs were, knowingly or not, displaying excessive caution and conservatism in their earnings forecasts. To be sure, anyone’s outlook can darken with age, independent of their real-world experience. So the researchers performed subsequent checks to determine whether the increased pessimism was more closely related to growing older, or to specific memories of past recessions.

“Our takeaway is, if we have two same-age CEOs, one who has experience navigating recessions as a CEO and one who does not, the first one will become more pessimistic after the crisis,” Koo says.

The more highly skilled CEOs (as measured by a widely accepted scale for managerial ability) exhibited less memory-induced pessimism, while CEOs who led more complex firms with a lot of moving parts were more prone to pessimism. “We expected that the manager-specific effect would be more significant when managers were under more demanding pressure or had more discretion,” Koo explains.

As the 2008 financial crisis itself faded into memory, seasoned CEOs gradually let go of their pessimistic bias. But it took three years, on average, for their forecasts to fully recover. We normally think of past experience as an aid to learning, but here it seems that the opposite was the case: Memories of past experiences with recessions slowed down CEOs’ post-crisis learning process.

“Prior research has found that past experiences can help people more rationally and then more wisely handle an ongoing crisis,” Koo says. “But at the same time, executives are also human beings. They may be scarred by their experiences and that can induce them to be excessively negative or pessimistic when they go through a financial crisis.”

Of course, that doesn’t mean that the veteran CEOs were less effective at guiding their firms through post-crisis recovery. Koo emphasizes that his findings do not capture whether, and how quickly, companies bounced back from the 2008 recession.

“Memory may not be the most dominant factor in our decision-making, but it still can influence executives even in their managerial decision-making,” Koo advises.

The lesson, then, is one for investors and other market players to store in their own memories for the next economic downturn: Take CEOs’ post-crisis predictions with at least a grain of salt.

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How this summer’s heat waves may impact the economy

Greg Johnson — Tue, 06 Aug 2024 13:39:44 +0000

How this summer’s heat waves may impact the economy Greg Johnson Tue, 08/06/2024 - 09:39

This sweltering summer has brought record-breaking high temperatures to 63 countries, all but cementing 2024’s status as the world’s hottest year on record (even though we’re barely past the halfway point). Such extreme weather trends are bound to have serious implications for the environment, public health, and the economy.

Joseph (Han) Stice

Why, then, aren’t economic indicators flashing bright red? Joseph (Han) Stice, assistant professor of accounting at the Donald G. Costello College of Business at �鶹��Ƶ, has run the numbers on business and climate change. His recent working paper, co-authored by Marcus Kirk of University of Florida and Derrald Stice of University of Hong Kong, paints a picture of profound climate-related disruption underneath the placid-seeming surface of the economy.

For the years 1990 to 2020, the researchers compared quarterly sales performance from a large sample of U.S. firms to the temperature data at their base of operations. In this way, they constructed a measure of weather sensitivity, which they termed “weather beta,” for each company in the initial sample. Specifically, they were looking at whether sales either benefited or suffered when local temperatures were higher or lower than the “ideal” of 65 degrees Fahrenheit.

“What they—they being the people who examine temperature—say is that if it’s above 65, you turn on your air conditioning. If it’s below 65, you turn on your heater,” says Stice.

After restricting the sample to only those firms with discernible weather beta, they ended up with a data-set comprising 66,795 firm-quarters.

Across the sample as a whole, the results were a misleading nonstarter. Weather fluctuations did not seem to have an impact on economy-wide sales, one way or the other.

This was no surprise to Stice. Citing past research, he points out that “the overall economic effect is that colder weather is, on average, better. But that’s not true in every single instance. Some industries (i.e., agriculture) benefit from hot weather. And it also depends on what region you’re in, what time of year it is, etc.”

“We need to have a national discussion and a global discussion,” Stice says. “But the people who really matter are the local leaders, as far as climate is concerned. The people you elect on the local level are going to have a much greater impact on how you respond and how your companies can adjust, than whether or not your candidate is in the White House.”

To gauge actual impact, the researchers split the sample by size and geographic concentration, presuming that larger firms with a wider geographic footprint would be less affected by temperature changes at home base. These differences between firms proved to be critical. For the smallest, most localized firms, a swing from the 75th to the 25th percentile in terms of nonideal temperature meant 8.8-15.9% lower sales. The biggest and most sprawling firms saw sales declines of just 4.3-5.6% from an equivalent shift.

Stice clarifies that “we are talking about very small deviations, like percentages of degrees on average per day over an entire quarter. If it were one degree hotter than 65 degrees every day, that would come up in our measure as a 90. The biggest number we have is like a 25 or a 30.”

Also, sales impact tells only part of the story. The sheer size of the data-set allowed Stice and his co-authors to predict quarterly sales performance for individual firms, based on the weather and firm characteristics. On average, actual sales declines were about half as severe as predicted. The researchers speculate that firms were able to soften the blow of immoderate temperatures by adjusting their business practices. The time and resources spent on these adaptations are part of the hidden economic costs of climate volatility.

If firm managers can anticipate how the weather can impact business outcomes, you would expect financial analysts to be at least as attentive to climate effects. However, the researchers found that sales forecasts made shortly before earnings announcements were thrown off by abnormal temperatures in the previous quarter, with 7.4% inaccuracy in the mean. Similarly, the researchers found that weather impact was positively correlated with announcement-period stock market returns. Apparently, even professional investors are being caught off guard by the subtle but costly interactions between climate and economic activity.

For more accurate appraisals, Stice suggests we should turn to the local level. He notes that his measures of firm-specific weather sensitivity happen to line up fairly neatly with municipal self-assessments made by local governments as part of the Carbon Disclosure Project.

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Cryptocurrency’s surprising transparency advantage

Marianne Klinker — Tue, 02 Jan 2024 18:18:45 +0000

Cryptocurrency’s surprising transparency advantage Marianne Klinker Tue, 01/02/2024 - 13:18

Despite the fears of regulators and skittish investors, clear and accurate signals of cryptocurrency quality may be hidden in plain sight.

As perhaps befits a product of the post-2008 economy, the cryptocurrency space has never known normalcy. In a mere 13 years, crypto went from an untried software innovation of mysterious origin to being touted as the future of investing by major movie stars in Super Bowl commercials. Soon thereafter, of course, came the “crypto winter” of 2022, which began well before, but was surely deepened by, the downfall of FTX and disgraced wunderkind Sam Bankman-Fried.

Forthcoming in Journal of Management Information Systems, a recent paper is the first to examine whether the intensity of developer engagement with a cryptocurrency could indeed be related to its quality.

The crypto backlash appears rooted in the belief that the sector is too rife with bad actors, and too technologically complicated, to be worthy of public trust. The consensus in the crypto community, however, is that accurate clues to crypto quality are hidden in plain sight. The majority of cryptocurrencies use open source platforms such as GitHub for the development of their software. Seasoned investors will routinely inspect the publicly available development history of a cryptocurrency as a basic aspect of due diligence.

Forthcoming in Journal of Management Information Systems, a recent paper co-authored by Mariia Petryk, an assistant professor of information systems at the Donald G. Costello College of Business at �鶹��Ƶ, is the first to examine whether the intensity of developer engagement with a cryptocurrency could indeed be related to its quality. (Her collaborators were Liangfei Qiu and Praveen Pathak of University of Florida.)

Mariia Petryk

“This paper is about how we evaluate reputation in a setting where traditional reputational instruments are not precise,” Petryk explains. “When we choose a doctor, we often rely on an endorsement from someone we trust. But in lieu of that, we look into the history of the doctor—education, training, etc.” By the same token (no pun intended), crypto investors could “judge quality based on the total effort developers made to write the code.”

Using GitHub data for 559 cryptocurrencies over the period August 2016 to December 2019, the researchers zeroed in on five open-source activities. They classed three under the heading of “quality enhancement.” Commits are code modifications submitted by developers and eventually added to the crypto source code. Before official adoption, proposed modifications exist as pull requests awaiting assessment. Issues are questions, bugs, or problems raised by developers or users for discussion within the open source platform.

The remaining two activities fall under “diffusion of software,” essentially a proxy for developer attention. Forks are mirrored copies of the original code attached to a developer’s account. Watches are a way for developers to “subscribe” in order to more closely follow the discussion within the community around a cryptocurrency.

Across the data-set, the researchers found that a one-standard-deviation increase in forks and watches would equate to a 0.56% price increase per month, or 6.7% per year.

As for the three “quality enhancement” metrics, increases in issues exerted upward pressure on token price, but pull requests and commits displayed the opposite effect. A one-standard-deviation increase in issues led to a 4.3 percent higher price over one year, while an equivalent increase in pull requests was linked to annual losses of five percent.

These contradictory results perhaps point to uncertainties about the length of time it would take for crypto admins to evaluate and implement proposed changes. It goes without saying that greater numbers of requests for revision would heighten such uncertainties and their possible implications for cryptocurrency quality.

Overall, these findings imply a “virtuous circle” whereby more promising cryptocurrencies attract more developer attention, which in turn produces quality improvements that are reflected in the token price. While the expansion of the developer community creates the potential for rising pull requests and commits to lower the token price, the price-positive impact of forks and watches was approximately six times stronger. As a general rule, then, intensity of developer attention and engagement could be viewed as a leading indicator of how the market values the tokens—with the very important caveat that broad statistical patterns may have little to no bearing on specific investment decisions.

Therefore, information from GitHub and other open-source platforms could be an important reference point for policymakers looking to evolve nuanced regulatory approaches. “One purpose of regulation is to create equal opportunity,” Petryk says. “Transparent mechanisms allow investors to learn about underlying assets and properties and make their own judgments. Open source platforms like GitHub are open to everyone, but not everyone thinks to use it. In terms of info disclosure, this could be an important factor.”

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Risky investment choices, not COVID, put U.S. hospitals in the red

Marianne Klinker — Thu, 02 Mar 2023 15:49:57 +0000

Risky investment choices, not COVID, put U.S. hospitals in the red Marianne Klinker Thu, 03/02/2023 - 10:49

Financially troubled U.S. hospitals are petitioning for more support from the federal government, but handouts won’t fix the underlying problem.

As the United States takes steps to move past the pandemic, its health care system is in a fragile financial state. At the end of 2022, about half of U.S. hospitals were in the red—making it the worst year for the industry since the start of the pandemic. No wonder, then, that hospitals are petitioning Congress for help and protesting the pending cessation of COVID funding from the federal government.

At first glance, the industry’s pleas appear justified. After all, COVID hit hospitals like a tidal wave, filling beds with patients requiring arduous, expensive care. At the same time, hospitals suffered from the same supply chain and workforce issues as virtually every other public-facing facility. And since the vaccine rollout, COVID’s waning lethality has produced an influx of patients who had delayed seeking treatment during the height of the pandemic—and whose health problems may have worsened in the interim.

Seb Demirkan

However, Sebahattin Demirkan, an associate professor of accounting at �鶹��Ƶ, says that the true source of the industry’s financial woes may lie beyond COVID. For Health Affairs Forefront, Demirkan and co-authors Ge Bai of Johns Hopkins University and Christopher M. Whaley of RAND Corporation took a deep dive into the most recent financial reports issued by ten of the U.S.’s largest nonprofit health care systems.

Contrary to the COVID-caused-it narrative, they found that, on average, revenue from patient care actually increased (albeit by less than 1 percent) between 2021 and 2022. Investment revenue, on the other hand, declined by a disastrous 185 percent over the same period. These are heavy but not totally surprising losses, seeing as how 2022 was the worst year for financial markets since the Great Recession. However, they cast doubt on the contention that hospitals’ financial struggles are primarily due to operational challenges brought on by the pandemic.

Without understanding the primary driver of hospitals’ financial strain, policymakers cannot make evidence-based decisions that benefit hospitals and patients in the long run.

For Demirkan, getting the origin story right is critical for policymakers weighing the current situation. As the article states, “Without understanding the primary driver of hospitals’ financial strain, policymakers cannot make evidence-based decisions that benefit hospitals and patients in the long run.” Clearly, if the health care system’s exposure to downside risk is to blame, more federal funding alone wouldn’t resolve the issue. Even if federal bailout money were restored to 2020 levels, hospitals would be in danger of yet further losses via their investment portfolio.

Demarkan’s main concern is for the taxpayers who may be stuck with the bill, through increased taxes and/or rising patient fees and insurance premiums. “While hospitals are critical for patients and communities, resources used to pay for hospital care come from those same patients and communities,” the article states.

He points to a possible contradiction between the non-profit status of these institutions and their investment strategy, which he says resembles that of a hedge fund. Such an approach is likely to reap outsized gains in bull markets—in bear markets (as in 2022), above-average losses. “If they behave like any other for-profit company or financial company, then it is not going to serve the entire nation, the taxpayers or people. All stakeholders will be hurt, basically,” Demirkan says.

As one possible remedy, he suggests regulators could insist that non-profit hospitals limit risk exposure across their portfolio as a precondition for public assistance. “They may say, ‘if you want to invest extra cash, invest in ETFs or mutual funds. FedEx, Amazon etc.—less volatile and less risky financial instruments and stocks.” Still, Demirkan acknowledges that attempts to ratchet up oversight or accountability would run afoul of the influential health care lobby.

At the very least, therefore, he advises the government not to “with blind eyes, give away money to these hospitals, and just look at how they use that money if they are nonprofit hospitals. And basically, use your judgment accordingly.”

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Does the Tax System Favor Diversified Firms?

Jennifer Anzaldi — Tue, 07 Jun 2022 16:52:56 +0000

Does the Tax System Favor Diversified Firms? Jennifer Anzaldi Tue, 06/07/2022 - 12:52

In This Story

Kelly Wentland

In business, a specialist strategy can sometimes be riskier than a generalist one. Competing in only one industry leaves firms highly vulnerable to heightened income volatility, with extreme gains and losses, often alternating in quick succession. Innovative firms, whose business models are based on heavy R&D investments with uncertain returns, are especially affected by these fluctuations.

The tax system can exacerbate these specialist-specific risks through a principle called convexity—fat years are taxed at the full rate (e.g., 21 percent currently) without an equal rate of subsidy or assistance in years without a profit. As Kelly Wentland, assistant professor of accounting at �鶹��Ƶ, explains, “Over two years, a diversified firm with a stable profit of $5 million per year would pay half the tax of a specialized firm that makes $20 million one year but loses $10 million the next.”

Policies that allow taxpayers to use current losses to get a refund of prior taxes paid (called a loss carryback) can help reduce this disparity. However, the Tax Cuts and Jobs Act (the 2017 tax reform) removed the ability for taxpayers to use carrybacks. The CARES Act subsequently reintroduced carrybacks, but only temporarily during the pandemic. While firms are still allowed to apply current losses to offset future income (called a loss carryforward), prior research shows that firms often do not fully utilize these loss offsets for a variety of reasons. As a result, convexity likely continues to play an important role in determining a firm’s tax liability.

An obvious opportunity for tax-wary specialists is to diversify their business in an attempt to stabilize overall financial performance. Classically, this is thought to be a key benefit of a conglomerate business model in the United States.

Wentland’s recent research paper (forthcoming in The Accounting Review) puts this wisdom to the test, comparing the income volatility and tax burden of industry specialists and generalists over the period 1993-2017. Her sample, pulled from the Compustat corporate database, includes roughly 35,000 firm-year observations in the paper’s primary analysis. Wentland controls for a host of firm characteristics, including firm size, accounting for the fact that certain firms have more resources for limiting their tax exposure.

Wentland found that operating in an additional industry was associated with a 35 percent reduction in taxable income volatility and an 11.6 or 14 percent lowering of the tax burden for firms in her sample period—depending on whether taxes were scaled by assets or sales, respectively. “On average, I find that firms that operate in more than one industry have a tax savings of about $2.5 million per year,” Wentland says.

But the aggregate figures tell only part of the story. Not all diversified structures were equally effective as a tax hedge. When the different branches of the business had high cross-industry cash flow correlations—i.e., a GE financing branch supporting its automotive sales—there was little or no tax advantage conferred. Additionally, generalists that were very active in multiple countries were less protected from convexity, because tax jurisdictions may prevent losses in one jurisdiction from offsetting income in another jurisdiction. Similarly, firms that diversified through M&A (mergers and acquisitions) are prevented by the tax code from using an acquired company’s past losses to balance out the purchaser’s profits.

To isolate the role of the tax system characteristic (convexity) from other firm characteristics that influence tax planning, Wentland examined how firms responded to two temporary tax law changes expected to reduce convexity in the tax system: the Job Creation and Worker Assistance Act of 2002 and the Worker, Homeownership, and Business Assistance Act of 2009. As a short-term response to economic downturns, these regulations granted businesses greater access to tax refunds by extending the periods to which firms could use current losses to offset taxes paid on past income years. In doing so, they reduced the advantage with tax convexity for generalists amongst firms that were eligible, i.e., those with net operating losses while the policies were in force.

“It’s not obvious that if you follow the strategy, you always get a benefit though. You really do have to keep in mind the context of your business and how you grow this strategy,” Wentland says.

Wentland’s nuanced findings can help policymakers understand how the tax code may affect corporates’ willingness to engage in riskier strategies. Policies that act to reduce tax system convexity, such as loss carrybacks, level the tax playing field for specialists and more innovative firms, thereby encouraging them to continue down their potentially more volatile path. In the last few decades, policies regarding carrybacks have wavered between generous and prohibitive in reaction to the economic climate. Alternatively, policymakers could be more proactive. Wentland suggests they could ask themselves questions such as, “Do we want firms to be diversified and insulated? If all of our companies are specialized and we have events like the pandemic or economic recessions, what does that mean for our economy? How do we want to incentivize that risk-taking from tax policy?”

Rather than pushing for one policy direction or another, Wentland hopes her research will advance and refine the debate. She points out that risk-taking is sometimes not only desirable but necessary. Think of Amazon’s initial losses from investments in logistics and supply chains and Big Pharma’s investments with its COVID-19 vaccine and the role these innovative breakthroughs have played in the past two years. On the other hand, nudging businesses toward diversification could soften the overall blow of an economic downturn.

“Say, for instance, we’re headed into economic recovery and we really want people to be investing and taking risks,” Wentland says. “We might say, ‘Maybe we should subsidize risk. We should have a bit more carrybacks. We should do these things to make it okay to fail and keep going.’ On the other side of things, though, we might ask ourselves, ‘Are we potentially heading into a recession? Do we want to think about how we should be preparing to insulate ourselves?’ In that case, you may not want to offer that subsidy for loss.”

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How Tax Uncertainty Threatens Economic Recovery

Marianne Klinker — Tue, 07 Dec 2021 16:37:59 +0000

How Tax Uncertainty Threatens Economic Recovery Marianne Klinker Tue, 12/07/2021 - 11:37

In This Story

Kelly Wentland

It’s often said that taxes are one of only two iron-clad certainties in life. But the degree of certainty attached to our tax-based expectations is by no means fixed.

As of this writing, for example, the Biden administration reportedly plans to hike the top long-term capital-gains tax rate from 20% to 39.6% – an increase which may apply retroactively. Commentators are currently debating whether and how the tax uncertainty thus generated may impact investment and saving.

We live in a world where uncertainty is advancing on many fronts, from the increasingly fractious political arena to the inscrutable future of international travel. This climate of generalized rising uncertainty has been linked to fiscal conservatism in the corporate sphere and the post-2008 decline of investment as a share of corporate profit.

Kelly Wentland

Kelly Wentland, an accounting professor at the �鶹��Ƶ School of Business, recently published a paper in Management Science (co-authored by Martin Jacob of WHU – Otto Beisheim School of Management and Scott Wentland of the Bureau of Economic Analysis) that further specifies and quantifies firm response to tax uncertainty. Its main analysis focuses on exceptional or “lumpy” investments as analogous to constructing a new chemical plant or expanding factory equipment. The researchers surmise that because tax uncertainty exposes firms to greater financing costs, it would affect large investments more than, say, incremental R&D or hiring. Lumpy investments are also of particular economic import, representing up to 40 percent of a firm’s total capital expenditure over a 16 year period.

The paper hinges on the Internal Revenue Service’s phased rollout of Schedule UTP from 2010-2014. The new policy requires firms to list their uncertain tax positions – i.e. claimed tax liability adjustments that often fall into gray areas in the tax code – on their annual return. Taxpayer firms subject to the policy would therefore be in a situation where their uncertainty was expected to be more salient, compared to those beyond reach of the rule. Indeed, articles published at the time reported that corporations were concerned that Schedule UTP would lead to more audits and higher compliance costs. While ex post evaluations of Schedule UTP suggest it may not have been as revealing as originally anticipated, Wentland and her colleagues’ work shows that initial expectations matter in terms of investment. An analogous point would be how buyers continued to allow beliefs of a strong housing market influence their offer prices right up until the housing market tumbled during the financial crisis.

The largest firms, with assets of $100 million or more, were the IRS’s guinea pigs, receiving the Schedule UTP requirement in 2010. The threshold was lowered in the following years to cover all firms with at least $10 million in assets.

Over the course of the phased rollout, the researchers compared investment activity of firms (harvested from the financial database Compustat) that barely made the cutoff for Schedule UTP to those whose assets fell slightly short of the requirement. For firms subject to Schedule UTP, the researchers also made before-and-after investment comparisons using historical data going back to 2005.

They found that the onset of Schedule UTP eligibility was associated with lumpy-investment delays of 4.5 months on average. But even this non-trivial number understates the chilling effect of tax uncertainty. When Wentland and co-authors compared firms that were never affected by the new policy to those that were, the relative delay rose to 18 months. Recall that the Schedule UTP rollout coincided with crucial years of economic recovery. This research shows that smaller firms who never made the $10 million cutoff ramped up investment more readily as part of their rebound from the Great Recession. (Note that the researchers controlled for firm size, so the difference here wasn’t due to a disparity in investment behavior between large and small companies.)

The policy change had implications for the size of investments as well as their timing. Post-Schedule UTP, lumpy investments shrank by 0.27% of total assets, which translates to an overall 5.3% decline in investment activity.

The other main types of corporate investment – acquisitions, R&D, and employment – were surprisingly not impacted at all by the new policy. This is perhaps most unexpected in the case of acquisitions, which technically qualify as lumpy (i.e. a one-off, unusually large expenditure). Unlike classic capital expenditure, though, acquisitions are usually carried out by firms that are flush with cash. Financially constrained firms normally pursue growth through the more conservative route of enhancing or adding to existing resources. For obvious reasons, tax uncertainty looms larger for the latter group of firms than the former.

Companies’ response to tax uncertainty is an especially pertinent issue at the moment. The recent history revisited in Wentland’s paper is repeating itself; the global economy is in tentative recovery mode once again, this time because of a pandemic rather than a once-in-a-lifetime recession. The positive and negative ripple effects of governmental positions and policies should be weighed very carefully. Wentland’s analysis can help policymakers better understand the potential trade-offs involved.

If President Biden’s infrastructure agenda is implemented, a corresponding tax rate hike has been proposed to fund it. But in calculating costs and benefits of legislation such as the American Families Plan, policymakers should take into account the drag on investment that could come with how the process itself may alter economic prospects. In particular, they may want to be aware that extended deliberations about policy can have unintended consequences if the possibilities under consideration stir up tax uncertainty among the public. In sum, the success of a given policy depends not only on its direct effects but also on the indirect effects surrounding its creation.

The net real economic impact of such policy may only become clear in the fullness of time.

Source: Martin Jacob, Kelly Wentland, Scott A. Wentland (2021). Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

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