Governor Gretchen Whitmer and leaders of the GOP-led Michigan House and Senate have recently considered proposals to postpone making required principal and interest payments on the unfunded accrued actuarial liability (UAAL) of the Michigan Public School Employee Retirement System (MPSERS). For all variations of this idea, the immediate results of such actions would be the… Continue reading
A new study from AEG’s Patrick L. Anderson shows AI and machine learning negligence pose serious economic risks. Problems can be identified and mitigated by implementing adequate “AI Audit” protocols. Few businesses are prepared for significant damages due to management complicity with bad AI applications AI Audit methodology proposed to safeguard organizations and individuals, limit… Continue reading
This paper, written by Patrick L. Anderson for the January issue of the NABE’s Business Economics journal, is the recipient of a 2018 Edmund A. Mennis Contributed Paper Award. The work earned Mr. Anderson his third Mennis award for the nationally-recognized accuracy of its analysis in handicapping location bids for Amazon’s “HQ2.” Abstract For nearly… Continue reading
2018 Revenue at Risk Report Manufacturer incentive programs have become increasingly controversial – the programs are overlapping, complex, and subject to confidentiality provisions. Therefore, the general public, lawmakers, and even some dealers are uncertain about their full extent. Over at least the past six years, dealerships’ gross and operating margins have been on the decline.… Continue reading
Written by Patrick L. Anderson, Persistent Unemployment and Policy Uncertainty, was honored with the Edmund A. Mennis Contributed Paper Award in 2013. This award is presented to the author of the most meritorious original work submitted each year to Business Economics, NABE’s quarterly professional journal. This paper lays out an innovative and very promising approach to analyzing a host of important policy approaches.
In the recovery from the deep recession that formally ended in 2009, unemployment has proven resistant to both aggressive fiscal policy and expansionary monetary policy. The persistence of high unemployment, fully four years after the trough of the recession and despite aggressive policies to combat it, raises a critical question about the ability of standard macroeconomic models to grasp fundamental business decisions faced by private firms, including hiring and investment decisions.
One competing argument to those regularly made in fiscal and monetary policy debates is the policy uncertainty hypothesis. This holds that managers of private firms have been rationally avoiding hiring workers, due to the risk of higher future costs imposed by government policies. However, such a hypothesis cannot be directly tested in standard models of firm behavior that rely on the presumption that firms maximize profits in each time period. The probabilities of transitioning from one policy regime to another, and the consequences of such transitions to the value of the firm, are not inputs these models.
To formally test the policy uncertainty hypothesis, we use a novel “value functional” or “recursive” model of firm behavior, in which managers maximize the value of the business rather than its profits. This model allows for managers to explicitly consider policy uncertainty, and the consequences of future business decisions they might make if conditions change. We create a data set that includes income statement information for firms in a selected U.S. industry in the relevant time period, parameters that reflect policy-related costs of employing workers in that industry, and probabilities of changing policies in the future.
Using this approach and these data, we demonstrate that policy uncertainty affects rational hiring decisions of firms. We show that business managers can make rational decisions to maximize the value of their businesses that forego available current-period profits, due solely to uncertainty about future policy-related costs. Tests for robustness indicate that this effect is not dependent on particularly onerous assumptions, that the response to policy uncertainty is higher in some industries than others, and that the scale of the firm also affects its sensitivity to policy risk.
Finally, we conclude that this approach has potentially broad application within business economics, particularly in evaluating investment and hiring decisions; real options; and other aspects of uncertainty, fixed costs, and managerial flexibility.
Each year, the Grand Rapids Area Chamber of Commerce hosts the West Michigan Regional Policy Conference. For 2008, Anderson Economic Group was retained to prepare a set of policy briefs…
The purpose of this paper is to compare the NITC and DIBC proposals, identifying the key factors affecting policy makers, investors, and taxpayers. To date, public discourse about the options has been hampered due to lack information about the proposals, including project viability, financing, and taxpayer risk.
The Consultants at Anderson Economic Group have completed this study independently in order to provide an unbiased source of information on the topic.