Anderson Economic Group Work

Michigan economist wins national award: Finds that new taxes, fines and healthcare costs are hurting employment in the U.S.


San Francisco, California – (September 10, 2013) – The Board of Directors for the National Association  for Business Economics (NABE) has awarded Patrick L. Anderson its  annual Edmund A. Mennis Award for Best Contributed Paper. 

Anderson examined the hotly debated question of whether taxes, fines, and healthcare costs related to the Affordable Care Act (ACA or “Obamacare”) are weighing down the economy. Anderson’s paper, “Policy Uncertainty and Persistent Unemployment,” applies a novel approach to show the effect of uncertainty about these costs on employment decisions. Anderson demonstrates that the rational response for many businesses, when confronted with the potential for hikes in income taxes, payroll taxes, and health insurance costs, is to delay hiring workers or to refuse to hire them altogether.

“The Edmund A. Mennis Contributed Paper Award is presented to the author of the most meritorious original work submitted each year to Business Economics, NABE’s quarterly professional  journal,” said Ken Simonson, 2012-13 president of NABE and chief economist of the Associated General Contractors of America. “Patrick’s paper lays out an innovative and very promising approach to analyzing a host of important policy approaches. It is a pleasure and privilege to acknowledge his work by presenting him with the Mennis Award at NABE’s Annual Meeting.”

 “I am honored to be recognized by NABE, and to receive this award from the most important economics association in the U.S.,” said Patrick Anderson.

Information on Business Economics as well as Patrick’s presentation of the paper, can be found on NABE’s website (click “Materials” then “Anderson.pdf). 

Patrick L. Anderson is the founder of Anderson Economic Group which he founded in 1996. Today the company is one of the premiere independent economic consulting firms in the US, and serves clients around the country from its offices in East Lansing and Chicago. Clients of Anderson Economic Group include private companies, governments, and some of the nation’s leading business trade organizations. This is Anderson’s third honor from NABE for his writing on business economics, receiving similar honors in 2004 and 2009. He is a recognized authority on business valuation and has written over 100 published works, including the recently released Economics of Business Valuation published by Stanford University Press.

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Abstract of Policy Uncertainty and Sustained Unemployment
by Patrick L. Anderson

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.

JEL Codes: C61, C68, J23, H32

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Click here for the article in Business Economics as published by Palgrave Macmillan.