What is the Certainty Factor?
The “Certainty Factor” posits that entrepreneurs will only invest when there is a degree of positive certainty with respect to both the business climate and government actions that could impact the economy. The Certainty Factor is directly tied to job creation as it is the private sector that creates jobs when entrepreneurs invest in their businesses or new business ventures. Absent private sector investment, job creation will stagnate or decline notwithstanding government spending. While there is always uncertainty associated with investing, entrepreneurs are reluctant to invest when the government appears to be acting capriciously or without regard to the economic impact of its actions. Certainty must also be positive as the certainty of a negative impact from government action will discourage investment more than uncertainty about such action. In other words, bad policy is worse that the anticipation of bad policy. However, the anticipation of bad economic policy itself (“uncertainty”) has a meaningful negative impact on investing.
Perhaps the best current example of the Certainty Factor’s influence involves tax policy. When Congress and the President agreed to extend the Bush tax cuts for two years, the President lost no time in telling everyone that his intent was to raise taxes in two years on “the wealthy.” Of course, businesses interpreted this as raising taxes “on business.” If an investment depends on the current tax rates to produce a profit, businesses will be reluctant to invest because of the uncertainty of near term tax rates. As such, they will sit on the tax benefits they receive for two years and see where the rates go thereafter.
ObamaCare is another good example. Businesses are uncertain about health care costs going forward as the legislation is so lengthy and complex even the experts are uncertain and disagree about the law’s economic impact. However, one thing almost everyone agrees on is that health care costs will go up for businesses with a significant number of employees. When a business prepares a forecast to justify investing in a new or expanded venture with a significant numbers of employees, what it knows about the negative impact of ObamaCare’s costs may discourage the investment. Alternatively, uncertainty about ObamaCare’s costs may discourage investing until the business knows the extent of the cost increases.
In summary, while all business ventures involve a degree of uncertainty, lacking a level of positive certainty sufficient to justify an investment, businesses and entrepreneurs will not invest. Absent meaningful private sector investment, job creation will stagnate or decline. As such, the Certainty Factor plays a key role in job creation and economic prosperity.