Regime Uncertainty—Now Maybe People Will Take the Idea Seriously
By Robert Higgs • Monday January 4, 2010 4:48 PM PDT • 13 Comments
Writing in today’s Wall Street Journal, Gary S. Becker, Steven J. Davis, and Kevin M. Murphy discuss how the government’s multifaceted efforts to “reform” health care, energy and environmental controls, financial regulation, taxation, monetary policy-making, and various other aspects of the politico-economic order have created such great uncertainty that business people are reluctant to invest or to hire new workers, and therefore recovery from the present recession, to the extent that it is occurring at all, is proceeding unusually slowly. As I read this article, I nodded yes … yes … yes … they are talking about regime uncertainty, all right.
I have been promoting this idea publicly since 1997, in articles, songs, dances (without wolves), stand-up comedy, performance art, and blog posts, not to mention my tedious lectures and my boring 2006 book Depression, War, and Cold War. I cannot say that the world has beaten a path to my door as I’ve sought to convince my fellow economists that this phenomenon was important in retarding recovery from the Great Depression and, in all likelihood, in retarding recovery from the present recession (although, to be fair, I must acknowledge that a few of my fellow economists and others have taken note).
Before I could write anything about the WSJ article, however, Brooks Wilson wrote a nice post about it at his blog, which I recommend. Wilson has artfully combined my crisis hypothesis on the growth of government with my regime-uncertainty argument to produce what he calls “the crisis paradox” — “crisis is the best time politically and worst time economically to enact fundamental economic reform.” Indeed. But, of course, that is precisely how things tend to happen, making political entrepreneurship the mortal enemy of economic prosperity.
Tags: American History, Economics, Great Depression, Politics, Property Rights, Regulation, Taxation, The State, Unemployment 
Tut, Tut, Dr. Higgs! As every “Modern” economist knows, all that one has to do to restore business confidence, after delivering a thrashing to the hapless plutocrats, is to administer a “coup de whiskey” in the form of monetary or fiscal stimulus. This measure, by stoking their “animal spirits,” will magically transform businessmen from penny-pinching hoarders of specie to drunken frat boys in an instant. They will then spend money with wanton abandon, plunging into ever-increasing debt like lemmings into the icy North Atlantic. They will thus be ripe to be thrashed again, and again, the cycle to be repeated ad infinitum.
On second thought, perhaps Keynes’s term “animal spirits” is a misnomer. Given how the above scenario is supposed to operate, it seems more to resemble Freud’s concept of the “Death Wish.”
John Perez | Jan 4, 2010 | Reply
By chance I was re-reading “Regime Uncertainty” yesterday. Dr. Higgs quoting Badger (1989, 116): “..for the most part the New Deal relied on private investment to stimulate recovery yet its rhetoric precluded the private confidence to invest.”
Obama would have done well to read this paper before meeting with/scolding his pet bankers last month.
Adam | Jan 5, 2010 | Reply
It is quite strange that R.U. has not been more widely accepted. After all mainstream economics has generally accepted the concepts of information costs and transaction costs when discussing markets. And much of the mainstream, left, center and right, accepts the idea (although it is probably wrong) that market systems need to rely on a regulatory, legal, fiscal, monetary and political foundation before they get established.
Similarly the same broad mainstream, at least if TV business and economics broadcasters can be taken as a sample, has embraced the idea that ‘expectations’ influence investment decision making.
So it is not a huge leap to argue that uncertainties impact expectations, and that the uncertainties about the legal, regulatory, political etc. foundation can escalate information and transaction costs and radically impact investor expectations.
Tim | Jan 6, 2010 | Reply
Perhaps the reason that the Economics profession has not widely accepted Regime Uncertainty is that it is hard to relate concretely to more objective economic indicators.
I for one believe that R.U. has given us a recession that has been longer and deeper than in its absence. Even a “Keynesian”, like me, who accepts that both vigorous monetary and fiscal policy policy has been needed to deal with an aggregate demand black hole has to be dissapointed with Obama fiscal policy. The lack of seriousness in the design of the “stimulus’ package which can only be characterized as “too little, too late” as well as just being a packaging of tired public expenditure ideas that were not high priorities in the past.
When the “too little, too late” approach is coupled with increasing taxes (or the threat therof), both investor and consumer confidence are afected.
In the case of this recession, one also has to look at what preciptated it–what caused the sudden lack of trust in the financial sector? Of course, we have ideas about underlying causes such as governemnt (GSE) gaurantees of junk. But what caused the lack of trust?
My memory may be faulty on this, but as I recall the timing of the beginning of the finacial crisis corresponds closely with poll numbers showing that an Obama victory was almost a sure thing.
In this case, perhaps anticipated R.U. precipitated the lack of trust.
Bastiaan Schouten | Jan 12, 2010 | Reply
I found your hypothesis of regime uncertainty as the reason why the 1930s depression was long and extended to be completely convincing. After I read your idea in your 2006 book, I wondered immediately why I had never heard this hypothesis before – it was so self-evidently an important factor, once it had been so clearly articulated by you.
I would expect most businessmen and investors would be far more sympathetic to the hypothesis than are academic economists, who face short-term incentives that encourage them to specialize in trying to impress other economists by means of clever puzzle-solving in academic journals rather than morally or empirically important phenomena. They tend to be risk averse in terms of openly supporting new and controversial hypotheses that are not already socially acceptable in their academic peer group. Why stick your neck out if there is no incentive to do so? See Robin Hanson’s work on the incentives against being an intellectual pioneer.
Michael Strong | Jan 25, 2010 | Reply