Regime Uncertainty: Reports Keep Coming In



Each summer, Wall Street strategist Byron Wien convenes a meeting of high rollers to discuss the outlook for investment. This year’s meeting brought together fifty individuals, including more than ten billionaires. Their expectations, as reported by CNBC, are gloomy:

“They saw the United States in a long-term slow growth environment with the near-term risk of recession quite real,” said Wien, in a commentary to Blackstone clients. “The Obama administration was viewed as hostile to business and that discouraged both hiring and investment. Companies and entrepreneurs were reluctant to add workers because they didn’t know what their healthcare costs or taxes were going to be.”

Add this report to the many similar ones to which my colleagues and I have called attention over the past two years.

Of course, for mainstream macroeconomists, such evidence means nothing. In fact, they hold it in complete contempt because (1) their formal mathematical models do not have a variable called “regime uncertainty,” and (2) even if they could be persuaded to take this factor into account, the canned data on which they rely—the product of the Commerce Department’s Bureau of Economic Analysis, for the most part—do not supply them with an “official” data set for their analysis. What you can’t measure, according to their “scientific” credo, does not exist. Their de facto motto (of which I have more than once been on the receiving end) is: you’ve got no formal model; you’ve got nothing.

In my study of regime uncertainty over the past fifteen years, I have given weight to three independent forms of evidence: (1) specific legislative, executive, judicial, and regulatory actions the government is taking, the ideology embraced by major government actors and advisors, and, in light of basic economic logic, what investors might reasonably infer about the future security of their private property rights from the government’s actions and the ideology of its leading figures; (2) direct testimony by investors themselves, as well as relevant opinion surveys of businessmen, when available; and (3) changes in risk premiums demanded by investors in the corporate bond markets, as shown by changes in the slope of yield curves. During the past two years, my scrutiny of these types of evidence has persuaded me that regime uncertainty has arisen and that this uncertainty probably accounts, at least in part, for the very low level at which long-term private investment has settled, with only relatively small recovery since it hit its most recent trough.

Again, however, full disclosure obliges me to warn the reader that the acknowledged experts in macroeconomics—those who work in this area at MIT, Stanford, Harvard, Chicago, Yale, Princeton, and the other esteemed universities—are to my knowledge unanimous in their disregard of the idea that regime uncertainty might be contributing to the prolongation of the present recession (or might have contributed to the prolongation of the Great Depression, as I argued in my 1997 paper). So, if you prefer to go with the experts, you should disregard my argument and my evidence and make your bets on the basis of what the experts say. You might wish to consider, however, that these are the same experts who, virtually to a man, failed to predict the present recession (and most of the preceding ones, as well) and that, according to their positivistic tenets, predictive power is the sine qua non of a scientific theory, as much in economics as in physics or chemistry.

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