Regime Uncertainty and the Non-Recovery

Robert Higgs introduced the concept of “regime uncertainty”, government policies and actions that threaten property rights, in his outstanding paper, Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War to explain the depth and duration of the Great Depression with special attention to the “Roosevelt recession” of 1937 to 1938, a recession within a depression. Commentators have applied the concept to predict or explain why the current recovery would be, or is, a slow jobless recovery.

As examples see:
http://mises.org/journals/qjae/pdf/qjae13_3_4.pdf

http://blog.independent.org/2011/11/06/u-s-economic-recovery-remains-anemic-at-best/

http://blog.independent.org/2011/10/08/important-new-evidence-on-regime-uncertainty/

http://blog.independent.org/2011/09/19/global-regime-uncertainty/

http://blog.mises.org/11716/jobs-investment-and-spending/

Today’s Wall Street Journal, “Regulation for Dummies” (p. A20) provides more evidence that regime uncertainty is a major factor in leading forward looking entrepreneurs and managers to be hesitant to expand old or create new enterprises. The evidence is provided in this chart (below) reproduced in the Journal from the Unified Agenda, Regulatory Service Center.

The Journal observes, it is not just existing or newly approved regulations that matter. “(T)he regulatory future matters as much. The Administration’s pipeline is clogged with proposed rules and plans to propose rules, which every business survey says are contributing to the policy uncertainty that is harming growth and hiring.”

Echoing Higgs, the Journal concludes, “The evidence is overwhelming that the Obama regulatory surge is one reason the current economic recovery has been so lackluster by historical standards. Rather than nurture an economy trying to rebuild confidence after a financial heart attack, the Administration pushed through its now-famous blitz of liberal policies on health care, financial services, energy, housing, education and student loans, telecom, labor relations, transportation and probably some other industries we’ve forgotten. Anyone who thinks this has only minimal impact on business has never been in business.” What should be added to the list is the real threat of significantly higher future tax burdens.

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Higgs on the Economic Recovery

If consumer spending were the key, the economy would be going strong. Real consumer spending peaked in the fourth quarter of 2007, fell slightly (about 2.5%) over the next six quarters, and by the fourth quarter of 2010 exceeded its previous peak by almost 1%. So it is clear that a "collapse" in consumption is not to blame for the economy's anemic recovery.

What is to blame is the collapse of private business investment. Until this critical component of the economy — technically, "private domestic business net investment" — fully recovers, the economy will continue to sputter.

Don't confuse net investment with gross investment.

Gross investment includes expenditures aimed merely at maintaining or replacing existing structures, tools and equipment, software and other capital goods as they become obsolete or wear out.

But unless firms do more than make up for depreciation, they do not expand their productive capacity, except to the extent that they replace worn-out or obsolete capital goods with models that employ improved technology. If all we do is replace a worn-out machine tool with a new one, we have not increased the number of machine tools.

Economic growth requires net investment — investment above and beyond the replacement level — and more rapid economic growth requires a greater rate of increase in such investment.

With that in mind, consider what has happened to net private investment.

Net private investment reached its recent cyclical peak in the third quarter of 2007, when firms were investing at a net annual rate of $463 billion per year. (In that same quarter, gross business investment was running at a $1.66 trillion annual rate.)

Net investment then fell steadily for the next four quarters, reaching $336 billion in the third quarter of 2008 and plummeting to $159 billion in the fourth quarter of 2008, a 53% drop in a single three-month period.

Although the financial-market panic that flared up in September 2008 began to subside early in 2009, net investment continued to fall, going into negative territory (minus $53 billion annually) in the first quarter of 2009 and falling further to minus $119 billion in the second quarter of 2009.

Some improvement began in the next quarter, but for the entire year 2009, net business investment amounted to minus $69 billion. Hardly by coincidence, U.S. gross domestic product also fell substantially in 2009...

Unless private investment recovers more rapidly, the economy's recovery is sure to remain slow, too slow to significantly lower unemployment...

A substantial, rapid recovery of net private business investment probably won't occur until the made-in-Washington clouds clear. Meanwhile, overall economic prospects will remain gloomy.

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Less Government, Less Economic Trouble

Robert Higgs writes:

Though our current economic troubles are complex, many mainstream economists have endorsed the simplistic Keynesian theory that massive government spending will produce jobs and prosperity.

From such Keynesian thinking have flowed the "stimulus" and bailout measures that have increased the size and power of government and added trillions of dollars to the public debt...

Politicians, who are always looking for plausible rationales for their insatiable spending, borrowing, and power grabbing, had never abandoned Keynesianism, so they have been elated to find economic "experts" again confirming their self-interested inclinations...

But what does history teach?

History teaches that temporary surges in government spending give people money that, for the most part, they save or use to reduce debt, rather than setting in motion an upward spiral of income, expenditure, real output, and employment, as was envisioned by John Maynard Keynes, the British economist whose theory spurred massive government interventions in the economy from the 1930s onward.

History also teaches that government "emergency" spending tends to fatten the coffers of the politically connected. Thus, much of the so-called stimulus spending has served only to increase the pay and benefits of government employees, transferring income from the private sector to the government sector, and to reward groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration...

Since the early 20th century, periods of national emergency — real and imagined — have triggered sharp increases in government power, scope, and cost.

The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and U.S. engagements in Afghanistan and Iraq.

We are now in another such critical period, springing from the housing bust, financial debacle, and recession.

In their embrace of Keynesianism, many economists have concluded that even though the New Deal's hodgepodge of policies never brought about full recovery, World War II did, as the economy expanded to produce munitions and enlarge the armed forces. Huge, deficit-financed government spending, they argue, finally wiped out the lingering mass unemployment.

The truth, however, is really quite simple. In 1940, after eight years of New Deal pump priming, the unemployment rate remained about 10 percent even if, unlike the Bureau of Labor Statistics, we count people enrolled in federal emergency work-relief programs as employed. The gigantic buildup of the armed forces, primarily by conscription, then pulled the equivalent of 22 percent of the prewar labor force into the military. Voilà, unemployment disappeared, as it was bound to do regardless of any wartime Keynesian fiscal policies.

Looking to the World War II model of how to deal with today's economic crisis is nonsense. Whatever else the war might have accomplished, it did not produce conditions that we may properly describe as genuine prosperity.

Government spending — whether on our current armed forces and their more than 800 foreign bases or on "green" energy and other government-favored projects — does not produce prosperity. It only diverts resources, as it always has in the past, from the genuinely productive private economy and bulks up an already bloated government.

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Why 'Stimulus' Doesn't Stimulate

Robert Higgs writes:

President Obama has asked Congress for an additional $50 billion in "stimulus" money to finance infrastructure projects. The theory is that the additional spending will cause businesses to boost production to meet this demand. Producers will add jobs, triggering increases in consumer spending that will ripple through the economy and fuel a stronger overall recovery.

Unfortunately, however, such government pump-priming hasn't worked in the past, and there's no reason to believe it will work now...

So the conventional wisdom—that a sharp decline in consumer spending caused the economy's downturn—is wrong.

What did cause the downturn? The answer is: a sharp decline in private investment.

In fact, the ups and downs of the business cycle are always driven by investment spending, not by consumption spending...

The media's focus on consumption unfortunately tempts politicians to approve "stimulus" measures aimed at pumping up this part of total spending—measures such as long extensions of unemployment insurance, aid to state and local governments to help them avoid personnel reductions, and increases in federal employee salaries.

Some economists in fact single out such measures for special praise on the grounds that such payments, because they are most likely to stimulate near-term consumption spending, have the greatest "multiplier effect."

Such arguments fail to grasp the true nature of boom-bust cycles, however, especially the central role of investment spending in driving them—and, more important, in driving long-term economic growth.

If politicians truly wish to promote genuine, sustainable recovery and long-term economic growth, they should focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, gross private domestic investment was still running at an annual rate more than 20 percent below its previous peak. Net private investment was fully two-thirds below the previous peak.

To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors' returns or create uncertainty that paralyzes the undertaking of new long-term projects...

What entrepreneurs, investors and executives await is policy stability and predictability, not more government spending, borrowing, sweeping new regulations, and heightened uncertainty.

Our crying need at present is for a robust revival of private long-term investment. Consumption-oriented government "stimulus" programs, threats of tax increases for entrepreneurs and business owners, and costly regulatory onslaughts breed fear and uncertainty and thus ensure a protracted period of economic stagnation.

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Robert Higgs: We Need Less Government Spending

Though our current economic troubles are complex, many mainstream economists have endorsed the simplistic Keynesian theory that massive government spending will produce jobs and prosperity...

Politicians, who are always looking for plausible rationales for their insatiable spending, borrowing, and power-grabbing, had never abandoned Keynesianism, so they have been elated to find economic “experts” again confirming their self-interested inclinations. Indeed, several prominent economists, such as New York Times columnist Paul Krugman, are urging Washington to spend even more, lest the economy slow.

But what does history teach?

History teaches that temporary surges in government spending give people money that, for the most part, they save or use to reduce debt, rather than setting in motion an upward spiral of income, expenditure, real output, and employment, as envisioned by John Maynard Keynes, the British economist whose theory spurred massive government interventions in the economy from the 1930s onward.

History also teaches that government “emergency” spending tends to fatten the coffers of the politically connected. Thus, much of the so-called stimulus spending has served only to increase the pay and benefits of government employees, transferring income from the private sector to the government sector, and reward groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration...

Since the early 20th century, periods of national emergency – real and imagined – have triggered sharp increases in government power, scope, and cost.

The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and US engagements in Afghanistan and Iraq.

We are now in another such critical period, springing from the housing bust, financial debacle, and recession.

In their embrace of Keynesianism, many economists have concluded that even though the New Deal’s hodgepodge of policies never brought about full recovery, World War II did, as the economy expanded to produce munitions and enlarge the armed forces. Huge, deficit-financed government spending, they argue, finally wiped out the lingering mass unemployment.

The truth, however, is really quite simple. In 1940, after eight years of New Deal pump priming, the unemployment rate remained about 10 percent even if, unlike the Bureau of Labor Statistics, we count people enrolled in federal emergency work-relief programs as employed. The gigantic buildup of the armed forces, primarily by conscription, then pulled the equivalent of 22 percent of the prewar labor force into the military. Voilà, unemployment disappeared, as it was bound to do regardless of any wartime Keynesian fiscal policies.

Looking to the World War II model of how to deal with today’s economic crisis is nonsense. Whatever else the war might have accomplished, it did not produce conditions that we may properly describe as genuine prosperity.

Government spending – whether on our current armed forces and their more than 800 foreign bases or on “green” energy and other government-favored projects – does not produce prosperity. It only diverts resources, as it always has in the past, from the genuinely productive private economy and bulks up an already bloated government.

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Common Fallacies about Macroeconomics

As the recession has deepened and the financial debacle has passed from one flare-up to another during the past year and a half, commentary on the economy’s troubles has swelled tremendously...

The bulk of it has been bad for the same reasons. Most of the people who purport to possess expertise about the economy rely on a common set of presuppositions and modes of thinking. I call this pseudointellectual mishmash “vulgar Keynesianism.” It’s the same claptrap that has passed for economic wisdom in this country for more than fifty years and seems to have originated in the first edition of Paul Samuelson’s Economics...

Vulgar Keynesians are nothing if not policy activists...The eras they esteem as the most glorious ones in U.S. politicoeconomic history are Roosevelt’s first term as president and Lyndon B. Johnson’s first few years in the presidency. In these periods, we witnessed an outpouring of new government measures to spend, tax, regulate, subsidize, and generally create economic mischief on an extraordinary scale. The Obama administration’s ambitious plans for government action on many fronts fill vulgar Keynesians with hope that a third such Great Leap Forward has now begun.

The vulgar Keynesian does not understand that extreme policy activism may work against economic prosperity by creating what I call “regime uncertainty,” a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private-property rights in the future.

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Can the Government Spend Its Way Out of a Recession?

Robert Higgs on the Stimulus

As we wait to see how the politicians in Washington will alter the stimulus package the Obama administration is pushing, many questions are being raised about the measure's contents and efficacy. Should it include money for the National Endowment for the Arts, Amtrak, and child care? Is it big enough to get the economy moving again? Does it spend money fast enough? Hardly anyone, however, is asking the most important question: Should the federal government be doing any of this?

In raising this question, one risks immediate dismissal as someone hopelessly out of touch with the modern realities of economics and government. Yet the United States managed to navigate the first century and a half of its past – a time of phenomenal growth – without any substantial federal intervention to moderate economic booms and busts. Indeed, when the government did intervene actively, under Herbert Hoover and Franklin D. Roosevelt, the result was the Great Depression...

Federal intervention rests on the presumption that officials know how to manage the economy and will use this knowledge effectively. This presumption always had a shaky foundation, and we have recently witnessed even more compelling evidence that the government simply does not know what it's doing. The big bailout bill enacted last October; the Federal Reserve's massive, frantic lending for many different purposes; and now the huge stimulus package all look like wild flailing – doing something mainly for the sake of being seen to be doing something – and, of course, enriching politically connected interests in the process.

Our greatest need at present is for the government to go in the opposite direction, to do much less, rather than much more. As recently as the major recession of 1920-21, the government took a hands-off position, and the downturn, though sharp, quickly reversed itself into full recovery. In contrast, Hoover responded to the downturn of 1929 by raising tariffs, propping up wage rates, bailing out farmers, banks, and other businesses, and financing state relief efforts. Roosevelt moved even more vigorously in the same activist direction, and the outcome was a protracted period of depression (and wartime privation) from which complete recovery did not come until 1946.

The US government has shown repeatedly that as an economic manager it is not to be trusted. What we need most are authorities wise enough to follow the dictum, "First, do no harm." The stimulus package will do enormous harm. The huge debt burden it entails, by itself, ought to condemn the measure. America is already drowning in debt. But the measure will also wreak harm in countless other directions by effectively reallocating resources on a grand scale according to political priorities, rather than according to individual preferences and economic rationality. As our history shows, the economy can recover strongly on its own, if only the politicians will stay out of the way.

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TARP and Reality

Think back. Think far, far back into the past. Think all the way back to the last week of September 2008. Historians tell us that at that time many Americans took leave of their senses. Despite all the evidence of their own eyes, ears, and noses, they became persuaded that the world as they had always known it stood on the verge of utter destruction. Hysterical "journalists" and "experts" on radio and television told them so. What else could they do? Because life without a flush 401(k) lay beyond their wildest imagination, they concluded that "something must be done."

That realization became the signal for hundreds of devoted public servants to leap into action to save civilization. Understanding full well that the people expected them to "do something," they looked around for something to do, and the first thing they noticed was a bill that the Treasury Department had put forward. They didn't like it at first, but after rather frantically redesigning it as a gigantic Christmas tree with all sorts of ornaments and lights they fancied would aid their reelection, they enacted the Emergency Economic Stabilization Act of 2008, known in some quarters as the Bailout of Abominations.

The core of this statute consists of the Troubled Asset Relief Program (TARP), in which the Secretary of the Treasury would expend as much as $700 billion in two installments to purchase rotten paper, such as mortgage-backed derivatives, from banks and other financial institutions. It was a bold stroke, to be sure. An unnecessary and foolish stroke, too, yet, withal, bold in the fashion of fearing nothing but fear itself, which was precisely the kind of boldness the crisis seemed to demand...

Some might to tempted to call the TARP an utter failure, given that it failed completely to carry out its stated objective, but brighter boys will see that this interpretation is all wrong. Look, Hank’s pals have the $290 billion that the Treasury has agreed to hand over to them; and before long, no doubt, Congress will authorize the Treasury to tap into the second bag of $350 billion for the purpose of promoting good will toward men, especially men (and women) whose votes for Democrats need to be rewarded in the Brave New Obama era. The United Automobile Workers union appears to be a leading candidate for such a reward (indirectly, in its case)―besides, if GM, Ford, and Chrysler went belly-up, life on earth would screech to an untimely end, long before global warming had killed off the whales and the cockroaches. But many others besides the Detroit Bad Boys and their not-always-hardworking employees will be straining at the bit for a sweet chunk of the loot.

Notwithstanding the many developments on the bailout front during the past six weeks, the New York Times, like other media outlets, continues to quote Wall Street insiders who report, as Alex Roever of JPMorgan Chase did recently: "You have a market that is frozen." What planet do these guys live on? It certainly is not the same one to which the Federal Reserve's data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these "frozen credit market" tales are pure hooey. Look at the data, for crissake. By now we should all be ready to move beyond hysteria, get a grip on reality, and begin thinking about how to repeal everything the government has done during the past six weeks.

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My thoughts: An excellent analysis from one of the greatest economic historians writing today. The American people were completely lied to on a subject they really can't comprehend. The data did not back up the official story, so the the media bombarded us will anecdotal evidence. The American people still opposed the bill. It was passed anyway. The Dow has dropped about 20% since the passage and Washington seems shocked that its plan failed. Actually they will never admit failure, but continue with new "solutions".

Robert Higgs on Fannie Mae/Freddie Mac Bailout

Yes, what is a government for, if not to save us from the impending disaster that its own policies have produced? Thank heavens for the government!...

Ah, equity investment! Now we’re looking at overt government takeover. For laggard students, let us define socialism: government ownership and control of the major means of production (including production of financial services). In a pinch, we can always resort to socialism—after all, we are doing so only in order to save capitalism!

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