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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Business and Self-Regulation

Grass somehow manages to grow up through small cracks in the sidewalk. Similarly, the American private sector somehow seems to be exerting itself despite the vast expansion of government by the White House and Democratic Congress.

Case in point: The announcement last week by four oil companies - Chevron, ConocoPhillips, ExxonMobil and Shell - that they are setting up a $1 billion joint venture to design, build and operate a rapid-response system to contain spills as deep as and deeper than BP’s Deepwater Horizon disaster.

Their goal is a system that can start mobilizing within 24 hours of an oil spill. They hope to have it up and running within 18 months.

I suppose one might ask why oil companies didn’t do this before. But it seems a vivid contrast with the apparently hapless performance of the Minerals Management Service, recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement, which seems to have sat on out-of-date response plans for years and which was not able to call in equipment and personnel to respond to the April 20 BP spill for weeks or months...

Consider Underwriters Laboratories, founded in 1894, whose UL stickers come attached to regulator products. Or the Society of Automotive Engineers, founded in 1905, which sets standards for the automobile and other industries.

Government hasn’t had to step in because UL and SAE work well without them. Federal regulators couldn’t plug the BP well. The oil companies’ joint venture promises to be able to do so.

Another case in point, which is different and more diffuse: the “capital strike.” In the wake of the uncertainty raised by the Obama Democrats’ huge increase in regulations and pending increases in taxes, businesses are sitting on cash and not hiring, banks are buying Treasury bonds and not lending, investors are not investing and consumers aren’t buying. The economy languishes...

Two lessons seem apparent here. One is that private firms can do things government regulators can’t do. The other is that if you choke the golden goose enough, it stops producing eggs - and you have to get your hands off its neck.

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Crony Capitalism and Regulatory Capture

Ron Paul writes:

What is happening to this country when the Republic of Congo is better for business than the United States? One big factor is regime uncertainty.

Regime uncertainty is the opposite of the rule of law. It is the rule of the whims of the people in charge and what mood they are in on any particular day. It is usually associated with third world dictatorships and plays a major role in why some countries remain poor. When a business cannot predict whether a government will issue a permit, confiscate or nationalize their capital investments, tax them into bankruptcy, or arbitrarily stall their operations, they tend to do business elsewhere. This type of government hostility is not conducive to wealth creation and it is tragic to see it chasing away businesses here when we need the jobs and productivity more than ever.

When the rule of law is respected, it provides business with some measure of predictability so they can plan and operate smoothly. When it is not respected, there are just too many variables, too much risk of loss or waste.

Of course, disregard of the rule of law creates other problems too. For the larger and better-connected businesses, it creates the opportunity of regulatory capture. If the government becomes too unpredictable, one business survival strategy is to become so involved in government and regulatory bodies that they effectively gain control over the very entities that are supposed to keep them in line. In other words, if you can’t beat the government, become the government. A business that achieves regulatory capture is also able to write and implement laws and regulations that it can deal with, but its competitors cannot. The eventual outcome is that companies use regulation to drive everyone else out of business until a monopoly is achieved, putting consumers at its mercy.

Meanwhile, the people develop a false sense of security, assuming that the many regulatory bodies in place are protecting them. Without respect for the rule of law, however, those bodies and their regulations are more likely protecting and enabling big business at the expense of small business and the consumer.

We see this not only with big oil, but big banking, big defense contractors, you name it. This is why, especially in a crisis, we should uphold the Constitution. It is the ultimate consumer protection from crony corporatism.

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