Regime Uncertainty and the Great Recession

I have pointed out that the Great Recession is not over.Nor is it likely to end anytime soon, given the anti-business, anti-growth policies and rhetoric of the Obama administration. (Making nice with crony capitalists like Jeff Immelt only underscores Obama’s cynicism.)

Economists Scott Baker, Nicholas Bloom, and Steven Davis have weighed in with a similar assessment; for example:

A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised [chart below] shows U.S. policy uncertainty at historically high levels….

Our index shows prominent surges in policy uncertainty around the time of major elections, the outbreak of wars and after the Sept. 11 attacks. It shows another surge after the bankruptcy of Lehman Brothers Holding Inc. in September 2008. Policy uncertainty has remained at high levels ever since….

Why has policy uncertainty increased so much? One argument holds that the recent financial crisis created an atmosphere of extreme uncertainty, bringing new and difficult policy issues to the fore. No doubt, the crisis presented policy makers with difficult choices in 2008 and 2009. But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship. (“Business Class: Policy Uncertainty Is Choking Recovery,” Bloomberg.com, October 5, 2011)

Here is the chart that accompanies the article by Baker, Bloom, and Davis:

The rampant uncertainty — due in large part to Obama’s policies and rhetoric — has prolonged the recession because businesses are loath to hire and make job-creating investments:

Source: Mark J. Perry, “The Jobless Recovery Is Really an Investment-less Recovery,” The Enterprise Blog, October 3, 2011.

Greg Mankiw sees it this way:

• The most volatile component of G.D.P. over the business cycle is spending on investment goods. This spending category includes equipment, software, inventory accumulation, and residential and nonresidential construction. And the recent economic downturn offers this case in point about the problem: From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent….

Myriad government actions influence the expected future profitability of capital. These include not only policies concerning taxation but also those concerning trade and regulation.

For example, passing the free trade agreement with South Korea, which has languished in Congress more than four years after first being negotiated, would be a step in the right direction. So would reining in the National Labor Relations Board; its decision to block Boeing from opening a nonunion plant in South Carolina may have been hailed by organized labor, but it surely did not hearten investors. (“How to Make Business Want to Invest Again,” The New York Times, September 10, 2011)

Stronger language about the negative effects of Obama’s policies can be found here:

Mark J. Perry, “Thanks to Regulatory Burdens, We’ve Got Both A Creditless Recovery and A Jobless Recovery” ( Carpe Diem, July 21, 2011)

Bruce McQuain, “Why aren’t we seeing a jobs recovery? Maybe it’s ObamaCare’s fault” ( Questions and Observations, July 21, 2011)

Jonathan S. Tobin, “Home Depot Founder: Obama’s Regulations Are Killing Businesses” (Commentary, July 21, 2011)

The present situation is scarily reminiscent of the Great Depression. As Robert Higgs writes,

the economy remained in the depression as late as 1940 because private investment had never recovered sufficiently after its collapse during the Great Contraction [of 1929-33]….

[T]he insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administration during the so-called Second New Deal from 1935 to 1940. Starting in 1940 the makeup of FDR’s administration changed substantially as probusiness men began to replace dedicated New Dealers in many positions, including most of the offices of high authority in the war-command economy. Congressional changes in the elections from 1938 onward reinforced the movement away from the New Deal, strengthening the so-called Conservative Coalition. (“Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” The Independent Review, Spring 1997)

By way of closing the circle, I note that Higgs endorses Baker, Bloom, and Davis’s research.

It is more than evident that the only sure route to economic recovery is the replacement of Obama by a Republican (almost any one will do), and firm Republican control of both houses of Congress.

Politics and Prosperity

“Government is a disease masquerading as its own cure.”

Regime Uncertainty and the Great Recession

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