Economics

Regime Uncertainty and the Great Depression

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At the Pittsburgh Tribune-Review, George Mason University economist Donald Boudreaux argues that the "regime uncertainty" theory developed by libertarian economist Robert Higgs presents "one of the most powerful challenges to any Keynesian diagnosis of economic ailments." As Boudreaux explains:

Higgs' careful look at the data on the Great Depression and World War II convinced him that (1) a U.S. economy producing genuine prosperity wasn't restored until 1946, and (2) investors hunkered down, especially from 1935-40, because New Deal regulations—along with President Franklin Roosevelt's increasingly vocal hostility to enterprise and successful risk-takers—created too much uncertainty about how government would treat profits and wealth accumulation.

The "regime uncertainty"—described by Higgs as "a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns"—unleashed by actual and threatened New Deal interventions made private innovation and entrepreneurial effort simply too unattractive. So private investment spending largely ground to a halt during FDR's reign.

The "Great" was thus put into the Great Depression.

Read the full story here. Watch Higgs discuss Arthur Ekirch's classic history The Decline of American Liberalism with Reason.tv's Nick Gillespie below.

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  1. The Great Depression was one of the most abominable, tragic episodes of modern history — a wonderful legacy of government, indeed.

    1. A man caused disaster.

  2. Stop this infantile belief in the “confidence fairy” and get out there and motivate some animal spirits!

    1. Beating you to death with a rock seems apt.

  3. “Government meddling is the difference between a great depression and an ordinary one.”

  4. too much uncertainty about how government would treat profits and wealth accumulation

    What the hell does does any of this have to do with today?

    Oh.

  5. Unprecedented corporate profitability and wealth accumulation at the very top. This is supposed to be the engine of employment and economic growth, right? So what gives? Corporate profits have to be a little more unprecedentedly huge, and then they’ll start hiring?

    1. It’s not the current quantity of profit, it’s the likely ROI and time-to-profitability of additional investments.

      1. Actually it’s a load of bullshit code words that mean “make it so that we can make as much profit as possible, even to the extent of poisoning people with impunity and turning workers into indentured servants, and it will increase employment… we promise.”

        1. Wow, this guy’s full-retard switch really has a hair trigger!

        2. Speaking of poisoning people with impunity, Chinese police stopped locals who stormed a solar panel factory that was pouring toxic waste into the environment.

          http://www.taipeitimes.com/New…..2003513628

        3. …..some folks, not able to see past the the Administration’s tired old class-warfare game, allow the ultra-corrupt, thieving, violent, privacy-invading, warmongering Big Govt boys and girls to continue their world-wrecking ways.

        4. Voices in his head make him post this.

    2. “This is supposed to be the engine of employment and economic growth, right?”

      Talk about completely missing the point.

      The engine of economic growth is rule of law and being able to predict how the government will treat you if you decide to give anyone a job. Now, as during the Great Depression, people have no idea from one minute to the next what stupid, destructive stunt Obama will pull.

      Why would anyone give anyone else a job knowing full well that they risk bankruptcy, depending on what Obama, in his incompetence and greed, tries to confiscate next.

      1. Only if they listen to you and for some ideological reason decide to ignore a chance to make a profit (as has been done since 1946 when taxes were much higher).

        Read Mishel:

        http://www.epi.org/blog/regula…..s-problem/

        where he shows that there are a lot of businessmen who do NOT see regulation as a problem; but they do see a lack of demand for what they want to sell.

  6. Well, you have two possible forms of government: (1) democracy or (2) dictatorship. Neither one can promise absolute certainty on economic matters, so “uncertainty” is just a cost of doing business. And if we can’t keep the economy healthy with said uncertainty, then we can’t keep the economy healthy, period.

    1. I don’t know why people can’t be just as certain with higher taxes as they can with lower taxes. Should Obama come out and say “Fine, I’m certainly going to raise your taxes to Clinton-era levels. Happy?”

      1. Tony, that would make the stock market drop even more. The expected value of an investment is the income it might generate times the probability that it will generate that income. For example, an investment with a 50% probability of generating $300 has an expected value of $150.

        For mathematical simplicity, consider a country where the president says he might nationalize all industry. Investors figure that there is a 60% probability of the president implementing his plan to take all their investments and a 40% probability that he will let them keep all of their investments. That risk lowers the value of a $400 investment to 40% * $400 = $160. If the president declares that he will definitely nationalize all industry, then the probability of investors keeping their investments is 0%. The new risk reduces the expected value of a $400 investment to 0% * $400 = $0.

        I hope I’ve explained it well enough for you to understand.

        1. Tony is right.

          “Uncertainty” is a bullshit explanation for the economy’s problems.

          The reality is that excessive government intervention and the fear of even greater intervention is scaring investors and businessmen. Not uncertainty.

          I’d be more inclined to invest if there was a 30% chance of the government nationalizing my investment than if there was a 100% chance of that happening.

          1. “I’d be more inclined to invest if there was a 30% chance of the government nationalizing my investment than if there was a 100% chance of that happening.”

            In other words, you are uncertain, and uncertainty matters to you.

            It matters to other people too, which was the point of the article. And you agree (though, for whatever reason, you do not seem to grasp that basic fact).

        2. Combining a 50% probability of generating a profit with a 60% chance of nationalizing industry the risk is now .5 * .4 = .2 or 20%. The risk makes the expected value on a $400 investment equal to $80.

        3. And so from what FACT, say an actual statement from someone who might, just might in some big stretch, be able to achieve the result, can anyone dealing with the real world derive the imminent nationalization of all industry?

          The one industry that might justifiably have been nationalized was the investment banking industry, and that idea quickly died on the vine before flowering. You are dealing in strawmen, which apparently tickles some brain cells, but it is some wild science fiction at best.

      2. No, because that only raises the minimum — but unless it comes with an equivalent commitment not to raise them still further (say, a constitutional maximum tax rate) the bad part of the uncertainty is just the same, so the expected value can only shift upward.

    2. What makes you think that certainty only has two meaningful values?

      Also, you can definitely have a government that is neither a democracy nor a dictatorship. And in most democratic governments, some portion (in our case, a great deal) of state power is wielded by people who are not in any meaningful sense accountable to the public.

    3. Well, you have two possible forms of government: (1) democracy or (2) dictatorship.

      Congratulations. Even against the usual contributions from OO, this is the stupidest thing I’ve read today.

  7. That’s not what they are doing. They are passing vague laws then spend years filling in the details. Haven’t you heard of ObamaCare and Frank-Dodd?

    1. This was in response to Tony, stupid threaded comments.

    2. Those laws are not that much different from any other. Business can make a case that its ability to make profits is hampered by them, but that doesn’t mean the laws are improper. If you can’t make a profit in the environment the people have set up via their government, you don’t deserve to make a profit. Besides, given record profitability, trillions in idle capital, and historically low tax rates, the idea that if we just ease up a bit on the supply-side and it will affect unemployment is nonsense. Businesses look for ways to employ fewer people (at least people in the US). I see no method offered here for how to prevent businesses from using any extra profit to increase employment in China rather than the US. I say direct action toward increasing consumer demand and reward domestic employment is much more of a direct route to solutions than giving businesses everything they ask for and hoping they put patriotism above rational economics. We’ve been coddling business for decades. At what point does it stop being a means to prosperity and starts looking like what it is: wholesale looting?

      1. “If you can’t make a profit in the environment the people have set up via their government, you don’t deserve to make a profit.”

        Take Logic 101. You are in severe intellectual disarray.

      2. Sure, people flocked to the USSR, where the system was set up for you.

        I disagree about the uncertainty, however. If businesses believe things might get BETTER, that will give them confidence to invest, even if it is not a sure thing. Uncertainty that things might get worse, however, makes people cautious.

        1. What businesses really need is confidence that someone will BUY what they want to sell! How many people do YOU know that want to make things to sit in warehouses? I thought that “Just in Time” manufacturing was all about keeping inventory low to increase profit.

      3. >>If you can’t make a profit in the environment the people have set up via their government, you don’t deserve to make a profit.

  8. >>>If you can’t make a profit in the environment the people have set up via their government, you don’t deserve to make a profit.

  9. Apparently, Roosevelt’s policies were so bad that they caused unemployment to rise before he was elected.

    Let’s get real. Unemployment was 23.6% in 1932 but Roosevelt’s inauguration was not until March 1933. Unemployment peaked at 25% in August 1933. It dropped 7 out of the next 8 years falling below 10% in 1941. This revisionist history that Roosevelt caused the Great Depression is absurd.

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