Regime uncertainty
Regime uncertainty is a concept developed by Robert Higgs, that describes uncertainty of investors in their private property rights in their capital and the income it yields because of government action.[1]
Higgs uses this concept to explain the seriousness and prolonged duration of some economic crises, like the Great Depression or great recession.
Effect on investment
Investment not only entails 'irreversibilities' or sunk costs, but can be delayed. Investment spending may be highly sensitive to risk in various forms, including uncertainty over future tax and regulatory policy. A major cost of political and economic instability may be its depressing effect on investment.
This uncertainty can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. The security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.[1]
Historical examples
The Great Depression
During the Great Depression, private investment has fallen significantly. Gross private investment plunged from almost 16 percent of GDP in 1929 to less than 2 percent in 1932; recovered to 13 percent in 1937 before falling again in the recession of 1938; and as late as 1941 stood at only 14 percent. During the war years, private investment ratios ranged from 3 to 6 percent. From 1946 through 1950 they ranged from 14 to 19 percent and averaged 16 percent — the same as in 1929. In 1929, when gross private investment was $16.2 billion, net investment was $8.3 billion. Net investment fell precipitously to $2.3 billion in 1930 and then became negative during each of the following five years. For the eleven-year period of 1930 to 1940, net private investment totaled minus $3.1 billion. Only in 1941 did net private investment ($9.7 billion) exceed the 1929 amount. During the 1930s, private investment remained at depths never plumbed in any other decade for which data exist.
One hypothesis is, that the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty for the investors. Given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, the political climate could hardly have failed to discourage some investors from making long-term commitments. There also exists a great deal of direct evidence that investors felt extraordinarily uncertain about the future of the property-rights regime between 1935 and 1941. Historians have recorded countless statements by contemporaries to that effect; in the years just before the war most business executives expected substantial weakening of private property rights ranging up to "complete economic dictatorship". The possibility that the United States might undergo an extreme regime shift seemed to many investors in the late 1930s and early 1940s not only possible but likely.[1]
- Main article: Great Depression
The Great Recession
References
- ↑ 1.0 1.1 1.2 Robert Higgs. "Regime Uncertainty - Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (pdf), The Independent Review, Vol, I, No. 4, Spring 1997. Referenced 2010-08-15.