The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

“Regime Uncertainty”

Our friend, Dr. Steve Hanke, had an interesting article about why we periodically see long periods of economic stagnation. The Great Depression was one. The recovery attempt since 2009 is another. We would add the long 25 year stagnation in Japan.

There are economists who believe these are secular (long term cycles) apparently coming from heaven or other defined places. Dr. Hanke doesn’t subscribe to this. He quotes a book by Robert Higgs, “Taking a Stand: Reflections on Life, Liberty, and the Economy.” Hanke writes:

In 1997, Higgs first introduced the concept of “regime uncertainty” to explain the extraordinary duration of the Great Depression of the 1930s. Higgs’ regime uncertainty is, in short, uncertainty about the course of economic policy — the rules of the game concerning taxes and regulations, for example. These rules of the game affect the net benefits and free cash flows investors derived from their property. Indeed, the rules affect the security of their property rights. So, when the degree of regime uncertainty increases, investors’ risk-adjusted discount rates increase and their appetites for making investments diminish.

Since the Great Recession of 2009, regime uncertainty has been elevated. This has been measured by Scott R. Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago. Their “Economic Policy Uncertainty Index for the U.S.,” which was published by the Cato Institute in Washington, D.C., measures, in one index number, Higgs’ regime uncertainty.

In addition, there is a mountain of other evidence that confirms the ratcheting up of regime uncertainty during the tenure of the George W. Bush and Barack Obama administrations. For example, a recent Pew Research Center survey finds that the percent of the public that trusts Washington, D.C. to do the right thing has fallen to all-time lows of around 20 percent.

So, contrary to the stagnationists’ assertions, the government is the problem, not the solution. Secular stagnation in the U.S. is just what it was when Alvin Hansen popularized it in the 1930s: Its bunk. Nothing more than a phony rationale for more government waste.

As long-time subscribers know, this has been our point for many years, especially the last seven. I have had some interesting conversations about the excessive governmental regulations since the last global crisis and the burden it imposes on financial firms.

There isn’t much in the way of once again preventing the same things that caused the last crisis. But the regulations, which require a battalion of compliance people for financial firms, banks, etc., are causing these firms to exit many businesses. That’s why there is such a lack of liquidity in many market sectors.

Yes, government is the problem. Too many lawyers in Washington, too few experienced business people.