My Question for Simon Johnson

As Bob Higgs has tirelessly reminded us, regime uncertainty — doubt about the security of person and property — retards investment and delays recovery from economic downturns. FDR’s constantly changing economic policies help explain why it took the US so long to recover from the Great Depression, and the inconsistent bailout, subsidy, and regulatory regimes of the Bush and Obama Administrations continue to harm the economy today.

Bob points out that that regime uncertainty is distinct from “policy uncertainty,” as that term is typically used today to describe changes in fiscal or monetary policy within a particular legal regime. This kind of policy uncertainty is getting increasing attention in the mainstream press — not in reference to things like Obamacare, but to proposed reductions in government borrowing and spending. For example, Simon Johnson, the IMF’s former chief economist, writes in today’s New York Times that Congressional debates about the non-shutdown and raising the debt ceiling have created uncertainty that is damaging the economy. “If people really believe that the government could default on its debts or otherwise not make payments to which it is committed, that introduces a huge element of uncertainty into many economic calculations. When you are less certain about what is going to happen tomorrow, you tend to postpone big irreversible decisions – like buying a new car or building a factory.”

Here’s my question for Johnson: Imagine a set of government policies deeply harmful to the economy — in this case, the continued monetary and fiscal stimulus from the Fed and Treasury that is perpetuating the malinvestment responsible for the recession. Which is worse, a belief that these bad policies will continue ad infinitum, giving people incentives to make bad economic decisions, or uncertainty about whether the bad policies will remain in place, possibly discouraging people from making the bad decisions?

 

Comments

  1. I have been watching and listening to those who are attempting to sign up for Obamacare and a thought struck me listening to comments from people trying to sign up. Many hear regime uncertainty as the reason businesses have been delaying investments but they do not connect what that actually means. Obamacare is the perfect example of what it means.

    People are learning that their cost and deductible is increasing significantly. For many that means that they are delying purchases, vacations, and other life events. People who have signed up are experiencing “sticker shock” while those who cannot are facing the unknown and so are hesitating to make life decisions. Those who have insurance and do not need to sign up with an exchange are still unsure what Obamacare is going to mean with their policies. They know for the current term of their policy but there is no security that their policy will not change significantly, or that they will even have insurance when it is time to renew.

    Obamacare is bringing regime uncertainty right into the living rooms of the American people.

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