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More Evidence on the Impact Regime Worsening on Slow Recovery

October 2, 2012
Regime Uncertainty and Slow Recovery Robert Higgs at the Beacon again reminds us that “anemic investment recovery evinces, at least in part, the prevailing regime uncertainty brought about by the Fed’s and the Bush and Obama administrations’ massive, ill-advised, and counter-productive interventions in the economy during the past five years.” Higgs provides the chart on RGDI, but private non-farm employment closely follows RGDI up and down over the relevant period and remains anemic as well. Some non-Austrian economists have also made similar arguments relative to anemic growth and slow recovery. For details see John Taylor’s blog post from May, “More Evidence on What Is Holding the Economy Back.”   Here, using a Freidman Plucking Model as the basis that recovery from a severe recession or pluck should be strong, he argues, “Of course something is now interfering with the usual economic response, because our current recovery is certainly not springing back to normal. I have argued that economic policy is holding the economy back, and I think recent research by Ellen McGrattan and Ed Prescott (on increased regulations) and by Scott Baker, Nick Bloom, and Steve Davis (on policy uncertainty) supports this view. Their work is part of a forthcoming [now out] book (Government Policy and the Delayed Economic Recovery) edited by Lee Ohanian, Ian Wright and me." Critics of regime uncertainty; in reality a real threat of regime worsening relative to property rights, return on investment, and economic freedom, as a significant contributor to the slow growth have argued that significant recessions accompanied by financial crisis are followed by slow, not rapid recoveries. However, this argument is not supported by economic history as recently shown by Michael Bordo, in a Wall Street Journal, editorial contribution, “Financial Recessions Don’t lead to A Weak Recovery. He concludes, “The evidence since 1880 shows a faster pace of recovery, The [Bush] Obama years are the exception.” More reasons and more evidence that QE infinity will be just as ineffective as QEI and QE II. I share now as I have in the past, Dr. Higgs’s pessimism, “Policy makers have cost the U.S. economy a decade or more of normal economic growth. How long will people in their capacities as political and financial actors continue to tolerate this foolish, destructive policy making? I do not know, but I believe I know what the result of these misguided ongoing experiments will be—economic stagnation at best, relapse or another bust at worst.”

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