Opinion
The sun shines on the U.S. Capitol dome on the first day the federal government has re-opened following a 16-day shutdown at the U.S. Capitol in Washington, October 17, 2013. REUTERS/Jonathan Ernst The sun shines on the U.S. Capitol dome on the first day the federal government has re-opened following a 16-day shutdown at the U.S. Capitol in Washington, October 17, 2013. REUTERS/Jonathan Ernst  

Government spending and regime uncertainty

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Robert Higgs
Senior Fellow, Independent Institute
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      Robert Higgs

      Senior Fellow in Political Economy and Editor at Large, The Independent Review

      Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation.

      He is the recipient of numerous awards, including the Gary Schlarbaum Award for Lifetime Defense of Liberty, Thomas Szasz Award for Outstanding Contributions to the Cause of Civil Liberties, Lysander Spooner Award for Advancing the Literature of Liberty, Friedrich von Wieser Memorial Prize for Excellence in Economic Education, and Templeton Honor Rolls Award on Education in a Free Society.

      Dr. Higgs is the editor of The Independent Institute books Opposing the Crusader State, The Challenge of Liberty, Re-Thinking Green, Hazardous to Our Health? and Arms, Politics, and the Economy, plus the volume Emergence of the Modern Political Economy.

      He is also the author of Delusions of Power, Depression, War, and Cold War, Neither Liberty Nor Safety, Politická ekonomie strachu (The Political Economy of Fear, in Czech), Resurgence of the Warfare State, Against Leviathan, The Transformation of the American Economy 1865-1914, Competition and Coercion: Blacks in the American Economy, 1985-1914, and Crisis and Leviathan. A contributor to numerous scholarly volumes, he is the author of more than 100 articles and reviews in academic journals.

In 1997, my article “Regime Uncertainty” appeared in The Independent Review. In the article, I sought to explain and elaborate on an idea that I believed, and continue to believe, helps substantially in understanding why the Great Depression dragged on for more than a decade. Because the basic idea may be helpfully invoked in understanding similar episodes, such as the slow recovery from the economic bust of 2007-2009, I have made numerous efforts in recent years to persuade my fellow economists and others that the incompleteness of the current recovery springs in significant degree from regime uncertainty’s role in discouraging additional private investments, especially long-term ones, and in discouraging new hiring, especially hiring for permanent, full-time positions.

In view of my sixteen-year campaign to bring about an understanding of the idea of “regime uncertainty,” one might think that I would be gratified by the growing recognition of the importance of the closely related (but narrower) idea of “policy uncertainty” in relation to the current, unusually slow recovery. However, most of the analysts and commentators who are now talking about policy uncertainty are doing so in ways that I find misleading and counter-productive.

In particular, many commentators (for example, Andy Sullivan, writing recently for Reuters) are interpreting the ill effects of the current policy uncertainty as having something to do especially with the congressional squabbling about sequesters, shutdowns, and other imagined horrors connected with Congress’s inability to write an annual budget and stick with it without ongoing emergency adjustments (e.g., increases in the statutory limit on public debt). These commentators suppose that such policy uncertainty harms the recovery because it impedes the public’s reliance on relentless increases in government spending, which they regard along Keynesian lines as a positive contribution to economic growth.

In contrast, my concept of regime uncertainty is something quite different. It is a form of uncertainty related to the public’s — especially the private investors’ — confidence in the future security of private property rights, which can be impaired by future regulatory changes (e.g., Dodd-Frank and Obamacare regulations), court decisions, administrative twists and turns, tax increases in various forms (e.g., Obamacare penalties enforced through the income-tax system), monetary-policy changes that threaten the dollar’s purchasing power and distort the allocation of credit, and personnel changes in the government’s corps of executives, judges, and assorted capos.

Unlike most of the recent commentators, I do not perceive cutbacks or interruptions in government spending as matters of critical concern except to the members of special interests, including in particular government employees and contractors. For the overwhelming majority of the people, reduced government spending is a godsend, even if many people do not know that it is, because it helps to reduce the scale and scope of the government’s destructive involvement in economic life and because it reduces the crowding out of productive private activities, such as private provision of education and private assistance to the poor and others in economic distress.