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Wednesday, December 24, 2008

Obama's Stimulus and Regime Uncertainty

John Stossel has this piece about Obama's stimulus. In it, he talks about the very important economic concept of regime uncertaintly.

Note Keynes's concern. Government interventions, such as the cartelizing of industry through the National Recovery Administration, "will upset the confidence of the business world and weaken their existing motives to action." In other words, investors will not take the risks necessary for recovery if their profits and freedom are subject to unpredictable government action. Economic historian Roberts Higgs calls this phenomenon "regime uncertainty.

In other words, when government wants to create bold and revolutionary changes to the economy, that sort of "regime uncertainty" makes business weary, very weary, to invest. This sort of revolution can stunt and significantly harm the economy.

As President Designate Obama begins the task of significant government spending to stimulate the economy, he is also planning on radically altering the economy at the same time. These revolutionary changes have the potential to corrosively affect the recovery. Obama is planning revolution in two areas, energy and financial services regulation.

President Designate Obama is determined to tackle the issue of global warming and he is determined to set much stricter emissions standards. While this is no doubt noble and certainly good for our environment, such monumental changes to our energy policy will throw business into a state of confusion. Almost all businesses use energy in one form or another. The automakers, for instance, will be forced to create a plethora of new energy efficient automobiles, not because they might be profitable, but rather to comply with draconian government regulations. On top of this, they will all soon be faced with millions of stocked automobiles that won't meet these new guidelines. Given their already dire straits, such draconian measures will spell the death knell for the autos.

For most other companies, they will soon need to spend billions of Dollars to meet the new restrictions for their own emissions standards in whatever form of energy they use. These billions will billions of Dollars they could have spent on new jobs, new equipment, new factories. Instead, they will spend them just to meet new government regulations.

The financial services industry will be the hardest hit. Many are disturbed that the bailout hasn't lead to more lending by banks. Yet, it should come as no surprise. Banks don't know what sort of regulations are coming. The only folks receiving loans are those with prestine credit. Two markets have potential for bargains, credit default swaps and sub prime Mortgage Backed Securities, and yet banks are likely to continue to stay away because both of those are about to face a plethora of new regulations. On top of this, it's likely that Obama will mandate new capital requirements. (in other words banks will need to hold onto more cash) As such, is anyone really surprised that many banks are now holding onto the bailout money? After all, they are likely to need as soon as Obama raises the requirements. All loans and financial instruments are likely to face new regulations. As such, why would any bank invest heavy in any of them? What may seem like a good investment now, will seem like a bad investment as soon as the regulations are handed down. Is there any surprise that much of this bailout money is going overseas? Why wouldn't banks take the money where there aren't plans for a plethora of new regulations?

That is the consequences of Obama's regime uncertainty. In his quest to put his foot down on what he construes as greedy Wall Street types and confront global warming, he has created an environment of uncertainty. In such an environment, businesses don't invest, hire, or expand. Such is a recipe for disaster if we are the middle of a heavy recession, as we are.

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