Bug Up My A**: Regime Theory Edition

I’ve posted favorably about regime uncertainty theory here a few times, and there’s a response that’s been bugging me for some time. So for no particular reason I’m going to talk about it now.

The response is, “business surveys don’t show regime uncertainty as the problem, they show businessmen claiming there is a lack of investment opportunities.” But that response is empty. Uncertainty creates a lack of good investment opportunities. If businessmen are very uncertain about what the game will be like in the future investment opportunities will not look good, hence there will be a lack of good investment opportunities. In other words, the response is potentially nothing more than a restatement of the theory it supposedly rebuts.

My criticism doesn’t actually provide any support for uncertainty theory itself, and I’m comfortable admitting it isn’t proven. My point is simply that the surveys don’t actually disprove it–in fact most don’t, I don’t think, actually address it directly.

But at least one business survey does, and that one does show some support for the theory. The October 2010 PNC Economic Outlook Survey reported that “Government policy uncertainty” was listed by 21% of respondents as one of their top challenges, second behind weak sales (34%). Proof? No. Evidence that the theory might be worth taking seriously? Yes.

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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5 Responses to Bug Up My A**: Regime Theory Edition

  1. Pinky says:

    I’m sure uncertainty has much to do with the current economic condition that keeps job creation so low. Why would I hire people to produce products that don’t have a sure market? That’s a risk no self respecting investor would want to make.

    But, the real problem has to do with why we have not faced this problem head on. Why we haven’t done away with the uncertainty.

    Coming up with a tax program that penalizes income in excess of $5,000,000.00 per year unless they invest that income in job creating ventures, would add a great deal of certainty to the system just as removing regulations and cutting taxes would do. But, cutting regulations and taxes would only give us more of the same–the hoarding of wealth. At some point, the graph line turns up on a knee and we lose our American society to feudalism.

  2. Scott Hanley says:

    And yet weak sales continues to lead the list of concerns, which would support the Krugman-style argument that falling demand is the primary problem and that mechanisms for boosting demand would resolve most of the businessmen’s uncertainties. I still can’t help thinking there’s a much larger, grayer critter in the room.

  3. James Hanley says:

    the Krugman-style argument that falling demand is the primary problem

    Actually, I think his argument is that falling demand is the only problem, or at least the only one about which we need concern ourselves. That’s ironic, given that he has (correctly) criticized our economy’s over-reliance on credit in the past 15-20 years, and that his solution is essentially a return to that. I suppose his idea is that you need to get the economy moving again, then fix things. But as any economist should know, that’s not how the incentive structure really works–people fix things when things are bad, not when they’re good.

    And, again, we have to ask why has demand fallen? Is it because people don’t have jobs? And then is the reason they don’t have jobs because businessmen are unwilling to invest, and possibly they’re unwilling to invest because of uncertainty?

    It seems to me that an appearance, perhaps reality, of diminished demand could be created by uncertainty. That is, are we sure that uncertainty is the actual problem rather than a byproduct of the problem?

  4. Scott Hanley says:

    My understanding of a financial crisis is that suddenly a lot of debt has no chance to be paid off. That debt was on someone’s books as an asset, so just as suddenly they have a lot fewer assets than they thought they had. That’s less money to invest with, so they have to contract. That puts people out of work, who also have to contract their spending. Businesses have lower sales, reduce payroll and inventory, and a vicious circle sets in.

    None of that seems to require any regime uncertainty; the dynamic could play out in exactly the same way without the slightest uncertainty. Which, arguably, it has, since until the debt limit crisis emerged, it’s hard to see any real regime change to be uncertain about (since even restoring Clinton level tax rates would be a minor adjustment compared to where they’ve been in the past). That’s why I don’t understand the question; of all the sources of uncertainty in the economic world right now, the threat of policy changes seems like such a minor contributor.

  5. James Hanley says:

    Scott, what you describe sounds like it could be rather simply handled through monetary policy. Value is lost, so what’s needed is to pump more value into the system, no? If all government is shifting around that remaining value it hardly seems to solve the problem.

    But mostly what I wanted to emphasize in my prior response was not to insist that regime theory was right, but that aggregate demand theory isn’t self-evidently right.

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