How Erratic Politicians Are Slowing Economic Growth
Several days ago, the IMF pointed out that intervention in the economy can slow down the recovery. One of the more obvious reasons for this is that the intervention would be wrong-headed — the wrong laws, reforms, and restrictions.
But another less-discussed reason intervention can slow down economic growth is because it makes businesses less certain about the future. Depending on who wins which election, the legal and economic environment could be completely different.
This business uncertainty leads to economic slowdowns, because business leaders aren’t sure which future to plan for — and they only have limited resources.
One of the most important fundamental lessons from economics is that incentives matter. Thus, whenever there is an economic situation that needs explanation, incentives should be the first place you look.
In this economic downturn, one of the key areas where experts are turning their eyes is the rather stagnant growth of business. Consumer spending is still down, but we’re told that the recession ended months ago, so the future should be bright. However, there is still a large demand for liquidity, and companies are reluctant to begin the process of re-expansion. The reason for this apparent anomaly is an incentives problem. Not any particular monetary incentive, but the incentive of fear.
Regime uncertainty, a phrase coined by the great economist Robert Higgs, is a significant factor in today’s business environment. It refers to the level of uncertainty businesses have about the current governmental administration. If the government may increase taxes, impose stringent regulations, or buy out your company in the near future, what incentive is there to risk investment money?
If you’re less certain about the future, you’re less likely to take on new risks — this means economic growth is hampered.
How entrepreneurs undertake risk when they essentially bet on the future economic conditions (the word ‘entrepreneur’ literally comes from the French word for ‘undertaker’). With a government regime as ridiculously intrusive and socialistic-leaning as the current administration, undertaking risk through entrepreneurial investment makes no sense.
Private investors should take notice of this trend. First, companies are probably not going to be as quick to jump on any positive economic forecast. The recession is fresh on everyone’s mind, and future government action could be a wide variety of bold maneuvers. Second, it is a good idea to emulate the caution of companies and make your investments safe. Obviously commodities like silver and gold are perfect for this.
The important factor of regime uncertainty has been overlooked by much of the media, as they try to latch onto the Keynesian ideas of aggregate demand (which basically says that people aren’t spending because…people aren’t spending), and overlook the ultimate causes. Our economy went into this downturn because of Keynesian ideals, and only by changing our perspective can we avoid repeating history. Incentives matter, and regime uncertainty causes an incentive of fear and a business environment of stagnation.