The Private Economy Is Doing Fine: Regime Uncertainty or Regime Worsening?
A day after President Obama opined, “the private economy is doing fine”, the Wall Street Journal in its “Notable & Quotable” (June 9, 2012, on page A11) highlighted Economist Robert Higgs from his new book “Delusions of Power” (2012) (Here and here). Dr. Higgs who has early and often argued that ‘regime uncertainty’ (Important New Evidence on Regime Uncertainty) has been a major factor in the slow, no, worst since the great depression, recovery is quoted:
John Maynard Keynes persuaded his fellow economists and then they persuaded the public that it makes sense to think of the economy in terms of a handful of economy-wide aggregates: total income or output, total consumption spending, total investment spending, and total net exports. . . .
In fact, “the economy” does not produce an undifferentiated mass we call “output.” Instead, the millions of producers who bring forth “aggregate supply” provide an almost infinite variety of specific goods and services that differ in countless ways. Moreover, an immense amount of what goes on in a market economy consists of dealings among producers who supply no “final” goods and services at all, but instead supply raw materials, components, intermediate products, and services to one another. Because these producers are connected in an intricate pattern of relations, which must assume certain proportions if the entire arrangement is to work effectively, critical consequences turn on what in particular gets produced, when, where, and how.
These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative. Without choice, constrained by scarcity, no true economic action takes place. Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy. . . .
Because the vulgar Keynesian has no conception of the economy’s structure of output, he cannot conceive of how an expansion of demand along certain lines but not along others might be problematic. In his view, one cannot have, say, too many houses and apartments. Increasing the spending for houses and apartments is, he thinks, always good whenever the economy has unemployed resources, regardless of how many houses and apartments now stand vacant and regardless of what specific kinds of resources are unemployed and where they are located in this vast land. Although the unemployed laborers may be skilled silver miners in Idaho, it is supposedly still a good thing if somehow the demand for condos is increased in Palm Beach.
Economist John Taylor in “Rules for America’s Road to Recovery” (Friday June 1, in the Wall Street Journal) provided an analysis of the current slow recovery that adherents of Robert Higgs’s “regime uncertainty”argument will find much to agree with, “America’s economic future is increasingly uncertain. In my view, unpredictable economic policy─massive fiscal ‘stimulus’ and ballooning debt, the Federal Reserve quantitative easing with multiyear near-zero interest rates, and regulatory uncertainty due to ObamaCare and the Dodd-Frank Reforms─is the main cause of persistent high unemployment and our feeble recovery from the recession.”
The real problem is not with just policy uncertainty, but uncertainty in the direction of “regime worsening”─the slowness in the economy is driven, not by just uncertainty, but more by the possibility that things could become even worse for returns on investment and property rights rather than better. Just imagine where the economy would be now if the current administration had gotten even more of what it asked for or has asked for─card check, cap and trade, increased tax rates on capital income, or even more recently, the Paycheck Fairness Act. Robert Higgs and the Journal are correct (“An Economy Built to Stall,” June 2-3, 2012, A14), “Mr. Obama has had the freest run of policy of any President since LBJ [The 1970s illustrate just how well that turned out.] So maybe the problem is the policies. ” And the rhetoric.
To see just how fine the private sector is doing in this environment see the graph on Real Gross private Domestic Investment:
Suggested Reading: John B. Taylor, “More Evidence on What Is Holding the Economy Back.”
Important extensions and/ or applications of ABCT to the current economy: two highly impotant new contributions:
Adrian Ravier and Peter Lewin, “The Subprime Crisis,”