The Rules of the Game

by Russ Roberts on October 31, 2008

in Politics, Property Rights, Regulation

Bob Higgs claims that "regime uncertainty," the uncertainty about the rules of the game, is what made the New Deal so ineffective. Because business didn’t know what the government was going to do next, people were hesitant to invest and take risk in the 1930s. It’s possible but it’s very hard to measure. Maybe investors were discouraged by the lack of opportunities in the economy or some other reason.

At the end of last week, the government announced that insurance companies were next to be bailed out. It became clear that firms were lining up making the claim that they too deserved government help. The effect that Higgs had written about feels palpable right now. When you know the government can save your company and your bottom line, you start spending an increasing amount of time on that possibility rather than trying to actually turn things around or look for private suitors. When you’re not sure about the rules of the game, risk-taking and investing becomes much more uncertain than usual.

In today’s WSJ, I argue that government policy appears to be making things worse and that doing nothing, at least for a time, is probably better. Of course, government has a problem with credible commitment. Doing nothing cannot be guaranteed to last for very long. And unfortunately, neither  presidential candidate has a commitment even to the principle that doing nothing might be the best policy. Such a principle might make a commitment to inaction somewhat credible. But even though the commitment to do nothing might be only temporary, I think it still would be useful for alternative strategies to the current one (so something, anything) to emerge and generate a consensus as to whether such alternatives might be preferable to the current scattershot approach of doing one thing today and something else tomorrow. Such uncertainty has to affect the calculus of risk-taking.

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{ 23 comments }

cashbaugh October 31, 2008 at 7:36 am

Bit of a typo…1030's? Though on that point, honestly, I wonder what helped the Italian city states of the 11th century be so successful in their pursuit of free banking. I don't know if their loosely feudal ties would have made for uncertainty or not.

Kit October 31, 2008 at 7:38 am

"people were hesitant to invest and take risk in the 1030s"

To right, William of Normandy had just been born and the invasion threat was looming. ;)

Russ Roberts October 31, 2008 at 7:48 am

Typo corrected. Thanks, folks.

mike farmer October 31, 2008 at 7:57 am

I believe uncertainty plays a big part in the market's decision making process. When no one knows what will happen next, they have no way to plan long term. Businesses become reluctant to invest in any new strategy if a whim of government can render the strategy useless overnight.

Martin Brock October 31, 2008 at 8:15 am

When you know the government can save your company and your bottom line, you start spending an increasing amount of time on that possibility rather than trying to actually turn things around or look for private suitors.

Agreed. On a more personal level, when you know government will "protect the investors" (McCain's words), by simply converting any "capital" you purchase into taxpayer obligations and similar rents regardless of any real productivity, you'll stop searching for real capital with real productivity, including your own labor and your children's labor, i.e. you'll stop planting, exchange your seed corn for "securities" and retire. Let someone else's children do the work.

When you're not sure about the rules of the game, risk-taking and investing becomes much more uncertain than usual.

Apparently, rent seeking is the rule of the game. Paulson, Buffet, Forbes and the rest simply take it for granted.

I'm not believing that the rules of the game suddenly changed in the last month. The scope and scale of this rent seeking over such a short period of time and its occurrence during a political season makes it headline news, but this sort of thing goes on continuously. What's happening now is not a changing of the rules. It's a complete breakdown of any pretense that other rules apply.

ettubloge October 31, 2008 at 8:33 am

Two things (but not only 2) make me cringe about the candidates:

1. McCain selling his ability to produce bi-partisan support for legislation.

2. Obama and a Dem majority in Congress.

I do not expect any do-nothing approach followed by either guy. BECAUSE IT IS A CRISIS!

Ike October 31, 2008 at 8:35 am

I've been preaching this very point in other internet venues, and when I'm not met with the sounds of crickets and tumbleweeds I instead face incredulity from people who have a lot of money tied up in the market.

Simple: No one will make necessary long-term strategies until they know the easy short-term band-aids are exhausted.

Flash Gordon October 31, 2008 at 9:08 am

It's possible but it's very hard to measure.

It must be a tenet of the dismal science that nothing can be known without measureable "data" of some sort. But if data is the only way to know anything I don't believe human civilization would have gotten very far. Especially since so much "data" either confirms what we already know, or is wrong.

muirgeo October 31, 2008 at 9:30 am

Yeah, I just love the blame it on the new guys who are trying to fix the massive screw up that has been laid before them claim.

And didn't the New Deal start several years after the stock market crash and the onset of the Republican Lead Great Depression. I'm pretty sure they tried your do nothing strategy and the final response to that failure was FDR's election?

Don Mynack October 31, 2008 at 9:37 am

"And didn't the New Deal start several years after the stock market crash and the onset of the Republican Lead Great Depression. I'm pretty sure they tried your do nothing strategy and the final response to that failure was FDR's election?"

Hoover immediately intervened in the market and the economy in general, he in fact laid the foundation for much of what FDR later did. Hoover would have been wise to do nothing, as was the response to a similar crash in 1921.

Martin Brock October 31, 2008 at 9:38 am

It must be a tenet of the dismal science that nothing can be known without measureable "data" of some sort.

That's the tenet of science generally. Much "data" is bullshit, particularly economic data heavily influenced by political theory, but I'll do my best to sift through the BS and stick with the scientific method; otherwise, I only know the political theory.

indiana jim October 31, 2008 at 10:56 am

Don,

I couldn't post on the "Is Obama a Socialist" Comments, so below is what I could not post there (I hope you don't mind, but I consider it important for your consideration and others):

Don:

I would use the definition from Wikipedia rather than the one you choose; here it is:

"Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society."

I also disagree with your claim (above) that:

"John McCain is hardly any better than Obama in rhetoric — and, almost surely, will be no better at all in practice (adjusting for the fact that, unlike a President Obama, a President McCain will have a Congress controlled by a party different than his own)"

This is very odd unless you are ignoring the matter of differences in Supreme Court appointments. But you should not ignore this; it may be the most important reason that Obama "in practice" implies the greatest acceleration down the "Road to Serfdom" since FDR. He will pack the Court again with folks that would make FDR proud, and I'm sure you know, probably better than I do, what that would mean.

J Scott October 31, 2008 at 11:11 am

Mr. Roberts, Thank you for a spot-on analysis of the current situation between Washington and Wall Street.

"Such uncertainty has to effect the calculus of risk-taking."

How apropos that your column concludes with this line. I would submit that "certainty" of action is precisely the notion at play. A play on words to be sure, but the well-intentioned mischief of the government's infiltration of business has the affect similar to that of water getting under your cars paint job; you won't know there's a problem until there's an unsightly hole—and the hole is just a symptom of something usually much worse. And the situation with government mettling will get much worse.

Yesterday I observed in support of Don's column that ANY government involvement is to be discouraged, as the government and the wrong-headed policies of the past 70 years brought us to this moment. A moment where it is intellectually acceptable to some for the federal government to coerce private banks into selling equity to the government. This is the intellectual end-game of the entitlement state: if a "safety net" is provided for the poorest, a net will be provided for wealthy as well.

It would seem the task now to dismantle the entitlement state and return our citizenry to blessings and risks of LIBERTY.

vidyohs October 31, 2008 at 11:18 am
vidyohs October 31, 2008 at 11:33 am

As you can see by opening and reading the article at my last post, T'ain't likely anything is going to change, Tis a matter of fact that it is quite likely to become a lot worse, no matter who sits in the Whitehouse.

You been had, I been had, all God's chilluns been had.

Jeremy October 31, 2008 at 12:30 pm

It's possible but it's very hard to measure.

In the "Regime Uncertainty" article, Higgs did attempt to measure these perceptions (however imperfectly) using survey data and data from financial markets.

Sam Grove October 31, 2008 at 1:30 pm

Leave it to the straw man slayer to keep providing the "popular" interpretation of history.

Among other things, Mr. "Do-nothing" Hoover signed the Smoot-Hawley tariff which provoked world wide severe protectionist policies.

Brad Petersen October 31, 2008 at 7:34 pm

"I'm pretty sure they tried your do nothing strategy and the
final response to that failure was FDR's election?"

Posted by: muirgeo | Oct 31, 2008 9:30:13 AM

Muirgeo, you have been corrected so many times on your flat out incorrect view of history that it is impossible to believe you are still posting in good faith. You know darn well that Hoover raised taxes, enacted Smoot Hawley, and took various other damaging steps in response to the stock market crash. To say that Hoover did nothing is false and you know it. So you're either a liar or a moron. I would advocate ignoring your dishonest, idiotic posts altogether except for my fear that someone might read one of them and believe that you're on to something.

J Scott October 31, 2008 at 8:04 pm

Mr. Petersen, Bravo! I agree with your assessment. The poster seems to prove the old P.J. O'Rourke line that "stupidity is a renewable resource"…

indiana jim October 31, 2008 at 10:42 pm

Muirgeo wrote (on another thread that is closed) to John:

"on the "Is Barack a Socialist" post you asserted I couldn't logically make the claim that Democratic presidents consistently preside over better economies then Republican presidents."

I, like John, answered on the other thread that was closed, but let me repeat a bit of it:

You have an omitted variables problem. The Congress, as you know, is the legislative branch, so simply observing the party of the executive branch is an underspecified model: that is, your inference is invalid.

Polybius October 31, 2008 at 10:48 pm

Another outstanding factual read, Professor Roberts.

I look forward to your next piece.

Against the grain November 1, 2008 at 4:49 pm

Great job Russ. I would like to add an analogy about stimulus that hopefully reinforces your position.

In my way of thinking fiscal and monetary stimulus is a lot like drug stimulants such as "speed". Every time our economy takes a little downtown the feds give us a little hit of speed. If we start to really have problems will let the feds give us hit and for good measure let us let the Congress give a good fiscal hit.

The problem is that the stimulus hides our symptoms and lets us temporarily avoid the true reckoning with our problems or illnesses. Only when we allow ourselves to mark to market our housing value and swallow the bitter pill of the loss that have already been sunk, will we be on the path to better health.

The other choice is to keep taking that quick hit and feeling better for a shorter and shorter time until we finally take full measure of where we stand.

I would further suppport the position that if we truly stood in reckoning while it would be a bitter pill, we would be back on our feet shortly, however if we play obfiscation central our troubles can only get worse.

TM November 2, 2008 at 8:07 am

The analogy that immediately leaps to my mind is that of a lottery. If you've ever bought a lottery ticket (like when the jackpot gets up to $200million or something) and had even the slightest thought or hope of winning, you have to admit it doesn't increase your short-term productivity. Rather, it fuels daydreams about gold-plated Gulfstream jets and owning an archipelago in the Carribean, etc. Businesses lining up waiting for a government handout are in a similar daydream right now. The scary thing is their dreams may in fact come true…

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