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.