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Meanwhile, Uncertainty Growth is Booming

Here’s a letter to the Wall Street Journal:

The subheading describing Alan Blinder’s essay “The Unsettling Mystery of Productivity” (Nov. 25) reads “Since 2010 U.S. productivity has grown at a miserable rate.  And no one, not even the Fed, seems to understand why.”

Here’s a potential explanation: regime uncertainty.  Pioneered by economist Robert Higgs to explain the length and depth of the Great Depression,* the concept of “regime uncertainty” captures the difficulty of investors to foresee how their rights to their property (including to their profits) will be affected by government policies.  A rise in regime uncertainty reduces productive, private-sector investments – and a consequence of reduced investment is slower productivity growth.

Economists at Stanford and the University of Chicago measure “economic policy uncertainty” – a concept quite close to regime uncertainty.  Data on their website go back to 1985.  The average level of U.S. economic-policy uncertainty from 1985 through 2009 is 101.1, while the average level of such uncertainty from January 2010 through October 2014 is 140.7.  That is, the average amount of uncertainty (as measured using data found on the website Economic Policy Uncertainty) since the start of 2010 is nearly 40 percent higher than during the preceding 25 years.

Whether or not this heightened uncertainty explains the slowdown in productivity growth, such intense, government-created uncertainty cannot possibly be good for the economy.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War,” The Independent Review, Spring 1997, Vol. 1: 561-590.

See also Roger Koppl’s important 2014 monograph, From Crisis to Confidence.