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« The Great Recession and the Specificity of Labor | Main | New NBR Blog Post on Idle Resources and Inflation »


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Peter -
I'm sympathetic to Higgsian regime uncertainty stories, but I always get a little concerned when people assert them as opposed to other explanations.

I guess what I'm getting at is - how, in your opinion, would one falsify or disprove this? It seems to me there are a lot of things impacting weak hiring right now, and I would fault Beck, Higgs, and I suppose you not on your argument but on the emphasis placed on that argument. How do we justify placing that much emphasis on that argument as opposed to, say an aggregate demand, or liquidity preference, or technological change argument that would predict precisely the same thing (high profits, low hiring, and where hiring does occur more tentative hiring of temps).

I'm not disagreeing with a thing you've written, I'm just not sure how to answer the question "what weight do we attach to that". Business surveys, for example, have consistently ranked demand as bigger concern than policy, despite the trade association and anecdotal statements to the contrary.

Peter - I agree that Gov't policy has caused a great deal of uncertainty, but there also exists a lot of uncertainty not dirrectly related to government policy (present and future). Regardless of government policy, it takes longer to come back from a balance sheet recession as opposed to traditional inventory recessions.

The Fact "that temporary hiring has experienced a boom, while private sector permanent hiring is lagging behind." Cannot simply be attributed to government policies, discounting fear of further economic retrenchment.

It was just such fear (or more aptly put: concern) that caused the sell of in first Chinies and than US equities over the past few days. Private and public balance sheets remain strained, second quarter growth is looking weaker than originally thought (probably about 0.9% for US GDP growth versus the originally reported 2.4%), China has a housing bubble, and no one knows when people will start buying. I believe it's these uncertainties far more than the healthcare bill which are curtailing investment.


I am sure this is an over-simplistic view of things, but I'll say it anyway:

The big scare we keep hearing about is deflation (decrease in price level). This is supposed to lead to a downward spiral where businesses take in less profits, lay off workers/lower wages, and then there is a further decrease in demand and thus lower prices (rinse and repeat).

But isn't this fallacious? At some point won't prices be low enough where consumer demand will prop back up? Isn't this a big part of the correction (or re-allocation) that needs to occur?

Steven -
I don't think the assertion is ever that it will never pick back up. It is understood that the processes you describe do happen. Investment depreciates too or there is creative destruction and eventually demand comes back. The question is what do you go through before that day comes, and what might a deflation do to put off that day.

If you're thinking people claim that the debt-deflation process goes on forever I think you're misreading the claim.

There is regime uncertainty. We also have a terrible policy mix and are headed for more of the same. Low interest rates and fiscal stimulus were Japan's response to its great recession, and they got a lost decade (now going on 2) as a result. I don't understand why people are surprised it isn't working for the US today when it failed Japan earlier.

In today's Wall Street Journal, Allan Meltzer rearks that President Obama is being badly advised. The weak economy is the outcome of the bad policies in place and the additonal bad policies investors fear will be put into place.

It is true that balance-sheet recessions are worse than inventory recessions. But the Obama policies (especially low interest rates) are impeding the restoration of balance sheets. The BIS annual report has an excellent discussion of the costs of the Fed's low interest rate policy.

I'm convinced by the regime uncertainty explanation, but the increase in temp work hires could also be explained by the fact that temp workers generally have a much higher productivity. In today's context temp workers could very well be a fire sale, so to speak.

And one more daffynition for the road;

Regime uncertainty: When the probability distributions of cakes, chips and hamburgers are unforeseeable.

That it may be difficult (impossible) to "measure" or "quantify" the amount of uncertainty and how much is due to government "activist" policy as opposed to other factors, should not dissuade from appreciating its existence or significance.

The "subjective" and "qualitative" nature of expectations and evaluation of uncertainty does not mean that it does not exist or that it is irrelevant. It means that as in much of history and contemporary events, there is an inescapable "interpretive" element.

It has been understood in this way for decades, including by free market economists who are not in the Austrian methodological camp.

For example, one of the leading monetarists, Karl Brunner, understood the relevance of governmental policy on exacerbating the inevitable uncertainty in a changing world:

"The evolution of ongoing shocks confronts agents operating in the economy moreover with a continuous information problem. Market conditions change and need perennial reassessment. The interpretation of these changes affects portfolio, price and output decisions. Portfolio and associated interest rate adjustments, changes in prices and output in response to evolving shocks are sensitively dependent on agents' perception of the nature and comparative duration. . .

"The markets perform in general efficiently relative to the actual information available with the best inferences accessible to the agents. Discretionary policy extends in the world the range of uncertain inferences to be made by agents. The shifting policy responses to all other shocks and the resulting changes in market conditions confront agents with additional uncertainty about the nature of monetary events. . .

"The 'politics of uncertainty' expressed by a discretionary management thus raises the information problem imposed on agents."

(Karl Brunner, 'Monetary Policy and Monetary Order,' "Aussenwirtschaft" Sept. 1984, pp. 195-196.)

But I should add that Brunner's focus was not merely on the, then, standard "rational expectations" approach to uncertainty, though this is an element in his exposition.

What Brunner emphasized in a number of other article on these and related themes ('Reflections on the Political Economy of Government' "Schweizerische Zeitschrift dur Volkswirtschaft und Statistik," Sept. 1978, pp. 649-679; and, 'The Limits of Economic Policy,' "Schweizerische Zeitschrift dur Volkswirtschaft und Statistik," Sept. 1985, pp. 213-235), was that shifting government policy potentially modified the setting in which agents have to make decisions in such a way that it delays their ability make rational decisions and retards their ability to reasonably adjust to the new circumstances.

And, it is clear that Brunner did not discount the relevancy of this type and degree of additional uncertainty even though he emphasized that the form and degree of this additional uncertainty could not be predicted or quantified.

Richard Ebeling

Richard - certainly. I don't think anyone has been trying to challenge the idea of regime uncertainty, have they?

But you've got an outcome that could be explained by a number of theories. Some of those theories are quantifiable. To say that we should be careful not to inordinately rely on a regime uncertainty explanation that is by its very nature subject to interpretation isn't to say that it doesn't exist or is not important.

Some of the versions of regime uncertainty that have been raised are especially odd.

Take the Bush tax cuts. I for one think they should be maintained for at least several more years. But how can you really cite this as an important source of "policy uncertainty"? Wasn't the fate of the tax cuts after 2010 uncertain from the very moment they were signed into law? It's not like we didn't know this was coming up. Why would we expect to see a negative impact on the economy only now? It doesn't make sense.

Or health reform. A lot of that is law now so presumably the uncertainty is largely out of the picture (the costs of the legislation, of course, are still there). But we were seriously considering even more draconian health reform proposals back in 1993-1994 and we didn't have a crisis then. In 1993-94 things were more uncertain than they are now in 2010 (because we've actually made the decision now!), but there was no problem at all. So how seriously can we really take health insurance as an explanation.

I think all of these things play a role - I'm not saying that this policy uncertainty isn't a factor. It is. But these are just two major things that people point to that are almost certainly overblown (for the reasons I outlined), and amidst all that nobody can point to any reason to think any other policy is any different. And all the while - whenever we actually survey business owners on what they're concerned about we don't see a huge change or a huge significance to policy uncertainty.


Part of the continuing uncertainty about the tax cuts is whether they will be allowed to expire, or whether an outcome in the November election might result in political pressure to maintain them.

Thus, it is reasonable to wait to see how the November election turns out.

The same applies to the health care legislation. The bulk of it does not come into affect until 2014, two years after the next presidential election -- and there is a lot of uncertainty as to whether or not the existing legislation might be modified or even radically downsized or eliminated based on the presidential and congressional elections in 2012.

I know from speaking to some doctors that hospitals where they work are delaying or reducing the time-horizon of contracts for physicians precisely because they are not certain about the costs of the health care legislation or what its form will be when implementation really kicks in.

An additional uncertainty is monetary policy. There is much talk about possible price deflation, yet the Fed announces that it will continue an "activist" policy threatening possible price inflation. So . . . what are we to expect from the Fed, and to what affect in terms of future interest rates and prices?

How big will the deficits be over the next few years, and how will they be funded? If foreign sources significantly dry up and domestic interest rates start to rise, what will be the Federal Reserves response, if the economy remains sluggish? How much money will be injected into the financial markets to feed the spending requirements of the Federal government, and how will that impact on future price inflation?

A "slack economy" does not assure against price inflation. We have experienced "stagflation" before. (For an insightful analysis that includes the role of expectations and uncertainty, see, Gottfried Haberler, "The Problem of Stagflation: Reflections on the Microfoundations of Macroeconomic Theory and Policy," 1985.)

Just think, as well, of the recent legislation concerning the financial markets. Much of it does not even specify what some of the agencies will actually implement or regulate, with those decisions awaiting the manning and internal determination of their widely discretionary mandate.

Of course, any single explanation can be exaggerated and blown out of proportion. And certainly "uncertainty" is not the only factor influencing the path of the economy. But it is very hard not to see it as of particular importance in this specific business cycle recovery period due to the nature and direction of the current presidential administration and congress.

Richard Ebeling

I have been reading Brunner/Meltzer papers for an upcoming conference, and have been pleasantly surprised by their Austrian character. They also took an early stand against the excesses of rational expectations analysis. And very early on Brunner criticized neoconservatism.


I've been a "big fan" of Karl Brunner for many years.

He was very insightful, often, as you say, offering "Austrian"-type arguments, while blending it with a better elements of Neo-Classical Economics and Public Choice Theory.

I especially found insightful three of his articles on the general character of economic analysis compared to most sociological, psychological and political science analysis of markets and the social order.

They are:

Karl Brunner, 'The Ambiguous Rationality of Economic Policy,' "Journal of Money, Credit, and Banking," (Feb. 1972,) pp. 3-12.

Karl Brunner and William Meckling, 'The Perception of Man and the Conception of Government,'"Journal of Money, Credit, and Banking," (Feb. 1977) pp. 70-85.

Karl Brunner, 'The Perception of Man and the Conception of Society: Two Approaches to Understanding Society,' "Economic Inquiry," (July 1987) pp. 367-388.

And separately by William Meckling, 'Values an the Choice of the Model of the Individual in the Social Sciences,' "Schweizerische Zeitschrift fur Volkswirtshaft und Statistik," Vol. 4 (1976) pp. 545-559.

They are worth reading.

Richard Ebeling

The artificial malinvestment / over consumption boom in America was much bigger than I think almost everyone understands.

Here's a picture of 20 miles of unused lumber rail cars, which were employed during the artificial housing boom, but which have sat idle now for 2 years:


A more certain govermnent environment won't put these back to work.

1 out of 4 among the unemployed are construction workers.

Why the snideness toward Beck -- "despite the source"?

Don't forget the health insurance reform. Companies are recalculating, etc. in anticipation of what will happen with health insurance.

More than that, I know someone who works for Humana, and she said that Humana is reorganizing, getting ready to fire most of its employees, and is anticipating getting out of the health insurance business as such altogether. Surely Humana isn't the only one. What are other health insurance companies doing? And what messages are they sending to other businesses about insurance cost and coverage?

I suspect that this is where the real uncertainty is coming in.


I think emphasis is placed on factors which are within the control of rational actors, because other factors will not alter course in response to a good argument.

Austrians tend to believe that the prolonged recession is a consequence of systemic misallocations. While some believe that monetary disequilibrium is partly to blame, they also believe little benefit is o be had from expansionary policy. Since aggregate demand is not a major issue, fiscal policy is a non-starter, especially given the assumed structural nature of the problem. Therefore, Austrians tend to focus upon regime uncertainty, not because it is the biggest factor, but because it is the most under our control.

Does that make sense? I hope I am not misrepresenting anyone. This is the impression I get from reading comments here and elsewhere on the matter.

Greg's picture saves 10,000 words of prose on the nature of malinvestment. Kudos.


I don't Austrians denegrate fiscal policy. Certainly I don't. Part of regime uncertainty is the fear of tax hikes.


"Therefore, Austrians tend to focus upon regime uncertainty, not because it is the biggest factor, but because it is the most under our control."

No, they don't. Once again you don't know what you are talking about. No wonder you feel right at home with Daniel.

I'm just getting around to realising how little I know about recession theory, so I won't comment much on this.

But, one thing sticks out here. Why is it that economists place so much weight on the theory of boom being absolutely logical? Why is Bohm-Bawerk not allowed to get away with vague modeling, his average "period of production" and "subsistence fund" are seen as outdated. But, when it comes to recessions explanations become much looser. I thought the liquidity trap was something about hoarding money, but I keep reading stuff about how it's really something much more loose and general. Also, we have "balance sheet recessions" and "inventory recessions". Why are these permissible concepts but the average-period of production is not?


Perhaps that was poorly worded. Let me try again.

Austrians, and those with Austrian leanings, tend to focus on regime uncertainty when discussing what policies can help end the recession as quickly as possible. They see recent activity in Washington as frustrating the reallocation of resources. Perhaps not all have said such things -- my impression is merely from what I have read recently online.

Although Daniel agreed that regime uncertainty is an issue, he disliked the emphasis which Pete and others place on it. Daniel, for example, places more emphasis on liquidity preference and deficient aggregate demand. Since I assume Pete believes our problems are more structural, he is not going to emphasise the same factors (see Steve's recent post about inflation). One of the few things policy makers can easily do is stop creating regime uncertainty.

Clearly, Austrians do not believe regime uncertainty is the primary cause of our problems, and they have many policy suggestions for preventing future business cycles.

I was walking through the woods tonight, thinking about economics, when a hypothesis occured to me. What if our incredible advances in communications technology are inhibiting the recovery?

Basically, nobody wants to lend or borrow until the economy recovers, but the economy isn't going to recover until investment "picks up". So everyone is waiting for everyone else to make the first move. However, since whoever goes first is taking more risk than anyone is comfortable with, nobody makes the first move and everybody waits. People are encouraged to wait "just that little bit longer" because everyone knows recessions do not normally last this long long, and any minute now the recovery will happen.

Advances in communications technology have made it easier than ever before to coordinate everyone for everybody, acting in their self-interest, to do nothing at all.

Perhaps someone has already suggested this hypothesis, I don't know. From what scant information I have to go on, it seems to fit the facts okay. Although it's not a very likable idea to those of us who advocate free markets, it is an interesting possibility nonetheless.

Lee Kelly, the theory you suggest is very similar to some interpretations of the liquidity trap.


Really? That doesn't sound right. Perhaps I just don't know what a liquidity trap is. I thought a liquidity trap was when some asset (like government bonds) that a central bank buys to increase the money supply has an interest rate so close to zero that it is almost a perfect substitute for money. But that isn't what I mean at all.

What concerned Keynes was the future rate of interest, where interest is defined in the broad sense as a return on an investment.

He suggested a situation where investors thought that interest rates - or returns on investment in general - in the future would be high, but current returns are very low. So, investors hold their money awaiting the rise they anticipate.

I wouldn't say that you're wrong about the liquidity trap though. Different people have different interpretations of it. The most direct interpretation is a false criticism of Say's law. It's pointing out that money is barren and a rise in demand for it is destructive. This is only true if demand for money isn't connected to anything else. But, in any gold standard or modern fractional-reserve fiat standard it is connected to other commodities or assets (Debt or gold mining). So, that version of the liquidity trap is false.

The other interpretation of Keynes' point is that it's about the "flight to quality". In this version the point is that investors hold assets that are liquid but low return because when a rise in returns occurs they can liquidate those assets and move into the higher return assets. This is very similar to what you're saying about. I don't really believe that this is true either, but I'm still thinking about the topic.

Troy Camplin,

I have an extremely hard time believing your post. Health Insurance is pretty much Humana's entire business. Also, if there is a major change like that that isn't public your friend probably shouldn't be talking about it.


May I put in a plug for my favorite explanation of the slow recovery - Hayek's Ricardo Effect? Government stimuli increase demand for consumer goods and therefore raise profits in consumer goods industries. That makes labor relatively cheaper, so per micro 101 consumer goods makers will use more labor and buy less capital equipment. But the real unemployment is in the capital goods sector, not the consumer goods sector.

I'm just telling you what a Humana employee told me. She is going to lose her job, and she told me that that is why. Humana is getting out of that business because there isn't going to be an insurance business to speak of soon. Certianly not one where one can make a profit. Yes, insurance is what Humana currently does -- but that's not what they have to do. Nokia used to be in the timber industry -- now they make mobile phones. Complete revamping is not unheard of.

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