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« Great Sheldon Richman Column | Main | Using Microeconomics to Understand Macroeconomic Problems »


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From my experience, most people don't dismiss the idea that health reform has a lot of consequences for business and it's things like this that make people like me - who support a lot of current policy - remain skeptical about important components of health reform.

What I think we find less convincing is not that health reform has consequences like this, but that regime uncertainty of this variety is somehow driving current unemployment rates.

I would agree that *on the margin* regime uncertainty matters. But no number of anecdotes will tell us whether it accounts for .0001% of the unemployment over the natural rate of unemployment, or 3%. I believe it is extremely, extremely likely that whatever is causing 3-5% excess unemployment in the US is the same as what is causing unemployment in the UK and other sluggish advanced economies. Since "health care" and "Obama" are only issues in the US, I conclude that regime uncertainty is accounts for more like .0001% than 3%. If you put Western nations on a scattergram, with unemployment on the y-axis and different explanations on the x-axis, to my knowledge the only one where there is an apparent relationship is tight money. With regime uncertainty, I'm obviously only talking about a metaphorical scattergram. At least for me personally, I would need to see that type of evidence to take up the flag against regime uncertainty.

Same as Daniel. If unemployment is driven by regime uncertainty, shouldn't restaurants face 'excess demand' and as a consequence shouldn't we observe rising prices?

"Tight money" is a manifestation of regime uncertainty. Banks also suffer from it, plus in some cases being undercapitalized.

The fact there is also regime uncertainty in Europe, too, doesn't mean the causes are precisely the same. They have a big public and bank debt problem -- more near-term than ours. That has put the Euro and even the EU itself into play.

Let's look to where regime uncertainty does not seem to be a major problem: much of the Asia Pacific region. And that is where things are going well. Plus, surprisingly, parts of Latin America (e.g., Brazil, Chile and Panama).

When people say they do not understand regime uncertainty, they cannot be talking to businessmen. It is the topic of almost every converstaion I have with businessmen. It was this morning on a long call I had with a European businessman with global exposure. Again, Asia was his one bright spot.

I repeatedly ask US businessmen who have a global reach one question. Would you make any net, new investment in the US? The answer is invariably no.

Okay Jerry, that's fair enough, but then regime uncertainty can easily be offset by increasing the supply of money, to compensate for the increased demand for money due to that regime uncertainty. The cause is then not regime uncertainty, but a failure of the central monetary authorities to respond to the increased demand for money.

Still, as a uni-causal explanation it seems fairly far-fetched and in the context of the (private) debt-to-gdp ratio and the debt minimization going on, it seems to be a fairly minor problem.

I'm thinking regime uncertainty is spread pretty evenly through the western nations. PIIGS, riots in Britain under a weak liberal-conservative coalition, possible flight from the Euro, massive continent-spanning regulations in the E.U., the full impact of which have yet to be appreciated, the Arab spring, Syria's crackdown, war in Afghanistan, Iraq & Libya, (and Pakistan if we're honest). Regime uncertainty seems like the dominant operating paradigm right now.

The countries that injected enough money to maintain monetary equilibrium are the same ones that do not exhibit these problems. Like Martin said, if regime uncertainty causes an increase in money demand, then fulfill the increase in money demand by printing more money.

Regarding the factors Eric Hosemann lists, that's par for the course for Europe (well London and Greece might be +1 or +2 right now). For the same reason you can't blame the crisis on greed when greed is always present, you can't blame spikes in unemployment rates for the type of regime uncertainty that is always present in Europe - especially when issues like PIIGS and riots are obvious RESULTS of the crisis, not the cause of it.

Clearly people need to understand a little capital budgeting and how regime uncertainty plays into it.

The reason regime uncertainty can explain unemployment is because businesses do not know, right now, what employees are going to cost them because of the health care act. If the expected marginal benefit of a particular job hasn't changed much, but the expected marginal cost is up, shouldn't we expect higher unemployment? It's only uncertainty because the fate of the health care act is still open. Once it's fully in place, we can expect relatively high unemployment levels to persist.

To the extent unemployment persists in industries like home construction, we can understand this based on uncertainty regarding home prices. The housing industry has faced a lot of recent intervention, so we can call that regime uncertainty as well.

The Dodd-Frank act also is contributing to regime uncertainty, since it has as-yet unknown effects on capital requirements and therefore lending decisions. At the least, it is increasing the cost of capital for businesses.

In sum, expected costs are up, expected benefits are the same. The value of holding off on investment is thus relatively higher than if the government was not so interventionist. From real options we can understand that the greater the uncertainty over the net present value of the investment, the greater is the value of delaying the investment.

Empirically this is all hard to untangle, and to see exactly how much of unemployment is due to what factor. But it is clearly not the case one can just dismiss regime uncertainty.

Regime uncertainty doesn't just increase the demand for money. It also reduces the desire to invest. Good firms know that when investment is too uncertain, they should wait, or pay special dividends to their shareholders, or buy back stock.

Never mind what people say is the reason why they are doing things -- it doesn't fit my theoretical paradigm! Now, who was it who said, "When the facts change, my views change. What do you do?" ?


It was Keynes.

One constant on this site is that someone will state a microeconomic proposition, and a respondant will recast it into a macro proposition. Then we waste a great deal of time getting back to the original micro proposition.

There may or may not be monetary disequilibrium (I don't think so.). If there is, that is another problem. Regime uncertainty is a micro issue. As Oxman suggested, it affects investment demand.

(Uncertainty's impact on investment demand was a major concern of Keynes. I am amazed at how many of his putative followers don't get the issue.)

While the primary sources for this blog often mix their usual undeniable truths with a few controversial concepts, I sincerely hope that none of them would claim that a fix for regime uncertainty is the printing of money.

One way that regime uncertainty can directly affect unemployment is when as yet unwritten costly regulations may or may not be applied to firms with less than 50 employees, or some other number.

Regards, Don

If I may reinforce Jerry's point, above.

The problem is not a lack of money, given people's decisions to defer or delay possible investment and other types of spending they might otherwise undertake in their respective corners of the market.

It is the fact that people are uncertain and fearful that incurring investment and other related financial commitments are too risky given the inabilities to make reasonable judgements about future health care costs, whether the "Bush tax cuts" will be allowed to expire, what the outcome will be of the "supercommittee's" deliberations concerning those apparent debt reduction talks (and if some real oxes will actually be gored, and by how much and when), and what are the likely consequences from the Fed deciding to maintain virtually zero interest rates into 2013 (and whether or not this foretells price inflation and if so by how much)?

(Not to speak of the interconnected uncertainties and concerns of events in the Euro-zone in our global economy.)

The presumption that if only those wishing to hold more "idle" cash could be given, say, ten percent more money balances by the Fed, everything would be alright and they would starting "spending" and raising "aggregate demand" enough to lift employment and various productions out of the recession, if a far too simplistic and excessively "macro" view of things.

It is the micro relationships beneath the "macro" surface that is at the heart of these problems.

As for the comment, above, by another participant, about what degree of "statistical significance" to assign to regime uncertainty. This, unfortunately, is the type of problem that Hayek emphasized in his Nobel Lecture on "The Pretense of Knowledge," that the "correctness" of a micro-process explanation of the dis-coordinations that are hindering "re-balancing" may be unprovable by macro statistical methods, but still be essentially true.

And by focusing on those wider macro-aggregates that seemingly can be statistically measured and correlated may lead us astray from a deeper and more correct understanding of the problems at work in the economy.

Richard Ebeling

I don't see how you can avoid going to Clower on this sort of thing. The effective demands out there are below the notional demands of GET in part because of regime uncertainty. It is only in Leijonhufvud's corridor that you can do okay (not great) by assuming D&S will somehow automatically come together. But when you've been bumped out of the corridor, that assumption is ruinously wrong. Talking-head Keynesianism assumes that stimuli always stimulate. One problem with that view is precisely its neglect of the difference between notional and effective demands, which Clower attributed to Keynes.


Some of the impact of regime uncertainly on unemployment would be an increase in the natural rate of unemployment.

The equilibrium impact of mandating insurance should be a lower real wage. The chance that this will happen should lower labor demand as well, and so lower the real wage. In the face of a minimum wage, this creates a surplus of labor, but even without that, it should raise the natural unemployment rate.

I agree with your skepticism that the extra high unemployment in the U.S. today is an increase in the natural unemployment rate due to these sorts of factors. It think the natural unemployment rate his higher, than it was 5 years ago, but the unemployment rate is much higher still.

If Rogoff and Reinhart are correct, there is no mystery in the slow recovery of employment after the financial crisis and deep recession. It follows the historical pattern, which is 4.8 years to employment recovery. That suggest well into 2013.

Bad policies (regime uncertainty) would add to the problem. So perhaps beyond 2013 for recovery.

What R&R find fits an Austrian story very well. Capital has been destroyed and labor productivity has fallen. Call it a rise in the natural rate.

J Oxman: What you are describing is a fall in the demand for loanable funds. If that's the problem, you print money, i.e. increase M to counterbalance a fall in V. This response is only anti-Austrian to the extent that 1930s Hayek is anti-Austrian.

Troy: The counterfactual here is if there were countries in the crisis that maintained nominal spending and still see substantial unemployment. I don't know of any such countries.

Dr. Ebeling: You said, "The presumption that if only those wishing to hold more 'idle' cash could be given, say, ten percent more money balances by the Fed, everything would be alright and they would starting 'spending' and raising 'aggregate demand' enough to lift employment and various productions out of the recession, if a far too simplistic and excessively 'macro' view of things."

As long as people think on the margin, banks will lend out some of the new money for new investment. To assert otherwise is to say that the law of supply does not apply in these circumstances or that we are in some sort of liquidity trap.

I believe the comment about statistical significance was directed at me, but I said no such thing. I said that regime uncertainty (qua regime uncertainty, as opposed to the other channel through which it could potentially affect nominal spending discussed here) would have SOME effect on the margin, but it is impossible to tell how big of an effect it is by just looking at the United States. I don't even know if the relationship between maintaining nominal spending and unemployment among Western countries is statistically significant, but it actually looks like it might be a relationship.

As per Hayek, I strong disagree with that characterization of his speech- I do not demand that we test ABCT statistically for the reasons Hayek gives. To justify talking about "macro" issues in terms of M and V as I'm doing, I would point out that in the same speech, Hayek says "I want to do this to avoid giving the impression that I generally reject the mathematical method in economics. I regard it in fact as the great advantage of the mathematical technique that it allows us to describe, by means of algebraic equations, the general character of a pattern even where we are ignorant of the numerical values which will determine its particular manifestation. We could scarcely have achieved that comprehensive picture of the mutual interdependencies of the different events in a market without this algebraic technique." I am not trying to fit values to some Keynesian model, which is what Hayek was attacking, either.

Dr. Woolsey: I hadn't thought about framing it in terms of the natural rate, though that does make sense. But again, if the problem is that the natural rate in the US has spiked, why did unemployment spike everywhere else starting in 2008, with no obvious analogue to Obama?

Ryan Murphy,

I believe you have misunderstood me. I am talking about a lack of investment. Not all investment is financed from new lending. In fact, little of it is. Most investment is financed from internal revenue. If we know anything right now, it's that firms have boat loads of cash.

However, the problem might be that the small firms do not have cash and they would like to borrow. But the banks that small firms borrow from may not want to lend or have the funds to risk. If this is the case, then it's a result of the nature of the targeted bailouts of Bernanke.

To reiterate: it is not a loanable funds problem. It is an investment opportunity problem.

Like most others, I disagree with Ryan Murphy here.

Let's think about the two quantity equations, we have:


The output quantity equation. And we have the total quantity equation:


The velocity in the output equation which I've called Vq is different to overall velocity V.

The idea Ryan is promoting here is that all changes should be seen in terms of M and V. But, which V? That's the question. The problem here is that Ryan is implicitly assuming that nothing can change the value of existing assets in an interesting way.

In the total quantity equation the value of PT can change. To put the issue differently the demand for money concerns the demand for money for all existing goods and services, not just output. If that demand increases because of uncertainty then V falls. The V in MV=PT and MV=PQ both fall. The folks here know this, and they account for it in different ways, I do it by using MV=PT, others do it by incorporating the logic I've used here into the determination of V in MV=PQ.

I agree that compensating for this by monetary expansion would work, at least in terms of MV=PT. But, that isn't really the point. The point here is that things that cause increased demand for money in the current environment are contractionary.

The Wall Street Journal weighs in tomorrow on our discussion. As they calrify, the rich are on strike and won't invest.

J Oxman, Richard Ebling, etc. -

The point that it is an investment opportunity and investment demand problem and not ultimately a money demand problem is precisely right. But what's unclear to a lot of people is why in this case regime uncertainty is so deleterious while in other cases it doesn't seem to have the same effect. As Ryan Murphy said, how can we blame health reform when much of the rest of the world is going through the same thing? Richard mentioned uncertainty about the Bush tax cuts expiring. Fine - there's uncertainty there. But even in the worst case scenario with whatever degree of probability investors want to attach to it, that means going back to Clinton era tax rates. Why does that get us depressed investment rather than Clinton era investment?

The regime uncertainty story is fine - it doesn't need to be elaborated how that would cause unemployment. That is all quite clear. What's unclear is what sort of regime uncertainty causes a depressed period like this that didn't cause similar problems one, two, or three decades ago this substantially. Regime uncertainty is always there. That's the nature of political involvement in the economy. What isn't always there is the demand uncertainty that follows a financial crash. We all agree that the problem is uncertainty about investment opportunities. The demand side story offers an explanation to that that the regime uncertainty story doesn't: an explanation for (1.) why it is happening now and not at some other point in the last several decades, (2.) why interest rates are so low despite relatively high deficits, and (3.) why inflation isn't going through the roof despite high levels of money creation.

Regime uncertainty can't answer (1.) or (2.) at least to my satisfaction - it provides something of an answer to (3.).

Current -
I think you're wrong about Ryan. He doesn't seem to be saying that all changes should appear in M and V - he seems to be saying that M is what we have some control over. I could be wrong - he could clarify - but I don't think Ryan misses the fact that the RHS reacts as well. Your last paragraph seems to agree with Ryan so I'm not sure what the issue is.

Although I suppose to the extent that it can answer my point (3.) it could potentially provide a solution to point (2.). So the primary distinction is that we always have regime uncertainty but we don't always have demand uncertainty, and regime uncertainty hardly seems to be substantial enough to have anything to do with what's going on now.


I wouldn't hang the whole regime uncertainty around the health reform bill. That's the U.S.'s own thing. Greece, Italy, etc. have their own form of regime uncertainty essentially through the debt problems.

I also agree regime uncertainty is always there, to a greater or lesser degree. In fact, it has been increasing in the 2000s I think after a couple of decades where businesses could be fairly confident that the regime would be stable. There's a paper by Stulz et al., I'll try to find it, linking increased operational uncertainty and increased cash holdings in the 2000s, even prior to the depression.

As a counter-example, look at Canada. I would argue that the regime uncertainty has lessened in Canada since they finally have a majority federal government after 2-3 years of a minority government. They also didn't have the housing market turmoil of the U.S. All in all, the setting is much more stable and predictable. We see that investment is solid.

Finally, to argue a tired point, isn't demand uncertainty for specific products always present too?

Why is a majority government more stable J Oxman? Haven't you been furnishing examples of regime uncertainty grounded in the free hand afforded to majority governments???

re: "Finally, to argue a tired point, isn't demand uncertainty for specific products always present too?"

For specific products, sure, but specific product markets don't drive general macroeconomic phenomena. We have to differentiate between relative and general prices and demands here. You have regime uncertainty fairly consistently - what you don't have every day is a housing crash and a financial crisis that reveals to people they are considerably poorer than they once thought they were.


I've been providing examples of specific items that generate regime uncertainty. The case of minority governments in parliamentary systems is that they are unstable. The Conservative party now in power favors markets much more so than the other parties. When the Conservative party was a minority power, they were vulnerable to attacks by the other parties if the opposition formed coalitions. Thus when the Conservative party was voted a majority, the uncertainty in the climate decreased.

Your second paragraph convinces me you are missing the trees for the forest. This is a common failing among those who spend too much time in the macro clouds and not enough time on the micro earth. General macroeconomics phenomena are only the aggregation of events occurring across product markets.

The housing crash is important; as I mentioned, this is an example of regime uncertainty now because the housing market has not been allowed to rebalance. Like the financial industry, it is a market of pronounced intervention.

Regime uncertainty isn't one thing. It is the multitude of interventions and the lack of predictability of the end result of the interventions. One thing we do know from history is that interventions breed interventions until the next crisis comes.

re: "Your second paragraph convinces me you are missing the trees for the forest. This is a common failing among those who spend too much time in the macro clouds and not enough time on the micro earth. General macroeconomics phenomena are only the aggregation of events occurring across product markets."

Ummm.... I spend most of my time on micro problems, actually.


I know it was Keynes -- I was quoting him that way to tease Daniel a bit.


I don't understand how that is the counterfactual. Look at countries without regime certainty -- like Canada -- and see what happened.


Regime uncertainty is one of many factors, and will have differing levels of influences based on what is causing the uncertainty, the details of the system, including the levels and nature of government involvement, etc. In other words, it is a complex process whose details cannot be known in any fundamental way. An understanding of the economy as a complex process would help one to understand this. That is the fundamental lesson of Hayek's economics. This is why we use probabilities in complex sciences, not because that tells us the absolute truth in a Newtonian physics sort of way, but because it tells us what is likely to happen. Nevertheless, it doesn't tell us what happens in every circumstance. We see this even with ABCT -- it matters where the cheap money goes. If it goes into internet stocks, we get 2000; if it goes into housing, we get 2008. Nor does the existence of a recession that does not follow ABCT negate it, as there are other factors that can contribute to the onset of a recession, including the fact that pattern of creative destruction follow a power law distribution, meaning every so often, such a pattern will be widespread enough to create a recession. Throw in an ABCT as a trigger of a major creative destruction avalanche, and then have a government do like ours and delay the reallocation of capital, create regime uncertainty through new social engineering programs, and engage in any number of policies that benefit big corporations at the expense of the creation of small companies which in fact create new jobs, and you get the situation we are in.

I think people are fudging regime uncertainty until it becomes meaningless.

As I understand it, the original meaning of "regime uncertainty" concerns the "social contract" of a country and the possibility of major changes to it with major economic consequences. It's not about mere uncertainty over particular laws, as Anthony Evans pointed out to me recently, that's just policy uncertainty.

It's not something that's happening all the time.


Your point is well taken, and it's important to define our terms. I use regime uncertainty in the sense that Robert Higgs uses it. He means as regarding the durability of private property rights.

I can see why many of the things we've discussed thus far should be more appropriately called policy uncertainty.

It seems to me that both are causes for reduced/delayed investment.

Well, pretty obviously Obama should have just had his new system just come in all at once rather than stretching it out. That way we would have gotten past all this regime uncertainty, particularly the uncertainty about whether or not it is even going to happen or not.

Seriously, this may well be the worst thing about Obamacare. Otherwise, it does not amount to much, barely changing our mostly private system at all, particularly compared to other countries. We will still be the only high income country without everybody having health insurance.

Obamacare is indeed a bunch of sound and fury signifying nothing, especially now that, according to a court ruling, the federal government cannot force me to buy health insurance (which would have been a real inconvenience, forcing me to choose health insurance over my mortgage). It will mostly make things worse, emphasizing, as it does, the very worst aspects of our current insurance system. I mean, if I were an evil genius trying to make the system so bad that people would clamor for universal care because the way the system got worse makes it look like it's the fault of private insurance, I certainly would have proposed Obamacare.

A better system would be for us to be the only country in the world where nobody had health insurance. Third party payers are what drive up costs so much. You can thank wage ceilings after WWII for the proliferation of employer-associated insurance.

Of course, that is only a second best system. The first best would be if only catastrophic insurance existed -- like we have with car insurance. Could you imagine what car repairs and maintenance would cost if your car insurance covered everything from oil changes to accidents?

The big joke of all the folks complaining about being made to buy health insurance is that the alternative that Hayek supported was universal national health insurance, a legit national economic function in his eyes.

To those who say, "Oh, but he opposed it later," sorry folks. What he opposed was the British system of full-blown socialized medicine that his son ended up working for. There are all kinds of plans, France, Germany, Switzerland, Canada, in between the abysmally dysfunctional system of the US, more expensive by far than any other in the world (this is an example of greater efficiency by market capitalism?), and the nearly Soviet-style system in UK.

Get real, folks. Obama could not go to a better system that Hayek would have approved because of lots of inance opposition, utterly ignorant. Should go to a better system, and quickly to avoid all this regime uncertainty stuff, but, maybe cannot do that because... ???

It really bothers me when people adopt Barkley's rhetorical strategy: "you libertarians love Hayek, but Hayek believed in X, which isn't very libertarian, which just goes to show how crazy you guys are."

Uh no, actually. Maybe it shows that Hayek was wrong. Maybe it shows that libertarians don't blindly worship whatever our intellectual influences say, whether it's Hayek, Mises, Rothbard, Kirzner, Nozick, Friedman, or whomever. Not ONE of them was right about everything.

You'll have to do a lot better than trying the Hayek tu quoque fallacy Barkley.

Maybe Hayek wasn't being consistent. Why should the health care system be exempt from the realities of spontaneous orders? It, of course, is not. Probably most economists just consider the health care system to be part of the economic system -- which it is, in part -- but it is likely too to be a spontaneous order of its own. Has there been work on health care as a spontaneous order? If not, there's a good research project, I would suggest. (Not for me -- I have already done the arts as spontaneous orders, some general theory on spontaneous orders, cities as spontaneous orders, and will be doing something on higher education as a spontaneous order.)

"The first best would be if only catastrophic insurance existed -- like we have with car insurance. Could you imagine what car repairs and maintenance would cost if your car insurance covered everything from oil changes to accidents?"

That's close to what we have in Ireland. Visits to a GP and things like dental work aren't covered by the HSE and often aren't covered by private schemes either.

I think it's generally a good idea.

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