Monday, May 30, 2011

Is Economic Stagnation Fostered by Regime Uncertainty?

One entrepreneur thinks so. While on a plane, Yale law professor Stephen L. Carter recently struck up a conversation with a business owner who explained to him "why he refuses to hire anybody." His reason can be summed up in the word uncertainty. He is unsure about the regulatory environment and how changes in regulations will affect labor costs, investment returns, and capital gains he would reap if he merely sold his businesses. His response lends credence to Robert Higgs' theory of regime uncertainty contributing to economic recessions.

When asked what the property roll of government should be, the businessman responds,
“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss."
Unfortunately, he does not elaborate what are the "things the government has to do." I imagine he means things like police, the military, roads and schools. That is not an uncommon opinion. Economic theory, however, teaches that even these are not things the government has to do.  His last sentence, moreover, implies he may mean something more. He may mean that the government should promote industry, provide protection against imports, give subsidies to small businesses, and ensure relatively low interest rates.  These things, of course, merely create more uncertainty.

The best thing for the state to do is to get out of the market altogether. Remove price controls and business regulation, lower government spending and taxes, and get out of the money production business. Such a path would of course change the current regime, but what follows would be a free society in which the division of labor could freely develop, making use capital accumulated and invested by entrepreneurs who could use economic calculation to make wise investment decisions. It would be the best possible environment for productive activity and for the employment and higher real wages that go with it. That is regime change we can believe in.

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