The Uncertainty Problem and the Great Recession
Voters headed to the polls Nov. 6, and for many their greatest concern was the U.S. economic situation. Although The Great Recession ended more than three years ago, growth has remained slow and job growth sluggish.
If we look at the recent Great Recession, real GDP fell by 3.7 percent, 8.9 percent, and 5.3 percent during the third and fourth quarters of 2008 and the first quarter of 2009 respectively. In the second quarter of 2009, GDP fell by .3 percent, but grew slowly every quarter since. So, technically, the recession has been over for more than three years.
But unemployment remains a major problem.
The unemployment rate peaked at 10.1 percent in October 2009, actually lower than the peak unemployment of the recession of the early 1980’s, which peaked at 10.8 percent in December 1982. The unemployment rate remained above 8 percent for 27 months from November of 1981 through January of 1984 during the Reagan recession. This time, the unemployment rate stayed above 8 percent for 43 months during the Obama administration, only dipping to 7.8 percent in September with a large drop in labor force participation.
Why have we had such a slow recovery from the recession? Why has the labor market been so slow to rebound? The answer is regime uncertainty, the same kind of uncertainty Franklin Delano Roosevelt’s administration created that stymied recovery from the Great Depression.
American economist Robert Higgs wrote a paper about the Great Depression in 1997 entitled “Regime Uncertainty.” It was also republished in his book, Depression, War, and Cold War. In it, Higgs explained the length and breadth of the Great Depression by focusing on the massive government intervention in the economy that created so much uncertainty as to what the rules of the game were that business halted investment.
He quoted financial economist Benjamin Anderson concerning the outpouring of new federal laws and regulations: “The impact of these multitudinous measures—industrial, agricultural, financial, monetary and other—upon a bewildered industrial and financial community was extraordinarily heavy.”
Higgs’s point was that the “regime uncertainty” created by the Roosevelt administration kept businesses from investing in new factories and machines and from hiring new employees. This is what kept the economy from expanding and employment from increasing for such a long time. And it is the same problem we face in 2012.
The U.S. economy continues to deal with slow growth and high unemployment, rather than quickly rebounding. Real GDP growth remains sluggish, growing at 1.3 percent in the second quarter of this year and 2 percent in the third quarter. It has grown faster than 2.6 percent in only two quarters of the entire recovery period.
Just as large a problem is how long many people have been unemployed. Almost 5 million people were unemployed longer than 26 weeks in September, making up 40.1 percent of those unemployed. In September, the median number of weeks people have been unemployed was 18.5, more than double what it was in January of 2008.
The reason for these enduring growth and labor market problems can be found in the regime uncertainty created by the Obama administration.
They enacted a 2,800 page health care bill with 20,000 pages of regulations, and more yet to be written. That has created unintended consequences and an uncertain future for our health care industry. They got a 2,300 page financial regulation bill with 243 Rules, and 67 studies, passed. After Cap and Trade legislation was defeated, the EPA began regulation of carbon in ways that have led to the closing of some coal-fired power plants and uncertainty about the future of others. The Bush Tax cuts have also been threatened, then temporarily extended, and now are set to expire when we hit the “fiscal cliff” in January.
Imagine how all of this impacts business decision making. Suppose you are the owner of three car washes and are thinking about opening up a fourth one, investing $300,000 in a building and equipment and hiring ten new people. First, you don’t know what the health care costs of these new employees are going to be, since that will be up to the Secretary of Health and Human Services under the Affordable Care Act. Second, you don’t know what our electricity costs are going to be as the EPA delves deeper into regulation of the power industry. Third, you don’t know what your income tax liability will be, since you file as a sole proprietor or LLC and pay under the personal income tax.
Given all this uncertainty, not counting the activist Federal Reserve policy that could alter interest rates at the next monthly meeting, it is likely that you will simply not invest right now and wait until there is a more stable set of rules of the game. If you do hire anyone, it will be part-time where you don’t have to deal with the Affordable Care Act and can respond quickly to the unknowns created by your government. This is a reason why the number of people who are employed part time who would like full time work was at more than 8.6 million in September.
Continual massive government intervention sustained the Great Depression and is weighing down the current economy. We will continue to slog along at 2 percent growth and unemployment near 8 percent until certainty about the rules of the game is restored, or until we regain what Friedrich Hayek called the Rule of Law over the Rule of Man.
Gary Wolfram is the William Simon Professor of Economics at Hillsdale College.
