Thread: Economics Uncertainty
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Old 09-22-2012, 10:25 PM   #7
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For anyone interested.. there is a fantastic paper about regime(or policy) uncertainty. It basically shows how the New Deal policies directly caused the Great Depression to last as long as it did. It was only after Roosevelt had died and WWII ended that business leaders felt confident that the government was not going to further expand and cause more uncertainty, so they began to invest heavily again.

Here is an excerpt:

It is time for economists and historians to take seriously the hypothesis that the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in the minds of investors.

Of course, scholars have had their reasons for not taking the idea seriously.
For a long time, historians have viewed the statements of contemporary
businesspeople about “lack of business confidence” as little more than routine
grumbling—sure, sure, what else would one expect Republican tycoons to
have said? Historians generally report such statements as if they were either
attempts to sway public opinion or unreflective whining.

Since World War II, economists, with only a few exceptions, have overlooked
regime uncertainty as a cause of the Great Duration for other reasons,
such as the availability of standard macroeconomic models whose variables do
not include the degree of regime uncertainty and, even if one wanted to incorporate it into an existing model, the absence of any conventional quantitative index of such uncertainty. Somewhat inexplicably, most economists regard evidence about expectations drawn from public opinion surveys as scientifically contemptible. Moreover, economists crave general models, equally applicable to all times and places, and so they resist explanations that emphasize the unique aspects of a specific episode such as the Great Depression.

In opposition to these professional inclinations, one can offer several goods
reasons to take seriously the idea that the regime uncertainty created by the
Second New Deal contributed significantly to causing the Great Duration.
First, the Great Depression was not just another economic slump. In depth
and duration it stands far apart from the next most severe depression in U.S.
history, that of the 1890s. We are talking about history, not physics; unique
events may have unique causes. Second, the hypothesis about regime uncertainty makes perfectly good economic sense. Nothing in the logic of the explanation warrants its dismissal or disparagement. Third, given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, and the character of the antibusiness zealots who composed the strategists and administrators of the New Deal from 1935 t o 1941, the political
climate could hardly have failed to discourage some investors from making
fresh long-term commitments. Fourth, there exists a great deal of direct evidence that investors did feel extraordinarily uncertain about the future of the property-rights regime between 1935 and 1941. Historians have recorded
countless statements by contemporaries to that effect; and the poll data presented earlier confirm that in the years just before the war most business executives expected substantial attenuations of private property rights ranging up to “complete economic dictatorship.” Fifth, investors’ behavior in the bond market attests in a striking way that their confidence in the longer-term future took a beating that corresponds exactly with the Second New Deal.

Finally, this way of understanding the Great Duration meshes nicely with a
proper understanding of the Great Escape after the war. The Keynesians all
expected a reversion to depression when the war ended. Most businesspeople, in sharp contrast, “did not think that there was any threat of a serious depression” after the war (Krooss 1970, 217). The businesspeople forecasted far better than the Keynesian economists: the private economy blossomed as never before or since. Official data, which understate the true increase because of mismeasurement of the price level, show an increase of real nongovernment domestic product of 29.5 percent from 1945 to 1946 (U.S. Council of Economic Advisers 1995, 406). Private investment boomed and corporate share prices soared in 1945 and 1946 (Higgs 1992, 57–58). None of the standard explanations can account for this astonishing postwar leap, but an explanation that incorporates the improvement in the outlook for the private-property regime can account for it.

From 1935 through 1940, with Roosevelt and the ardent New Dealers
who surrounded him in full cry, private investors dared not risk their funds in
the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with (Higgs 1987; Hughes 1991). But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.

So, the next time your socialist friends point to the New Deal.. explain to them how it was a BAD deal for America.

(caveat: some of the new deal policies and undertakings worked, there is no denying that.. of course most of those were conceived of by Hoover... but the OVERALL effect was chilling and kept us in poverty far longer than needed)
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