By now, we have all heard the basic argument that a core problem impeding recovery during the 1930s was the uncertainty created by public policy. In Robert Higgs’ words: “the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in he minds of investor.” New or anticipated taxes and regulations were at the heart of this uncertainty. And as Burton Folsom notes in a recent book: “Roosevelt’s special-interest spending created insatiable demands by almost all groups of voters for special subsidies. That, in itself, created regime uncertainty.” Obviously, the subsidies were used as a tool of coalition building. But at the same time, they created questions for all: “where would the line be drawn? Who would get special taxpayer subsidies and who would not?” (New Deal or Raw Deal, 251).
Things have changed significantly since the 1930s. Government has more than doubled in size relative to GDP and many of the forms of spending that seemed so novel during the New Deal have become a central component of what many consider to be a minimally functional state.
Another thing that has changed: whereas during the 1930s, the pool of investors was largely limited to the wealthy. In the past quarter century, in contrast, a majority of Americans have stepped into the market, often through a 401(k) or an IRA. We became a nation of investors.
To bring things full circle, I turn your attention to a piece by Graham Bowley in today’s NYTimes, “In Striking Shift, Small Investors Flee Stock Market.”
The lead: “Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.”
“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”
This trend is being reinforced by baby boomers readjusting their portfolios away from equities and toward bond funds and the loss of real estate value (and hence a loss in the capacity to use the house as an ATM).
For decades, political scientists and economists have spoken of a political business cycle wherein elected officials goose the economy in the months leading up to an election to maximize their votes, leaving the long-term economic fallout until after the election. Now that nearly every man and woman is an investor, things may be more complicated. One must ask whether the efforts to prove that something is being done are convincing voters qua small investors that the future is quite uncertain, thereby having the unintended consequence of prolonging the recession?