Bob Higgs has used the concept of “regime uncertainty” to explain why the Great Depression lasted so long. In brief, the argument is that FDR’s escalatingly anti-capitalist rhetoric in the mid- to late-1930s spooked investors, who were uncertain whether they would be allowed to enjoy the future fruits of their investments. Therefore, investment declined, provoking a slump in 1938 and generally prolonging the Depression.
Some have argued that the prolonged period of high unemployment and anemic growth the United States has experienced in the wake of the 2007-9 “Great Recession” is also due to regime uncertainty. They blame the Obama Administration and Democrats in Congress for fostering a regulatory environment hostile to business.
But if that explanation of poor growth in 2009-10 is right, how can it explain poor growth in 2011-12, after Republicans took the House of Representatives? Under divided government, regime uncertainty is nil. The 2011-12 Congress is on pace to be the least productive since 1947 in terms of passing laws. Libertarians say gridlock is good — well, we definitely have gridlock, so where are all the benefits?
Here’s the evidence:
The chart shows inflation-corrected personal income, excluding transfers from the government. Real personal income today still stands below its level at the start of 2008. If these figures were divided by population, they would look worse still. There has been a very weak recovery.
Why should we not blame House Republicans as much as Democrats and Obama for the bad economy? Advocates of the regime uncertainty thesis might say that Obamacare is causing sufficient uncertainty to drag down the economy, because no one is completely sure how it will be implemented and what the consequences will be. But there’s little evidence for this claim. When the Supreme Court surprisingly upheld the law, the reaction in the broader market, excluding health-care stocks, was muted.
What about other regulations being issued by administrative agencies? Even though divided government reduces statute production, it does not reduce bureaucratic rule-making. Indeed, divided government helps untether bureaucracies from legislative oversight, as political-science studies of “bureaucratic drift” have theorized and, in some cases, demonstrated empirically. But if we go this route, then we are back to explaining why unified government in 2009-10 supposedly created regime uncertainty. At a minimum, we are left with the inference that libertarians have vastly overrated the benefits of legislative gridlock.
In summary, whatever merits the regime uncertainty thesis has in explaining the length of the Great Depression (and they may be significant), it cannot explain the stagnant recovery of 2009-2012.