David R. Henderson  

Jerry Jordan on Regime Uncertainty

Did Health Care Reform Cure Me... Two from the New York Times...

In this five-minute interview with Karen Gibbs, Jerry Jordan lays out nicely the "regime uncertainty" (Bob Higgs's term) that we face. That is, business people, and the rest of us, for that matter, don't know what future tax rates or tax rules will be, don't have a clear understanding of the health care rules (as Pelosi said, first we must pass the bill and then find out what's in it), etc. Jordan also points out that consumption as a percent of GDP is very high, as is govt. spending on goods and services, leaving little room for investment spending.

HT to Dan Klein.

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CATEGORIES: Fiscal Policy , Regulation

COMMENTS (10 to date)
Paul writes:

I'm still waiting for that big risk premium in asset prices...

david writes:

The Chinese seem willing to do the saving for us. I'm sure we're not so provincial in EconLib as to pretend that trade should be free only in some markets, so this isn't a worry.

If investors face uncertainty, they should be hedging it away. This is what the market does, doesn't it? Regime uncertainty seems like a poor explanation next to the simpler one of excess capacity and insufficient demand.

Randy writes:

"...and the rest of us, for that matter..."

Good point. I hadn't really thought about it before, but these things really are weighing on my budget. I have no idea how much the healthcare bill is going to cost me, but I know its going to cost me. I don't know how much my taxes will go up, but I know they will go up. I know that tuition rates are going up and that tuition assistance is going down. I know that employers are still considering all employment decisions very carefully and I have no idea if all the fallout that will impact me is over. So I hold onto savings and wait until I can get a firm handle on what the budget is going to look like over the next few years. Is this also a case of "insufficient demand"? Certainly. But there are reasons for it.

Alex writes:

A great place to study "regime uncertainty" right now would be the Apple app store approval process. How do Apple's changing rules affect developers.

Lori writes:

If 'regime uncertainty' is a major source of hesitancy in business, I would read it as a symptom of a world in which business models are built largely around 'gaming the system.'

Randy writes:

Lori, I agree. Another way to look at it is that, given the modern political environment, it isn't possible to run a business without playing the game.

David R. Henderson writes:

david asks:
"If investors face uncertainty, they should be hedging it away. This is what the market does, doesn't it?"
Answer: no. Jordan addresses this in the short interview, making the explicit distinction between risk and uncertainty. He's using those terms the same way Frank Knight used them in his 1921 book, Risk, Uncertainty, and Profit. Risk has to do with known probabilities of specific outcomes. That's the kind of thing insurance companies deal with. Uncertainty has to do with unknown probabilities and even possibly an unknown set of possible outcomes. Risk can be hedged against; uncertainty is much harder, some would say impossible, to hedge against.

biL. writes:

Nice interview, but the link you put in is incorrect.
This one works (as of now):


Lori writes:

Randy, that is another way to look at it. It's a chicken-egg conundrum. My bias is to see it as government made to business' specifications. Wall Street says 'jump,' Washington asks 'how high?'

david writes:

@David R. Henderson

Suffice it to say that a prevalence of Knightian uncertainty militates against the vast majority of neoclassical economics.

We cannot abandon rational expectations on one hand and then invoke it on the other to reach the desired policy conclusions. Either consumers are rational, or they are not; claiming them as incapable of being rational only when their being so leads to policy we don't like is transparently illogical.

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