Evidence for Regime Uncertainty

This weeks Econtalk was with John Taylor of Sanford University.The subject, the State of the Economy. Considering the economy is in the tank, Russ Roberts and Taylor talk of things that are effecting the market. Naturally, Regime Uncertainty was brought up as why the economy is lagging.

That cycle is really explained by the investment, natural dynamics of the economy. You superimpose onto that the various action to stimulus packages, Cash for Clunkers, and you see the little blips and ripples, but it’s the main trajectory of the economy recovering, and now the recovery is slowing. Similar pattern in the Great Depression: enormous decrease in private investment, and then it stagnated in the face of what some call regime uncertainty–all the chaos of the rule changes and policy changes. Do we see any evidence of an uncertainty about the future on the part of private investment or has it pretty much recovered steadily? Private investment pause has occurred as you’ve gone from 5.6% to 2.7% for the first quarter. You see investment rising and then slowing down–part of my story, investment driven. Reasons for that not completely clear. I emphasize the same things you mention during the Great Depression, uncertainty about policy, debt increasing in ways we haven’t seen before. Projected by the CBO to be 947% of GDP if we don’t make a correction. Inconsistency, that can’t stand. That’s not a forecast–it’s a warning flag. Either current policy has to change or some other kind of disaster that resolves the inconsistency.

So naturally, liberals in the comment section can’t let those assault of the polices of Obama and the Liberal GOD, FDR stand. They ask for evidence of uncertainty. As Taylor asked (bolded above) has private investment declined or has it remained steady? Simple enough question to ask and answer. As shown by the graph below, private investment has fallen during the current recession, by over 200%!!!

Fixed Private Investment, % change

That’s a pretty big decline. considering the costs of Obamacare, Dodd-Frank reform bill, EPA actions, the reaction in the wake of the BP spill and looming tax increases…it’s not hard to understand why companies are not investing.

Now this isn’t proof positive. Anyone that knows me and my writing, knows that I’m not one to think anything conclusively proves anything. And in an effort of intellectual honesty, I’m a critic of Fed data. I believe the Fed, and any government data are biased low. In this case, it makes the data even more dreary, if the Commerce dept is low balling FPI like they do Unemployment, the situation is even worse than ever.