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Tuesday, August 30, 2011

Regime Uncertainty

"I know that uncertainty about future tax rates was as great in 2006, when the unemployment rate was 4.5%, as it is today when unemployment is 9%. So was uncertainty about what the government was going to do to solve its long-run health-care spending problems, deal with global warming, deal with dependence on foreign energy sources, and regulate finance. Yet--as Allan Meltzer surely knows--investors weren't holding cash in 2006." -- Brad Delong

4 comments:

  1. I would first ask how it is that Professor DeLong could know that uncertainty among business was as great in 2006 as it is today.

    I would also think that a period in which there has been several last minute near-government shutdowns over the debt ceiling and an explosion of debate over whether to raise taxes, cut spending, some hybrid of the two etc. would significantly increase the uncertainty over future tax rates as compared to 2006, when these things were not prevalent.

    I mean the last debt ceiling deadline by which Congress needed to act I think it was only until the very night before that a resolution got passed. Certainly it seems reasonable to imagine if the operation and ability of government to act itself is shrouded in such nail biting suspense and uncertainty, the expectation of future tax rates might edge up a bit too in the direction of uncertainty.

    I also would imagine there is much greater uncertainty regarding a regime that has nationalized the mortgage, auto, and banking industry than one which had not.

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  2. Sumner has may favorite post regarding the whole regime uncertainty meme.

    http://www.themoneyillusion.com/?p=9247

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  3. "I would first ask how it is that Professor DeLong could know that uncertainty among business was as great in 2006 as it is today."

    Historical judgment?

    But thisguy's link shows the nonsense behing the "regime uncertainty" meme better than anything with which I could respond.

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  4. The link you provided suggests that regime uncertainty concerns "[policies] that create business cycles."

    Robert Higgs defines regime uncertainty as "a partial explanation of the economy’s failure to recover quickly and fully."

    As such the misdiagnosis by Summer's blog post would at least seem to suggest that if one were going to disregard the concept of regime uncertainty as nonsense, it would be prudent to have the basis of your dismissal founded on ideas that address it accurately.

    For more and a link to a debunking of the alleged debunking of Regime Uncertainty see Higgs here:

    http://blog.independent.org/2011/09/05/regime-uncertainty-pirrong-debunks-the-keynesian-debunking/

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