Austrian Economics Wiki

Regime uncertainty is a concept developed by Robert Higgs, that describes uncertainty of investors in their private property rights in their capital and the income it yields because of government action.[1]

Higgs uses this concept to explain the seriousness and prolonged duration of some economic crises, like the Great Depression or the current 'Great Recession'.[2]

Effect on investment[]

Investment not only entails 'irreversibilities' or sunk costs, but can be delayed. Investment spending may be highly sensitive to risk in various forms, including uncertainty over future tax and regulatory policy. A major cost of political and economic instability may be its depressing effect on investment.

This uncertainty can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. The security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.[1]

Historical examples[]

The Great Depression[]

During the Great Depression, private investment has fallen significantly. Gross private investment plunged from almost 16 percent of GDP in 1929 to less than 2 percent in 1932; recovered to 13 percent in 1937 before falling again in the recession of 1938; and as late as 1941 stood at only 14 percent. During the war years, private investment ratios ranged from 3 to 6 percent. From 1946 through 1950 they ranged from 14 to 19 percent and averaged 16 percent — the same as in 1929. In 1929, when gross private investment was $16.2 billion, net investment was $8.3 billion. Net investment fell precipitously to $2.3 billion in 1930 and then became negative during each of the following five years. For the eleven-year period of 1930 to 1940, net private investment totaled minus $3.1 billion. Only in 1941 did net private investment ($9.7 billion) exceed the 1929 amount. During the 1930s, private investment remained at depths never plumbed in any other decade for which data exist.

Given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, the political climate could hardly have failed to discourage some investors from making long-term commitments. There also exists a great deal of direct evidence that investors felt extraordinarily uncertain about the future of the property-rights regime between 1935 and 1941. Historians have recorded countless statements by contemporaries to that effect; in the years just before the war most business executives expected substantial weakening of private property rights ranging up to "complete economic dictatorship". The possibility that the United States might undergo an extreme regime shift seemed to many investors in the late 1930s and early 1940s not only possible but likely.[1][3]

Main article: Great Depression

The Great Recession[]

The December 2009 regular survey on Small Business Economic Trends by the NFIB shows that capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey reveals that only 7% of small businesses see the next few months as a good time to expand. Only 8% of small businesses report job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007. The weak economy is the most prevalent reason given for why the next few months is "not a good time" to expand, but "political climate" is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors state: "the other major concern is the level of uncertainty being created by government, the usually source of uncertainty for the economy. The 'turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here."[4]

Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier. Job openings are at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses is slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment is lower now than any time on record, dating back to 1967.

According to the Michigan Survey of Consumers, 37% of households plan to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remains higher than any previous year back to 1960.[5] In 2009, companies were holding more cash — and a greater percentage of assets in cash — than at any time in the past 40 years.[6][7]

The chairman of China’s sovereign wealth fund said in late 2008 that China had no plans for further investments in Western financial institutions. "Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have." Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. “If it is changing every week, how can you expect me to have confidence?” he asked.[8][9]

The chairman of the Business Roundtable, an association of top corporate executives that has been President Obama's closest ally in the business community, accused the president and Democratic lawmakers in June, 2010, of creating an "increasingly hostile environment for investment and job creation." ... "By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses."[10]

Main article: The Great Recession


  1. 1.0 1.1 1.2 Robert Higgs. "Regime Uncertainty - Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (pdf), The Independent Review, Vol, I, No. 4, Spring 1997. Referenced 2010-08-15.
  2. Robert Higgs. "Recession and Recovery - Six Fundamental Errors of the Current Orthodoxy" (pdf), The Independent Review, v. 14, n. 3, Winter 2010. Referenced 2010-08-15.
  3. Robert Higgs. "Regime Uncertainty in the 1930s: A New Deal Insider’s Account", The Beacon, blog of the The Independent Institute, Jun 29, 2009. Referenced 2010-08-15.
  4. William C. Dunkelberg, Holly Wade. "NFIB Small Business Economic Trends" (pdf), December 2009. Referenced 2010-08-15.
  5. Gary S. Becker, Steven J. Davis and Kevin M. Murphy. "Uncertainty and the Slow Recovery", The Wall Street Journal, January 4, 2010. Referenced 2010-08-15.
  6. Tom McGinty and Cari Tuna. "Jittery Companies Stash Cash", The Wall Street Journal, November 3, 2009. Referenced 2010-08-15.
  7. Robert Higgs. "More Evidence of Current Regime Uncertainty?", The Beacon, blog of the The Independent Institute, Nov 7, 2009. Referenced 2010-08-15.
  8. Keith Bradsher. "China Shuns Investments in West’s Finance Sector", The New York Times, published: December 3, 2008. Referenced 2010-08-15.
  9. Robert Higgs. "Regime Uncertainty in 1937 and 2008", The Beacon, blog of the The Independent Institute, Dec 6, 2008. Referenced 2010-08-15.
  10. Lori Montgomery. "Business leaders say Obama's economic policies stifle growth", Washington Post, June 23, 2010. Referenced 2010-08-15.

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