Yes Virginia, Regime Uncertainty Is a Big Deal

by Pejman Yousefzadeh on April 3, 2011

On today’s “This Week” program, Torie Clarke’s stated that employment and economic growth are not picking up as fast as we would like them to pick up because of uncertainty regarding the regulatory situation. Paul Krugman responded by pronouncing concerns regarding regulatory or regime uncertainty as “a myth.” Quite properly, Don Boudreaux is not having any of Krugman’s blasé dismissal of Clarke’s hypothesis:

Why are expectations and uncertainties about future consumer demand so obviously relevant while expectations and uncertainties about future government policies so obviously irrelevant?  I know of no reason – not even one in Keynesian economics – for Krugman’s apparent conclusion along these lines.

More generally, why are “animal spirits” so cockeyed?  If animal spirits can cause sudden, economy-screeching-to-a-halt pessimism among investors – pessimism explainable by no phenomena more observable than animal spirits – why cannot the spirits of animals (1) be spooked by what these spirits, correctly or not, predict to be unpredictable or enterprise-quenching government policies; and (2) just as mysteriously as they become pessimistic about the future for no apparent reason, also become optimistic about the future in the absence of any observable reason for optimism?

Of course, Krugman will offer no answers to these entirely sensible queries. He will simply denounce the likes of Don Boudreaux as stupid and/or venal, and declare that no one who believes as Boudreaux does can possibly want what is best for the economy. What’s more, this non-response will be more than enough to satisfy many of Krugman’s most ardent fans. You cannot expect much better from the epistemically closed.

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