Imagine what it is like right now to plan for the future as a business owner. The owner doesn’t know if he or she will even be allowed to be open for business two weeks from now, or a month from now.
Indeed, politicians and their unelected (and unaccountable) health advisors keep insisting that they might elect to close down businesses or impose new restrictions on large portions of the economy at any time.
The uncertainly associated with all this is immense. Consider some examples: thanks to moratoria on evictions in many cities, renters who can’t pay rent — thanks in part to government-forced lockdowns — can stay in their rental units indefinitely. Landlords have no idea when they will next be able to actually collect revenues again from paying customers. Meanwhile, “elective” healthcare services like eye care and dental care have been deemed “unessential” by bureaucrats and governors in many states. These offices will be closed and collecting little-to-no revenue. Restaurants, of course, aren’t permitted to do business beyond take-out service in places with lockdowns. (Although these restaurants still have to pay rent for their dining rooms.)
Even beyond the short term, business owners have no way to plan. If a business owner is allowed to actually conduct business during the summertime this year, it may still be that politicians will later elect to shut businesses whenever it is decided the risk of spreading viruses demands another “shutdown.” We’re even told this could go on for years.
One would have to be impressively naive and deeply ignorant about how businesses work to think that commerce, investment, and entrepreneurship would just continue as usual under these conditions. In reality, the threat of a government-mandated lockdown hanging over the heads of countless business owners and entrepreneurs will mean there will be far less willingness and ability to invest in businesses, offer products and services, or employ people.
The Problem with Regime Uncertainty
This problem has a name: “regime uncertainty.” Economic historian Robert Higgs defines it as “a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights.”
Broadly understood, of course, “investing” isn’t just a matter of people putting money in mutual funds or buying municipal bonds. “Investors” are people who buy and manage apartment buildings. Investors include doctors and dentists who invest enormous amounts of time and money into a private healthcare office. Investors are people who put their life savings into starting a new restaurant or tavern.
As Higgs has shown, when the legal environment and property rights can be so radically altered so quickly, economic growth slows and economic depressions are drawn out and made worse.
Specifically, Higgs has illustrated that regime uncertainty was a significant factor in making the Great Depression such a long and unpleasant affair. The Roosevelt administration’s numerous and enormous changes to the legal regime — through new taxes, regulations, and labor laws — made the Depression far worse than it needed to be. Higgs explains how thanks to a multitude of state interventions during the Depression:
the Roosevelt administration “abruptly and dramatically altered the institutional framework within which private business decisions were made, not just once but several times” … with the result that regime uncertainty was heightened and recovery substantially retarded.
As one investor at the time observed:
Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or nonunion?… Are we to have inflation or deflation, more government spending or less?… Are new restrictions to be placed on capital, new limits on profits?… It is impossible to even guess at the answers.
The result was “the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in the minds of investors.”
The recovery was slowed, of course, because investing, building businesses, and engaging in innovation became far riskier and unpredictable thanks to the chances that governments might once again impose draconian new restrictions on businesses. This changed the calculus completely.
Regime Uncertainty vs. Regular Uncertainty
Admittedly, even in a laissez-faire policy regime, it is more difficult for investors to calculate risk and future conditions when consumers and employees become far more fearful about an outbreak of disease. But, as Brendan Brown notes, private firms are likely to adjust quickly to attempt to address the needs of consumers who may now demand less crowded rooms and more “precautions.” Uncertainty is always a problem for investors and entrepreneurs. But regime uncertainty is worse because it limits the ability of property owners to adapt. Regime uncertainty also tends to be done in a haphazard and arbitrary way across a multitude of markets.
Consumers will still drive some owners out of business because consumers constantly change their demands and values. On a whime, consumers may decide to spend their money elsewhere. But in an unhampered market, businesses and investors can learn from watching others, plan for the future in their specific markets, and adjust accordingly. Unlike governments in the business of ruling by decree, investors and business owners seek to serve as wide a swath of the public as possible.
But this sort of flexibility is destroyed when governments impose lockdowns. There is no learning and no adjusting. Statewide lockdowns don’t take into account diversity in health, demographics, and market conditions. Instead economic activity is halted in a one-size-fits-all fashion based on what politicians — not consumers, mind you — deem to be “essential.” Even worse, changes can be be quickly imposed by a small handful of policymakers without public debate or consultation. There is no time for businesses to adjust.
This is far worse than any ordinary market shock.
Wall Street vs. Main Street, Again
Ultimately, this process will also accelerate wealth inequality by contributing to the further financialization of the economy. Thanks to the maximization of the “too big to fail” narrative at the Fed and in Washington, the financial sector continues to grow as the safe go-to place for investment. Why invest in community businesses and small medical firms when it is much lower risk to invest in a bank or a financial firm that’s sure to be bailed out? The constant threat of forced shutdowns makes this risk assessment even more stark: non-financial firms can be shut down and destroyed at any time. But Wall Street will be bailed out.
Since the financial sector employs a relatively small number of people, this shutdown-bailout dichotomy means employment will suffer. It means the working class and the middle class will suffer. It means people with sizable Wall Street portfolios will benefit while Main Street businesses go bankrupt.
But even Wall Street will eventually suffer because an economy cannot survive on bailouts forever. At some point, people have to produce actual goods and services. This requires capital. It requires planning. It requires many things that arbitrary shutdowns make far more difficult to find.
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