Don’t Just Do Something, Stand There

Richard Posner comments on something I’ve been pointing out around here for some time—that the uncertainty that’s being created by the Congress is harmful to our economy:

But Krugman’s passionate support for the Administration’s health-care program suggests that he has not absorbed one of the central elements of Keynes’s theory, which is the role of uncertainty in depressing investment spending and, both by depressing investment and by increasing passive savings, in depressing consumption spending as well. (I elaborate on the role of uncertainty in depressions in a forthcoming article in Challenge magazine, entitled “Uncertainty Aversion and Economic Depressions: Analysis and Implications”). When uncertainty in the sense of risk that cannot be calculated rises, it tends to make businessmen and consumers alike freeze–they hoard money rather than spend it, whether spending on investment in the case of businessmen or sending on consumption in the case of consumers. That is the prudent response to increased uncertainty, because by holding off on spending the businessman or the consumer buys time to gather information about his options, or simply wait for the situation to clarify itself, and also accumulates cash with which to deal with emergencies to which an uncertain economic environment can give rise. We see these tendencies at work today, in the huge excess reserves accumulated by the banks, the decline in new bank loans, the massive layoffs by employers uncertain about the demand for the goods and services they produce, the decline in business deals, and the sharp increase in the personal savings rate.

Hat tip: Glenn Reynolds

There’s plenty of reason for uncertainty. Not knowing how much an employee is going to cost discourages employers from taking on employees, not knowing how much of their income they’ll be allowed to retain discourages both employers and consumers, and not knowing what the economic climate will be in the future makes bankers want to hold on for dear life. It doesn’t help that former chairmen of NASDAQ are being convicted of fraud on an unfathomable scale, we can’t trust the ratings of the credit ratings agencies, and the smartest and brightest in the financial world quite clearly are anything but.

Some kinds of certainty can be harmful, too. For example, when banks, auto companies, investment banks, insurance companies are so sure they can’t screw up badly enough that they’ll be allowed to fail, it causes them to take excessive risks. That’s called “moral hazard”.

Besides its manifestly undemocratic character one of my biggest gripe about technocracy as an organizing principle is its underlying assumption that whatever the commissars are trying to control is in continuing approximation, that fine-tuning is always possible.

That’s wrong. Failing to take into account the necessity for some degree of certainty can bring the whole shebang crashing around our ears.

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