WEBVTT NOTE Regime Uncertainty - Then and Now 1 00:00:00.000 --> 00:00:06.600 All right, our next speaker, senior fellow in political economy at the Independent Institute, 2 00:00:06.600 --> 00:00:10.280 edits their quarterly journal called the Independent Review. 3 00:00:10.280 --> 00:00:16.060 He is the 2007 winner of the Schlarbaum Prize for Lifetime Achievement and the Cause of 4 00:00:16.060 --> 00:00:17.060 Liberty. 5 00:00:17.060 --> 00:00:24.700 He's the author of a number of books, and here is one of his right there, Against La 6 00:00:24.700 --> 00:00:30.180 Leviathan, Depression, War and the Cold War, and of course, as I always mention when I 7 00:00:30.180 --> 00:00:36.660 introduce him, a book that is near and dear to my heart because Murray Rothbard has signed 8 00:00:36.660 --> 00:00:42.640 it as the text for U.S. Economic History, a book called Crisis on Leviathan, which we 9 00:00:42.640 --> 00:00:49.200 have on sale out front. He's going to be talking about regime uncertainty then and now. Please 10 00:00:49.200 --> 00:01:02.560 Please help me welcome Robert Higgs. 11 00:01:02.560 --> 00:01:10.840 Meaning no offense to my colleagues, I'm going to put this little book up here. 12 00:01:10.840 --> 00:01:15.880 I was going to refer to it, but I didn't know I'd have a stand for it. 13 00:01:15.880 --> 00:01:18.680 So there it is. 14 00:01:18.680 --> 00:01:26.240 This is a book published originally in 2006 by Oxford University Press in a font that's 15 00:01:26.240 --> 00:01:33.140 a little hard to read, I think, and it was republished in 2009 by the Independent Institute 16 00:01:33.140 --> 00:01:42.120 and reset with a larger font and a much cheaper price. So this is the one I recommend if you 17 00:01:42.120 --> 00:01:48.420 have an interest in it. It's called Depression War and Cold War. And the reason I'm referring 18 00:01:48.420 --> 00:02:14.420 The work I've done on regime uncertainty, which is a term I devised as it were, at least as I define it, was first dealt with in a published article in 1997, an article I put in the independent review, which is easy for me, I'm the editor. 19 00:02:14.420 --> 00:02:22.180 So, even though I'm normally my own worst critic, I let that one slip through. 20 00:02:22.180 --> 00:02:28.700 And the article is called Regime Uncertainty, Why the Great Depression Lasted So Long and 21 00:02:28.700 --> 00:02:33.060 Why Prosperity Resumed After the War. 22 00:02:33.060 --> 00:02:40.340 And that, with a little revision, becomes the first chapter in this book. 23 00:02:40.340 --> 00:02:48.440 But it goes on because that was one of a number of papers I was writing in those days and 24 00:02:48.440 --> 00:02:53.140 they all can be seen as sequels to my book Crisis and Leviathan which was published in 25 00:02:53.140 --> 00:03:00.780 1987. From that book I developed a very keen interest in the war economy and in particular 26 00:03:00.780 --> 00:03:09.280 how the war economy of World War II related to the preceding depression and the following 27 00:03:09.280 --> 00:03:12.120 Prosperity in the United States. 28 00:03:12.120 --> 00:03:18.740 And being an economic historian, I knew what the economic historians and economists almost 29 00:03:18.740 --> 00:03:26.680 unanimously had been saying about that relationship for decades, which was, as the saying goes, 30 00:03:26.680 --> 00:03:31.040 the war got the economy out of the depression. 31 00:03:31.040 --> 00:03:37.240 Well, I was a good enough historian, even though I'm an amateur, to know that there 32 00:03:37.240 --> 00:03:44.160 There are some ways in which that just wasn't so, and appreciating that I began to do research 33 00:03:44.160 --> 00:03:50.480 into that area that led me to write a number of articles, and the first five chapters of 34 00:03:50.480 --> 00:03:55.720 this book pull the most important ones together. I think they do hang together pretty well 35 00:03:55.720 --> 00:04:04.720 to try to explain why the depression lasted as long as it did. I call that the great duration. 36 00:04:04.720 --> 00:04:13.800 Why the war economy was not what people think it was, that is a time of prosperity, and 37 00:04:13.800 --> 00:04:21.520 yet why the economy did enjoy real prosperity as soon as the war ended and resources were 38 00:04:21.520 --> 00:04:28.120 reconverted to civilian use overwhelmingly in 1945 and six mainly. 39 00:04:28.120 --> 00:04:39.840 So the whole period from 1935 or so to 1948 is one that I've been at pains to understand 40 00:04:39.840 --> 00:04:44.600 for a long time because I think it's been generally misunderstood almost by the entire 41 00:04:44.600 --> 00:04:47.040 economics profession. 42 00:04:47.040 --> 00:04:53.360 And so I feel like, you know, that Johnny, whose mother saw him marching by with the 43 00:04:53.360 --> 00:05:02.360 the Troop and declared why they're all out of step, but Johnny. I'm the Johnny here. 44 00:05:02.360 --> 00:05:08.240 Although I have to say I think I've brought a few people over eventually and I'm hoping 45 00:05:08.240 --> 00:05:18.040 to bring some more over before I'm finished. I've argued since the mid-90s that one of 46 00:05:18.040 --> 00:05:22.600 the reasons, and I'm not arguing it's the only reason, one of the reasons why the depression 47 00:05:22.600 --> 00:05:33.600 and Persisted So Long in the 1930s was because the private property rights of investors became 48 00:05:33.600 --> 00:05:40.000 uncertain and as a result of their fears about what might happen to their property rights 49 00:05:40.000 --> 00:05:45.280 in the future, both their ability to control their capital and their ability to accrue 50 00:05:45.280 --> 00:05:52.480 income generated by that capital, they became very reluctant to make new investments, especially 51 00:05:52.480 --> 00:06:01.040 When you're going to lay out current resources to acquire an asset which will pay back your 52 00:06:01.040 --> 00:06:07.640 investment only over a period of 10 or 15 or 20 years, you're making a bet, as it were, 53 00:06:07.640 --> 00:06:10.440 on conditions over a very long time in the future. 54 00:06:10.440 --> 00:06:15.720 And the longer the time you're betting on, the more important it becomes that you not 55 00:06:15.720 --> 00:06:23.000 not be afraid of what the government might do to attenuate your private property rights 56 00:06:23.000 --> 00:06:27.560 along the way so that the investment would never pay itself back fully and you would 57 00:06:27.560 --> 00:06:30.060 simply have lost money by making it. 58 00:06:30.060 --> 00:06:37.120 So it's a very common result in investment theory and options theory and a lot of ordinary 59 00:06:37.120 --> 00:06:44.900 sub-fields of economics that investors tend to become paralyzed or they become very careful 60 00:06:44.900 --> 00:06:50.980 and Reluctant to Make Investments, the more uncertain prospects are. 61 00:06:50.980 --> 00:06:55.720 Now that's a long, that's kind of an axiom of finance theory going back for centuries 62 00:06:55.720 --> 00:07:04.220 up, I suppose, but what I did in the concept of regime uncertainty was to think about this 63 00:07:04.220 --> 00:07:07.280 relevant uncertainty here rather differently. 64 00:07:07.280 --> 00:07:13.420 Economists had talked about changing regimes of various sorts, but my concept of the regime 65 00:07:13.420 --> 00:07:18.200 Regime here has to do with the security of private property rights. That's what it's 66 00:07:18.200 --> 00:07:27.860 all about. And that is not simply a matter of what the law says. And one of the things 67 00:07:27.860 --> 00:07:33.020 I've been at pains to try to make people understand over the years is that when I speak 68 00:07:33.020 --> 00:07:41.780 of regime uncertainty, I'm not speaking of something that is equivalent to policy uncertainty. 69 00:07:41.780 --> 00:07:49.540 That's part of it, sometimes an important part. It's not the only part, however. And so what 70 00:07:49.540 --> 00:08:04.020 I'd like to do is recite for you how I described in my first article what I mean by regime 71 00:08:04.020 --> 00:08:10.900 uncertainty. To narrow the concept of business confidence, which is again an old idea, I 72 00:08:10.900 --> 00:08:16.580 I adopted the idea that business people may be more or less uncertain about the regime, 73 00:08:16.580 --> 00:08:21.740 by which I mean distress that investors' private property rights in their capital and 74 00:08:21.740 --> 00:08:27.360 the income it yields may be attenuated by future government actions. 75 00:08:27.360 --> 00:08:35.780 Such attenuations can arise from many sources, ranging from simple tax rate increases, to 76 00:08:35.780 --> 00:08:43.140 to the imposition of new kinds of taxes, to outright confiscation of private property. 77 00:08:43.140 --> 00:08:49.660 Many intermediate threats can arise from various sorts of regulation, for instance, regulation 78 00:08:49.660 --> 00:08:57.780 of securities markets, labor markets and product markets. And in any event, and this is important, 79 00:08:57.780 --> 00:09:03.940 the security of private property rights rests not so much on the letter of the law as on 80 00:09:03.940 --> 00:09:11.820 From the Character of the Government that Enforces or Threatens Presumptive Rights 81 00:09:11.820 --> 00:09:21.020 As extreme as the legal and regulatory changes of the 1930s were, the real source of regime 82 00:09:21.020 --> 00:09:29.380 uncertainty lay less in those changes than in the character of the people in charge of 83 00:09:29.380 --> 00:09:32.760 the U.S. government at that time. 84 00:09:32.760 --> 00:09:39.720 The real reason for regime uncertainty in recent years lies not so much in all the outrageous 85 00:09:39.720 --> 00:09:44.520 actions the government has taken, including those Bill just described actions taken by 86 00:09:44.520 --> 00:09:54.140 the Fed, the TARP program, the GM Chrysler bailouts, the AIG takeover, and so forth. 87 00:09:54.140 --> 00:09:56.440 Those are bad enough on their face. 88 00:09:56.440 --> 00:10:03.240 But I think in addition to that we have to understand that the Obama administration is 89 00:10:03.240 --> 00:10:06.920 a scary thing for most investors. 90 00:10:06.920 --> 00:10:11.300 Not if you're one of their crony capitalists on Wall Street, not if you're a partner at 91 00:10:11.300 --> 00:10:17.240 Goldman, that doesn't scare you at all, that allows you to sleep soundly at night. 92 00:10:17.240 --> 00:10:22.900 But if you're not in that privileged circle of crony capitalists, you have very good reason 93 00:10:22.900 --> 00:10:30.920 to be afraid of the kind of people in charge of administering, enforcing, or violating 94 00:10:30.920 --> 00:10:35.240 the law from positions of power in the current administration. 95 00:10:35.240 --> 00:10:41.240 So even though good friends of mine have urged me over the years to give up the name regime 96 00:10:41.240 --> 00:10:46.720 uncertainty and substitute something more immediately comprehensible such as policy 97 00:10:46.720 --> 00:10:51.040 uncertainty, I've refused to do that because that is not what I mean. 98 00:10:51.040 --> 00:11:00.640 is bigger than that, more robust than that, and in a sense scarier than that as well. 99 00:11:00.640 --> 00:11:09.140 Now this kind of uncertainty began to emerge around 1935. 100 00:11:09.140 --> 00:11:14.660 Before that, in the so-called first New Deal, the Roosevelt administration had done a lot 101 00:11:14.660 --> 00:11:21.660 and a lot of radical things, but it had continually worked with business interests in a lot of ways. 102 00:11:21.660 --> 00:11:33.660 Starting around 1935 and in some ways slightly before that, President Roosevelt decided to deal with the threats he faced in the coming election from very radical challengers. 103 00:11:33.660 --> 00:11:43.660 People like Huey Long, Upton Sinclair, Father Coughlin, just a host of crackpots that were gaining large followings in this country. 104 00:11:43.660 --> 00:11:49.420 The economic troubles always bring the crackpots out of the woodwork and allow them to get 105 00:11:49.420 --> 00:11:50.420 followings. 106 00:11:50.420 --> 00:11:52.520 And that certainly happened in the 1930s. 107 00:11:52.520 --> 00:11:58.620 Every kind of crackpot imaginable had a plan for getting the economy out of the depression. 108 00:11:58.620 --> 00:12:01.260 And Roosevelt feared these people. 109 00:12:01.260 --> 00:12:03.220 He had good reason to fear them. 110 00:12:03.220 --> 00:12:09.340 Someone like Huey Long, our pride and joy here in the state of Louisiana, every man 111 00:12:09.340 --> 00:12:17.260 When a king, every woman a queen, but nobody wears a crown. I love that. But other people 112 00:12:17.260 --> 00:12:23.300 loved it too at the time. That's why some people felt the need to shoot Huey dead. So 113 00:12:23.300 --> 00:12:28.900 at all events, Roosevelt was quite afraid of Huey while he lived, and even after Huey 114 00:12:28.900 --> 00:12:35.220 was out of the way, he was afraid of other such crackpots. And so he felt that he could, 115 00:12:35.220 --> 00:12:41.500 as it were, cut them off at the pass by radicalizing himself, by shifting from this first New 116 00:12:41.500 --> 00:12:49.180 Deal to the so-called social New Deal, whose landmark statutes were the Social Security 117 00:12:49.180 --> 00:12:55.960 Act and the Wagner Act, the National Labor Relations Act, which as it were unleashed 118 00:12:55.960 --> 00:13:03.440 the labor unions of the United States and made them very frightening to investors, frightening 119 00:13:03.440 --> 00:13:10.180 and Forceful Members of the New Deal Coalition from that time on until after World War II. 120 00:13:10.180 --> 00:13:17.260 So Roosevelt's radicalization of himself in order to be re-elected in 1936, it worked 121 00:13:17.260 --> 00:13:18.260 like a charm. 122 00:13:18.260 --> 00:13:25.200 He was re-elected by a huge landslide and I think he took so much pleasure in how well 123 00:13:25.200 --> 00:13:29.680 this radicalization of himself had worked that he stuck with it. 124 00:13:29.680 --> 00:13:35.240 At the same time, however, as Raymond Moly describes beautifully in his book after seven 125 00:13:35.240 --> 00:13:47.000 years, Roosevelt became increasingly maniacal and paranoid. He more and more wanted to have 126 00:13:47.000 --> 00:13:53.100 all the power over everything he could get, and he more and more became afraid that everything 127 00:13:53.100 --> 00:13:59.860 The only thing that went wrong was the product of machinations of his enemies, particularly 128 00:13:59.860 --> 00:14:07.260 the big business interests that continued to oppose him, conservative newspapers and 129 00:14:07.260 --> 00:14:08.860 people of that sort. 130 00:14:08.860 --> 00:14:14.980 So it became harder and harder for moderates like Ray Moly, I mean if you can think of 131 00:14:14.980 --> 00:14:21.000 him as a moderate, he really was compared to the people that gained Roosevelt's major 132 00:14:21.000 --> 00:14:38.000 And if you pay your attention from 1935 on, people like Ben Cohen and Cochran and William O. Douglas and Jim Landis and Felix Frankfurter and Brandeis, they were the leaders of this crowd. 133 00:14:38.000 --> 00:14:50.000 They were sometimes known as the Harvard Boys because of Frankfurter's key role in guiding them and goading them and placing them in key positions inside the federal government. 134 00:14:50.000 --> 00:14:57.360 They became the main advisors in the so-called second New Deal, and its second New Deal just scared investors to death. 135 00:14:57.360 --> 00:15:01.680 And as a result, long-term investment never came close to recovering. 136 00:15:01.680 --> 00:15:10.080 In fact, for the entire decade, or more than a decade, the 11 years from 1930 through 1940 inclusive, 137 00:15:10.080 --> 00:15:16.800 if you add up all the investment in the United States, it comes to a negative number. 138 00:15:16.800 --> 00:15:23.280 That is, depreciation of capital stock in that 11-year period exceeded the amount spent 139 00:15:23.280 --> 00:15:25.080 for new investment. 140 00:15:25.080 --> 00:15:30.440 So here we had a decade that was a lost decade in any way you look at it. 141 00:15:30.440 --> 00:15:33.660 There was no real economic growth. 142 00:15:33.660 --> 00:15:38.760 We ended the decade with still a great high level of unemployment. 143 00:15:38.760 --> 00:15:44.960 And we hadn't in any way increased the economy's capacity to produce because the capital stock 144 00:15:44.960 --> 00:15:45.960 had not been increased. 145 00:15:45.960 --> 00:15:51.960 This is the only decade in our history that has that remarkable aspect to it. 146 00:15:51.960 --> 00:16:00.960 Now, not everybody likes my idea of regime uncertainty, and in fact, most mainstream economists dismiss it out of hand. 147 00:16:00.960 --> 00:16:06.960 Krugman, of whom previous speakers have spoken, calls it a fairy tale. 148 00:16:06.960 --> 00:16:09.960 He speaks of the confidence fairy. 149 00:16:09.960 --> 00:16:18.880 However, Krugman is the paradigmatic vulgar Keynesian, which means he basically explains 150 00:16:18.880 --> 00:16:25.000 everything as based on animal spirits. And I guarantee you, my regime uncertainty has 151 00:16:25.000 --> 00:16:31.240 a much more solid basis than Lord Keynes' animal spirits, which had none whatsoever. 152 00:16:31.240 --> 00:16:41.240 In fact, I've used various forms of evidence all along to test, as it were, the idea of regime uncertainty. 153 00:16:41.240 --> 00:16:49.240 I've used historical facts in abundance describing what the government was doing, what other people were doing, and the economic logic of it. 154 00:16:49.240 --> 00:16:55.240 You don't have to be a rocket scientist to see if the government is threatening some draconian new form of regulation. 155 00:16:55.240 --> 00:16:59.240 That's going to discourage investors at the margin. 156 00:16:59.240 --> 00:17:05.240 You don't need economic genius to figure that out. 157 00:17:05.240 --> 00:17:11.240 So I've looked at a lot of historical facts. I've looked at a lot of testimony specifically on this issue 158 00:17:11.240 --> 00:17:17.240 by people in business and by investors. And let me read you just one of these to illustrate. 159 00:17:17.240 --> 00:17:25.240 This was something that was written in 1937 in a letter 160 00:17:25.240 --> 00:17:32.600 from Lamont Dupont, who was one of the bigger investors of the day. He said, 161 00:17:32.600 --> 00:17:39.800 Uncertainty rules the tax situation, the labor situation, the monetary situation, 162 00:17:39.800 --> 00:17:44.120 and practically every legal condition under which industry must operate. 163 00:17:45.080 --> 00:17:52.680 Are taxes to go higher, lower, or stay where they are? We don't know. Is labor to be union 164 00:17:52.680 --> 00:18:00.280 or non-union? Are we to have inflation or deflation? More government spending or less? 165 00:18:01.080 --> 00:18:07.480 Are new restrictions to be placed on capital? New limits on profits? It is impossible to even 166 00:18:07.480 --> 00:18:13.000 guess at the answers. This wasn't a public relations statement. This was something he wrote a 167 00:18:13.560 --> 00:18:21.400 personal letter. But this is perfectly illustrative of how many business people were feeling at the 168 00:18:21.400 --> 00:18:29.040 At the time, all the way from 1935 to 1940, at the time I started my work on this subject, 169 00:18:29.040 --> 00:18:37.120 I had not read a book called Pride, Prejudice and Politics, subtitled Roosevelt versus Recovery 170 00:18:37.120 --> 00:18:45.640 1933 to 38. The author is Gary Dean Best, a historian who was not an Austrian and not 171 00:18:45.640 --> 00:18:50.580 even an economic historian for that matter, but I highly recommend this book if you want 172 00:18:50.580 --> 00:18:55.900 I want to understand how business people were feeling about what was going on in the United 173 00:18:55.900 --> 00:19:03.580 States between 1933 and 1938 because Best went to the archives and he pulled out a gigantic 174 00:19:03.580 --> 00:19:11.100 mass of testimony and it's a very revealing book. I wish I'd read it before I started 175 00:19:11.100 --> 00:19:18.580 my work but I eventually did catch up. So that's one form of evidence, what businessmen 176 00:19:18.580 --> 00:19:24.020 themselves were saying. I also looked at a number of polls. Scientific polling began 177 00:19:24.020 --> 00:19:29.080 in the mid-30s and some of these polls specialized in polling business people, particularly the 178 00:19:29.080 --> 00:19:35.220 fortune poll. So they asked a lot of interesting questions bearing on regime uncertainty and 179 00:19:35.220 --> 00:19:40.480 I looked at those and what I found was that the businessmen were pretty much convinced 180 00:19:40.480 --> 00:19:47.480 even late in 1941 that after the war, the government of the United States would exercise 181 00:19:48.580 --> 00:20:04.580 Somewhere between more severe control of the economy and draconian control, they might convert it into outright fascism or communism or socialism with central planning or something extreme like that. 182 00:20:04.580 --> 00:20:16.580 After all, it was happening in other places in the world at the same time and many people feared, for good reason, that Roosevelt would have liked to be a dictator like Mussolini or Hitler or Stalin. 183 00:20:16.580 --> 00:20:26.100 One. So these polls tell us about the extent to which these kinds of beliefs were in the 184 00:20:26.100 --> 00:20:31.540 minds of investors. I also looked at the structure of investment. If business people are afraid 185 00:20:31.540 --> 00:20:36.780 that not only invest less, but they'll change the kind of investment they make. They'll 186 00:20:36.780 --> 00:20:42.700 move away from longer term investments and towards shorter term. And the data show exactly 187 00:20:42.700 --> 00:20:47.340 that for the 1930s. 188 00:20:47.340 --> 00:20:53.980 And finally, I looked at, as it were, evidence that shows businessmen putting their money 189 00:20:53.980 --> 00:20:55.740 where their mouth is. 190 00:20:55.740 --> 00:21:03.620 A lot of historians being left liberals or even farther left than that tend to see these 191 00:21:03.620 --> 00:21:06.380 kind of business statements as just self-serving propaganda. 192 00:21:06.380 --> 00:21:13.180 Yeah, that's just the plutocrats generating PR against Roosevelt. 193 00:21:13.180 --> 00:21:21.040 But you can't bring that objection against how people end up pricing bonds in the corporate 194 00:21:21.040 --> 00:21:23.080 bond market. 195 00:21:23.080 --> 00:21:27.380 People don't buy and sell corporate bonds to make publicity statements. 196 00:21:27.380 --> 00:21:31.520 They have money at stake and they have to think about what real risks are. 197 00:21:31.520 --> 00:21:37.880 So I looked at what happened to the spreads between interest rates for high-grade corporate 198 00:21:37.880 --> 00:21:48.040 bonds over the period from 1929 to 1950, actually, and I found an astonishing result, which was 199 00:21:48.040 --> 00:21:56.280 that the yield spreads were very small between long-term payoffs and short-term payoffs on 200 00:21:56.280 --> 00:22:01.640 on Corporate Bonds, up through the beginning of 1934. 201 00:22:01.640 --> 00:22:13.920 But in the next two years, they became enormous, huge, so huge that a 20-year payoff was commanding 202 00:22:13.920 --> 00:22:28.920 Effective interest rate to five or six percent above. That is, you know, several times the payoff on a one-year payout on a corporate bond. 203 00:22:28.920 --> 00:22:40.920 So the bond market clearly showed me this gigantic jump in what I interpret as risk premiums on the future, reflecting regime uncertainty. 204 00:22:40.920 --> 00:22:45.420 When I first had my computer spit out a graph on this, I couldn't believe it. 205 00:22:45.420 --> 00:22:48.420 I said to myself, nobody's going to believe this. 206 00:22:48.420 --> 00:22:51.420 They'll think I made it up. 207 00:22:51.420 --> 00:22:55.220 But, you know, if you don't believe me, you can go rerun it yourself. 208 00:22:55.220 --> 00:22:58.120 The data are there for you to check. 209 00:22:58.120 --> 00:23:05.320 And it stayed up there until sometime between the first quarter of 1941 and the first quarter of 1942. 210 00:23:05.320 --> 00:23:06.220 Think about that. 211 00:23:06.220 --> 00:23:12.700 The economy is now going into the greatest war in the history, and yet, businessmen 212 00:23:12.700 --> 00:23:19.180 now are less apprehensive about the future than they had been for the previous six years. 213 00:23:19.180 --> 00:23:23.860 And it's because Roosevelt had to placate the business class to get them to build the 214 00:23:23.860 --> 00:23:24.860 war economy. 215 00:23:24.860 --> 00:23:31.100 And so he did it by basically handing the war economy over to them, with Stimson and 216 00:23:31.100 --> 00:23:38.540 and Knox being put in charge of the war department, the Navy department, and Patterson and Forrestal 217 00:23:38.540 --> 00:23:41.340 running those departments on a day-to-day basis. 218 00:23:41.340 --> 00:23:49.140 And 10,000 or more, I'm not making this up, there are more than $10,000 a year men or 219 00:23:49.140 --> 00:23:55.540 no dollar a year without compensation, they recall, business people running the war agencies 220 00:23:55.540 --> 00:24:04.340 that the US used to run a war command economy from 1942 through 1945. 221 00:24:04.340 --> 00:24:08.300 So once these businessmen were running the economy and allocating resources, no, they 222 00:24:08.300 --> 00:24:10.940 weren't afraid of the government anymore. 223 00:24:10.940 --> 00:24:14.960 They were controlling it along with the military itself. 224 00:24:14.960 --> 00:24:20.140 And so they got over their regime uncertainty, but they couldn't do anything about it while 225 00:24:20.140 --> 00:24:25.940 All the war went on because all the resources were being steered to military uses. 226 00:24:25.940 --> 00:24:31.980 It was only when the war ended and resources now could be released for civilian uses that 227 00:24:31.980 --> 00:24:37.580 they were able to show that their fear was gone. 228 00:24:37.580 --> 00:24:44.260 At that point we saw the most amazing recovery or growth of the private economy ever took 229 00:24:44.260 --> 00:24:46.860 place in the U.S. economy in one year. 230 00:24:46.860 --> 00:24:56.860 1846 was the greatest year of American economic history for the growth of private product, 231 00:24:56.860 --> 00:25:00.260 never anything like it. 232 00:25:00.260 --> 00:25:06.440 So that's how we got back to prosperity and there's a lot more to it, so buy a case of 233 00:25:06.440 --> 00:25:11.380 my books and give them to all your family members for Christmas. 234 00:25:11.380 --> 00:25:17.900 Now, I'm out of time, but I just want to say that in the past three years we've seen a 235 00:25:17.900 --> 00:25:26.000 re-emergence of regime uncertainty because of the snowstorm of government measures and 236 00:25:26.000 --> 00:25:31.300 all the apprehensions that they have created about what's going to be next. 237 00:25:31.300 --> 00:25:38.540 Because some of these statutes, for example, Obamacare and the Financial Reform Act, basically 238 00:25:38.540 --> 00:25:46.780 They just create gigantic crates full of invitations to regulators to fill in the details. 239 00:25:46.780 --> 00:25:52.900 Hundreds of regulations have to be made to tell people specifically what these laws are 240 00:25:52.900 --> 00:25:56.660 going to mean when they're enforced and administered. 241 00:25:56.660 --> 00:26:01.500 Well, if you're in business, you have no way of knowing what health care costs are going 242 00:26:01.500 --> 00:26:05.700 to be two or three years from now, none. 243 00:26:05.700 --> 00:26:09.860 You don't have any good way of knowing what kind of controls are going to be exercised 244 00:26:09.860 --> 00:26:11.260 over financial markets. 245 00:26:11.260 --> 00:26:14.860 And I mean everything from pawn shops on. 246 00:26:14.860 --> 00:26:18.340 These statutes are written very broadly. 247 00:26:18.340 --> 00:26:22.100 And so many people get snared at them who don't even think they're part of the financial 248 00:26:22.100 --> 00:26:23.660 markets. 249 00:26:23.660 --> 00:26:26.660 And taxes are going to expire. 250 00:26:26.660 --> 00:26:27.660 Are they going to be extended? 251 00:26:27.660 --> 00:26:29.660 Are they going to be increased? 252 00:26:29.660 --> 00:26:30.660 Who knows? 253 00:26:30.660 --> 00:26:37.620 And it's just one thing after another that have put investors in a frightened mood lately. 254 00:26:37.620 --> 00:26:40.380 And so investment has been very slow to recover. 255 00:26:40.380 --> 00:26:53.620 It's still net private fixed investment is still down about 75% or more from its peak before the recession. 256 00:26:53.620 --> 00:27:09.380 So this recovery has been very slight, certainly not enough to be the engine of a bonafide real recovery that would allow us to reduce the unemployment rate substantially. 257 00:27:09.940 --> 00:27:14.420 So I looked at all the same kinds of evidence I looked at before. 258 00:27:14.500 --> 00:27:22.380 Recently, I looked at just the facts and the logic, the testimony of businessmen and investors, which has been voluminous. 259 00:27:22.380 --> 00:27:33.380 Poll data, I've looked at the structure of investment, and I've looked at the corporate bond yields and the yield curves have done just what they did before, just not to the same degree. 260 00:27:33.380 --> 00:27:47.380 After the turmoil from late 2008 to mid 2009, we ended up with a yield curve that was much steeper for all kinds of corporate bonds than before. 261 00:27:47.380 --> 00:28:17.380 and furthermore we finally got what the mainstream economists always blamed me for not having which is a quantitative index of regime uncertainty just publicized in the last two or three weeks by three researchers two people at Stanford and one at Chicago so they have very good credentials as mainstream economists and they produce this index I don't have time to describe how it works but 262 00:28:17.380 --> 00:28:26.880 But their names are Baker, Blumen, Davis, and if you're interested I can give you some places to look for their index. 263 00:28:26.880 --> 00:28:35.880 It's quite interesting. I don't think it's the last word by any means, but what it shows is indeed what I've been arguing from other forms of evidence. 264 00:28:35.880 --> 00:28:43.880 That the level of policy uncertainty has risen to much higher levels since the Lehman Brothers bankruptcy, 265 00:28:43.880 --> 00:28:51.380 and it stayed there, it fluctuates, but it stayed at extraordinarily high levels since then. 266 00:28:51.380 --> 00:28:56.380 So, why is the recovery so pathetic? 267 00:28:56.380 --> 00:29:01.880 One of the reasons, and I think an important reason, is regime uncertainty. 268 00:29:01.880 --> 00:29:03.880 Thank you very much.