Regime Uncertainty and the Fiscal Cliff

Robert Higgs has written extensively on "regime uncertainty", particularly as it relates to the Great Depression.  In a nutshell, he says that uncertainty regarding future policy helped contribute to the lack of investment during the Great Depression.  When individuals and businesses don't know what the laws will be in the near future, it serves as a deterrent to starting or growing businesses, along with investing in them.

We have major economic problems for a variety of reasons, but they all somehow revolve around the government (or governments if you include state and local) and the central bank (the Federal Reserve).  Spending, debt, inflation, taxes, and regulations all contribute to our problems.  With that, you can add regime uncertainty, which is the lack of predictability with all of these factors.

I am writing this post on December 27.  We go over the so-called fiscal cliff on January 1.  I don't really include any spending cuts as part of this, as I view this as a positive thing, even if small.  But there are a bunch of different taxes that are scheduled to go up.  While the president and Congress are supposedly trying to work something out, we have no idea if any agreement will be reached, and if so, what it will entail.

As an individual, assuming you are working or making money, you don't know what your tax rate will be in less than 5 days.  If you are a small business owner, you don't know what your taxes will be in less than 5 days.  If you are an investor, you don't know what your taxes will be in less than 5 days.  If this isn't regime uncertainty, I don't know what is.

This distorts the market in many ways.  It affects investors on their decisions to buy and sell stocks (or other investments).  It affects business owners on whether to expand their business or hire new people or even to replace someone who has left.  It affects individual workers on their decisions to save, or buy a house, or buy a car, or plan a vacation.  Even if the tax changes mean "only" $200 per month to a family, this could affect their decision making if they are on the margin.

Obamacare was bad enough.  It created regime uncertainty.  As Nancy Pelosi said, we will find out what is in the law, now that it has passed.  But for people and businesses to not know what the tax rates will be (in many different categories) in just a few days from now, it is hard to imagine that this isn't affecting human behavior on a grand scale.  It may even encourage some people to die early.

While I still believe that overall government spending is far more important than the tax rates, the looming fiscal cliff is just another example of how the government makes us poorer.  This regime uncertainty is preventing individuals and businesses from engaging in activity that could make our lives better.  We will never get to see the new products and services that we could have had if only the government had made our laws more predictable, along with being less tyrannical.

In conclusion, it doesn't matter at this point if we go over the so-called fiscal cliff or not.  It has already damaged and distorted our economy.