Sunday, April 26, 2020

Shutdowns And Long-lasting Effects On Killing The Economy

How Shutdowns Will Keep Killing the Economy, Even When They're Over

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.

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.

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