A few complementary notes on regime uncertainty

Not much about finance or banking today. I just wanted to come back to a few concepts I mentioned in earlier posts (like here, here and here), such as regulatory regime uncertainty.

We keep hearing economists, journalists and politicians complaining about companies not investing ‘enough’ at the moment. Keynesians like Krugman, de Long and co, and some other non-Keynesian mainstream economists think that the main underlying reason to this phenomenon is lack of demand. I argued several times that, while demand fell probably too low in 2009, one of the other main culprits since then had been regime uncertainty: regulations keep changing and red tape expanding, leading most firms to postpone their various investments and projects until they have a clearer view of the rules going forward.

The Economist’s Buttonwood’s blog had a post about business regulation two days ago, which led me to look for some evidence that increasing (and uncertain) regulation was negatively impacting investments. I found this US Chamber of Commerce Small Business Study, which is enlightening. What it reveals:

• 44% of SME owners ranked economic uncertainty as their number 1 worry (with over-regulation at number 3, or 39%, and high taxes number 4, or 37%). To be fair, economic uncertainty also comprises demand uncertainty. But read the rest first.
• Only 24% indicated that they thought that business climate for SME had improved over the last couple of years.
• 42% of SME owners ranked the US growing deficit and debt as number 2 worry.
• “Seventy-eight percent of small business owners said that the U.S. deficit and debt pose a threat to the success of their businesses. The current federal debt and deficit (40%) and the regulations coming out of Washington (35%) are the top two current issues coming out of Washington that cause concern about the future of their businesses. In addition, sentiment is strong that the climate for small businesses is worse than under the previous administration (80%).”
• “The majority of small business owners, when asked what they need most from Washington right now, would like Washington to get out of the way (84%) as opposed to lending a helping hand (11%). When asked about specific actions they needed from Washington, overwhelmingly small business owners wanted more certainty (87%).”
• “Government regulations on small businesses continue to be seen as unreasonable (73%) by small business owners with a two thirds majority (66%) saying that what Washington will do next to small businesses scares them most.”

Right. It’s kind of a proof, isn’t it? This is also applicable to banks: giving God-like powers to regulators (or anyone) is usually not a good idea. Uncertainty is everywhere in the banking world. Just look at the latest Swiss news: a top official announced that, perhaps, Swiss banks will be subject to a very high 10% leverage ratio. Or perhaps just 6%. Or in between. Or possibly not at all. Or…well, they’re gonna discuss and let you know later. How can any bank plan for the future and lend in such conditions?

On a side not, I am wondering whether or not increasing red tape is linked to The Decline of Creative Destruction, as this Bryan Caplan piece was named today. Surely it is. Very interesting chart anyway (see below). Job destructions during the crisis were actually at the same level as they were throughout the 1990’s… It would be interesting to compare this chart to the evolution of business red tape. Unfortunately, this isn’t my area, so I’ll let you do it!