Regime Uncertainty

The concept of “Regime Uncertainty” was proposed by economist Robert Higgs to flag some of the issues introduced by FDR’s presidential administration as he attempted to rapidly end the Great Depression.

This is similar in many ways to a broader idea called “Policy Uncertainty,” which is exactly what it sounds like: economic risks tied to uncertainty in policies that influence the decisions business owners make.

If I’m a business owner who’s thinking about investing money in a new warehouse, but there are local zoning laws related to warehouses that haven’t been sorted out yet (and which could result in the construction of said warehouse costing twice as much), there’s a good chance I’ll wait until that process is finished before making any kind of decision.

That waiting is a problem if you’re looking to have the best economic outcomes. Money that just sits there isn’t terribly useful to the economy, while money that builds warehouses (and thus employs builders and then warehouse workers) very much is.

The more uncertainty business owners (and other economic agents) face as a result of fuzzy, delayed, or threatened policies, then, the more stranded money—assets that just sit there not doing anything worthwhile—you tend to have. And if you have enough inactive resources, that can become its own problem, leading to a cascade of negative effects like unemployment, ill-maintained infrastructure, and insufficient tax revenues.