Growls

Because of the poor economy over the past few years, many pundits ascribe a lot of the cause to uncertainty. For example, in a column posted at MarketWatch yesterday, Kirk Spano counseled about the need for a “balanced alternatives during uncertainty.” But exactly what is meant by uncertainty?

Let’s turn to business and financial historian John Steele Gordon, who recently lectured about the economic lesson from American history. The lecture was adapted for the July 2012 issue of Imprimis (requires Adobe), a publication of Hillsdale College.

One of the lessons is that “markets hate uncertainty.” That portion of the lecture follows:

“The Great Depression that started in the fall of 1929 ended, at least technically, in early March 1933. The stock market, almost always a leading indicator, had bottomed out the previous June, down 90 percent from its high in September 1929. 1933 would be the second best year for the Dow Jones average in the entire 20th century, coming off, of course, a very low base.

“But recovery was very slow in coming. Unemployment, over 25 percent in 1933, was still at 17 percent as late as 1939. Indeed, in 1937, when the economy suddenly turned south again, there was a problem: what to call the new downturn. Most people thought the country was still in a depression, so that word wouldn’t do. But economists, delighted to have a problem that they could actually solve, came up with the word “recession,” and that’s what we have been using ever since.

“Usually, when there has been a steep decline in economic activity, recovery is equally steep. The valley is V-shaped. That is what happened in 1920, when there had been a severe post-war depression and then a strong recovery. So why was the recovery so slow in the 1930s? One reason, according to an increasing number of economic historians, is that Franklin Roosevelt had a bad habit of changing his mind. While highly intelligent, he was no student of economics and seldom read books as an adult. So much of his program was, essentially, seat- of-his-pants policy. First there was the National Recovery Administration, which amounted to a vast cartelization of the American economy. When the Supreme Court threw it out—by a unanimous vote—FDR moved on to other remedies, including big tax increases on the rich.

“But markets, which can function even in disaster with ruthless efficiency, hate uncertainty. When uncertainty regarding the future is high, they tend to tread water. As a result, there was what is known as a “strike of capital.” While corporations often had large cash balances—General Motors made a profit in every year of the Great Depression—and banks had money to lend, there was little investment and few loans made. Both the banks and the corporations were too uncertain about what the government was going to do next.

“That is precisely what is happening today. Banks and corporations have plenty of money. Apple alone is sitting on about $100 billion worth of corporate cash. And yet the recovery from the crash of 2008 has been tepid at best. The valley is U-shaped. Undoubtedly a big reason for that is the enormous uncertainty that has plagued the country since 2008. Will health care—one-sixth of the American economy—be taken over by the folks who run the post office? Will the Bush tax cuts be ended or continued? Will the corporate income tax go up or down? Will manufacturing get a special tax deal? Will so-called millionaires—who, when you listen carefully to what liberal politicians are saying, can earn as little as $200,000 a year—be forced suddenly to pay “their fair share”?

“Who knows? So firms and banks are postponing investment decisions until the future is clearer. Perhaps the clearing will happen on November 6.”

"Imprimis is the free monthly speech digest of Hillsdale College and is dedicated to educating citizens and promoting civil and religious liberty by covering cultural, economic, political and educational issues of enduring significance.  The content of Imprimis is drawn from speeches delivered to Hillsdale College-hosted events, both on-campus and off-campus.  First published in 1972, Imprimis is one of the most widely circulated opinion publications in the nation with over 2.5 million subscribers." Subscription is free upon request.