Regime Uncertainty: Michigan’s Legislative Creativity and Business Investment

Let's face it. It's no cakewalk being an entrepreneur.

What will the price of steel or copper or lumber be tomorrow? Will there be demand for your product? When will this recession end? Will another company produce a better product at a cheaper price? Will you be able to hire and retain qualified workers? Was your business plan realistic?

It's a small wonder that the Small Business Administration reports only two out of three business startups survive the first two years, and less than half make it to four years.

Absent a crystal ball, entrepreneurship is an informed gamble at best.

The only thing that existing and new businesses can count on is the institutional environment within which they are operating. Given all the logistical difficulties and the uncertainty about the future, the only saving grace that allows entrepreneurs to take risks — thus creating wealth and creating jobs if all goes well — is the framework of rules within which they operate.

To overcome the challenges of an unknowable tomorrow, businesses must have certainty about the rules. They must know that property rights will be respected; that contracts will be enforced by a neutral court system; that taxes will be predictable and legislation transparent. This is the institutional environment that allows capitalism to thrive and encourages entrepreneurs to risk their time and money.

Without that stability, everything falls apart. After all, the details of life and business are uncertain enough; if there's no certainty about the rules within which the game is played, everything is up in the air. And then there's no reason for entrepreneurs to risk their time and treasure.

Economist Robert Higgs first coined the term "regime uncertainty" in this 1997 article that explains the fundamental reason why the Great Depression lasted so long. Simply put, the New Deal policies — with their experimentation, price controls, business taxes and burdensome regulations — created such an environment of uncertainty that investors sat on their money.

Higgs reports that, as late as November 1941, only 7.2 percent of surveyed American business owners anticipated an eventual return to a free-market system; 52.4 percent anticipated "an economic system in which government will take over many public services formerly under private management but still leave many opportunities for private enterprise;" 36.7 percent anticipated "a semi-socialized society in which there will be very little room for the profit system to operate;" and 3.7 percent anticipated "a complete economic dictatorship along fascist or communist lines."

In sum, 93 percent of surveyed American business owners anticipated more government attacks on property rights, and more than 40 percent anticipated government domination of the economy. It is no surprise that nobody was investing. In fact, investment didn't resume until after World War II — that is, after the wartime economy, but also after the end of the New Deal's uncertainty and the death of President Roosevelt.

Fast forward 70 years, and we have an eerily similar situation, as explained by my colleague Dr. Gary Wolfram. In a recent Human Events piece titled "Regime Uncertainty and Economic Crisis," Wolfram builds on Higgs' insights and shows parallels with today's environment. Bear Sterns is rescued but Lehman Brothers is left to go bankrupt. The Secretary of Treasury asks for $700 billion of TARP funds based on a two and one-half page bill. Then, the Secretary claimed not to have the authority to use those TARP funds to bail out GM and Chrysler, only to "discover" a bit later that he did. Will we have "cap-and-trade," and a massive energy tax? Will health care be overhauled at great cost to employers, making new employees prohibitively expensive? Will the Bush tax cuts be left to expire? Will taxes increase to fund massive government spending?

Who knows? Burdensome taxes and the heavy hand of government regulation are bad enough for economic growth. But the environment of regime uncertainty that hangs over the country adds an element of unpredictability that paralyzes risk-taking and thus investment and job creation.

Unfortunately, the state of Michigan is not immune to this, with a Legislature and governor unfriendly to business and adding uncertainty to an already uncertain world.

Here are just a few examples:

• Gov. Jennifer Granholm proposed a $554 million tax increase for 2011 — in the middle of a recession!
• Legislators proposed to increase the gas tax by 8 cents per gallon.
• Michigan seems to be hanging its economic hat on an advertising campaign to promote tourism — initially to be funded by a tax on rental cars at airports (yes, that's right, encourage tourism by taxing tourism). Eventually, these funds were allocated from general revenues. That is, from Michigan consumers and businesses.
• The state of Michigan is attempting to revive the economy through various corporatist public-private ventures, leaving investors to guess if they will be chosen as a favorite — and spending time and treasure on currying favor with legislators and bureaucrats rather than expanding their business activities.
• In an isolated, but egregiously indicative example, the state of Michigan recently forced private business owners to join — and pay for — a union.

Theory and history show the inefficiency of central planning and the negative effects of government intervention in the economy. But things start getting really troublesome when the rules of the game are eroded.

Dr. Nikolai G. Wenzel is the Wallace and Marion Reemelin Chair in Free-Market Economics at Hillsdale College. The Mackinac Center is a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.