Economy & Business

Regime Change

(Larry Downing/Reuters)
The costs of our increasingly uncertain policy environment

It’s time for regime change, and I’m not talking about throwing President Trump out of office.

Robert Higgs, the great economic historian, coined the term “regime uncertainty” to describe a situation in which investors lose confidence that their property rights as currently constituted will be respected by the government. Regime uncertainty makes productive economic activity difficult, because it inhibits long-term investment. If you believe, for example, that government may be about to violate the rights of landowners and embark on a land-redistribution scheme, then you have to think twice before building a factory on ten acres of land or investing $1 million in new equipment for a ten-section farm. Ask Robert Mugabe’s unhappy subjects how that works out.

A less fundamental version of regime uncertainty is policy uncertainty. That happens when investors are fairly confident in basic property rights but fear that radical changes in public policy will alter the character of their investments or their enterprises in ways that make them unprofitable. For example, the employer health-insurance mandate imposed by the Affordable Care Act covers firms with 50 or more full-time employees. Republicans would like to repeal that mandate, but some Democrats would like to see the ceiling lowered to 40 or 30 full-time employees. Depending on how the next couple of elections go, an employer with 40-odd employees might press up against the threshold or be entirely liberated from it — so do you hire ten people for a new expansion, or do you not hire them?

President Trump, and many class-war Democrats, would like to change the way private-equity firms are taxed on their income from investment partnerships, which could more than double their tax burden. Do you want to get into the private-equity business before that’s sorted out? What about other businesses that also have “carried interest” income that might be caught up, unintentionally, in the jihad against private-equity managers? With the Trump administration — and many in Congress from both parties — opposed in part or in whole to NAFTA, how does General Motors or Apple plan multinational projects involving the United States, Canada, and Mexico?

One of the basic problems here — perhaps unexpectedly — is the national debt and the deficits that contribute to it. The debt presents straightforward problems: Keep running up the debt and eventually debt-service payments become so crushing that the federal government has no money left for anything else. But there are other problems related to the national debt, problems rooted in earlier efforts to reduce the deficit. Because of the way our budget rules now work, tax cuts passed by Congress frequently are temporary. They have sunset provisions, and have to be renewed. Hence all that endless talk a few years ago about “renewing the Bush tax cuts,” which eventually became the Obama tax cuts. The Byrd Rule, which is part of the 1974 Budget Control Act, allows senators to block bills being passed through the reconciliation process if those bills would add to the deficit over a ten-year budgetary horizon. Hence, lots of tax cuts expire in ten years. It doesn’t do any good, really — it’s just a way to keep statutory spending controls from doing their jobs.

The Trump administration, and Republicans in Congress, very much want to pass a tax cut right now. Some Democrats want to cut taxes, too, though usually different taxes for different taxpayers. So the Republicans want to use the reconciliation process to pass the tax cuts in a way that forecloses the possibility of a Democratic filibuster. That means that the tax cuts will be temporary, expiring in ten years.

Republicans, until the day before yesterday, understood the value of certainty. During the Obama years, they made a great deal of noise about “economic uncertainty” related to Democratic proposals for taxes, regulation, health-care reform, and the like. They have since had a change of heart and have embraced uncertainty — certainly in the person of President Donald Trump, who is dangerously mercurial, but also in more quotidian matters. They put forward temporary tax cuts and short-term economic fixes. Some of them, notably Secretary of Commerce Wilbur Ross, have embraced the frankly insane idea of putting a permanent five-year sunset provision on NAFTA, forcing the complete renegotiation of the North American trade pact every five years. (Including the original U.S.–Canada bilateral trade negotiations, NAFTA took about a decade to negotiate the first time around.) Having failed to repeal the Affordable Care Act and replace it with a Republican alternative, many in the GOP, including the president, have embraced a strategy of health-care chaos, defunding little bits of Obamacare and waiting for the entire edifice to collapse under the stress of its own contradictions.

Republicans, until the day before yesterday, understood the value of certainty.

Somewhere, the ghost of Dwight D. Eisenhower is saying things that cannot be reprinted here.

Inspired by Trump, the Republicans have declared themselves agents of chaos, and have taken up the least conservative sentiment there is as their motto: “Hey, how could it get any worse?”

It can always get worse.

There is not going to be any certainty on the big domestic-policy items — taxes, health care, the entitlements, and much else — until there is a reasonable, sober, sustainable settlement on our national fiscal challenge. So long as the charade of ten-year sunsets and CBO-satisfying accounting shenanigans rule the day, there is not going to be any predictability — and that is going to impose real costs on economic growth, employment, wages, and future prosperity.

We don’t have regime uncertainty. We have a regime of uncertainty. And it is time to change that.


NR Editorial: The Senate’s Improved Tax Reform Bill

Entitlement Reform Required for Tax Reform

The Perlious Path to Tax Reform

— Kevin D. Williamson is National Review’s roving correspondent.


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