Term of the Week: Regime Uncertainty

Regime UncertaintyRegime Uncertainty is a phenomenon that happens in countries where the government (the regime) interferes in the free market system, stifling business and paralyzing growth.

FREE MARKETS

Free markets are driven by the supply and demand of consumers who choose which products (and therefore the companies that produce them) they like and which ones they don’t.  The ones that consumers don’t like go out of business and the ones they do like stay in business.  When consumers like something, other companies start-up new businesses to produce that thing and all those companies producing that thing compete against each other for your dollar.  This competition forces companies to reduce costs (lowers the cost to you) and/or improve their product (nicer stuff for you) so you will give one company versus another, your dollar.  Those who compete effectively stay in business, those who don’t go out of business.

In order for this system to work effectively, new businesses need money to enter the market to produce products that consumers like, provide a new product or expand.  Companies get their money to pay for this from investors through stock, through private investors, from their own wallet, or from the bank.

REGIME UNCERTAINTY

This is where Regime Uncertainty comes in.  People only want to invest in, or start-up, successful companies in sectors that are doing well, or that they believe will do well.  One of the factors in determining if a company will do well, is how a government will affect the future of that company.

Right now, all companies in the United States are suffering from Regime Uncertainty.  They do not know which companies or sectors of the economy the government will bail out next, or will suddenly be burdened with crippling regulations (like new health care mandates), or how much taxes may rise.  All of these decisions the government may make, at a moment’s notice, crippling business overnight.  That is why in a free market system and according to the Constitution, government should never be allowed to manipulate the markets, print money, provide bailouts, etc…  The government’s “random intervention” in the marketplace by bailing out GM, but not other failing manufacturers, bailout out AIG but not other failing banks, sends a message to all businesses, that government will do whatever it wants to whichever companies it wants in whatever sectors it wants.

The uncertainty of what the government will do next scares off investors who do not know where to put their money for fear of losing it.  Without investors investing, companies can not grow.

For example, used car businesses were forced to close when the government’s Cash-For-Clunkers program drove consumers to the new car market and reduced used car inventories.  Mom and Pop repair shops closed because several months passed with fewer used cars needing repair because of the same program.  Prior to Cash-For-Clunkers, the car repair business was booming as people held onto their cars for longer, choosing to repair them rather than replace them.  As a result, many investors would have invested in the expansion of car repair shops, only to lose their investment when the Cash-For-Clunkers program dried up used car repairs for several months as used cars were tossed in the trash for new cars.

This is Regime Uncertainty, when the government arbitrarily and recklessly manipulates a part of the market.  The collateral damage from that manipulation is never considered.  It’s like a two mile high Giant walking across the country to save a cat in a tree somewhere.  Great for the cat, devastating for everyone the Giant is walking on to get to the tree.  And if you ask the government how successful the Giant was, they will point to the cat, say it was extremely successful and pat themselves on the back.

As a result, business in this country is paralyzed. New businesses are afraid to start-up for fear of new regulation, higher taxation or the government bailing out their competition.  Existing businesses are afraid to expand..is the economy going to get worse, or better?  They don’t know, so they do nothing, and wait.  Capital from investors is non-existent as investors don’t want to risk losing it.

If the government had just stayed out of the free market, then businesses would assess the risks based solely on market conditions and expand or not expand based on their perception of the risk.  Companies will take risks, and many will survive and some won’t but the system will move forward and the economy will grow as a result.  It has always been this way.

Companies even in this economy may choose to risk it, but because the government is a wild card that could crush them at any moment, they choose to stay where they are instead and not take any risk, which is the worst thing that could happen for all of us.

No business risk, means no business expansion, equals no new jobs and no recovering economy.

Regime Uncertainty, just another problem brought to you by our overpaid, underworked federal government.

GM



Categories: Government Failures

Tags: , , , , , , , , ,

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