With the election of President Trump, all the crystal‐ball gazers opined that the economy would witness a “Trump Bump.” Well, it hasn’t happened. Why not? In two words, “regime uncertainty” is holding back credit and broad money growth, which drive nominal economic growth.
Just what is regime uncertainty? The first chapter in Robert Higgs’ anthology Depression, War and Cold War: Studies in Political Economy is titled “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War.” This is a fitting title for a piece penned by the scholar who first nailed down the idea of regime uncertainty. According to Higgs:
Regime uncertainty pertains above all to a pervasive uncertainty about the property‐rights regime — about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on voluntarily acceptable terms. Will the government simply take over private property? Will it leave titles in private hands, but strip the owners of real control and profitable use of their properties? These questions fall under the rubric of regime uncertainty.
Who creates regime uncertainty? It falls on the doorstep of politicians (read: Washington, D.C.). Their zigs and zags have enormous effects on free cash flows, the certainty of those cash flows and the interest rates used to discount them to present values. So regime uncertainty will affect the way bankers, who produce credit, size up prospective loans. Indeed, as regime uncertainty rises, bankers will, other things being equal, tighten their purse strings.
Higgs’s diagnosis is best summarized in his own words from Against Leviathan: Government Power and a Free Society. According to him, here is how it works:
Roosevelt and Congress, especially during the congressional sessions of 1933 and 1935, embraced interventionist policies on a wide front. With its bewildering, incoherent mass of new expenditures taxes, subsidies, regulations and direct government participation in productive activities, the New Deal created so much confusion, fear, uncertainty and hostility among businessmen and investors that private investment and hence overall private economic activity never recovered enough to restore the high levels of production and employment enjoyed during the 1920s.
In the face of the interventionist onslaught, the U.S. economy between 1930 and 1940 failed to add anything to its capital stock: Net private investment for that 11‐year period totaled minus $3.1 billion. Without ongoing capital accumulation, no economy can grow. …
The government’s own greatly enlarged economic activity did not compensate for the private shortfall. Apart from the mere insufficiency of dollars spent, the government’s spending tended, as contemporary critics aptly noted, to purchase a high proportion of sheer boondoggle.
The current state of affairs in Washington, D.C., is one of great regime uncertainty — a great many zigs and zags. In consequence, bankers have reined in lending. Moreover, they have explicitly stated that their caution is a result of regime uncertainty. The following chart of the annual growth rate for private credit and commercial and industrial loans shows the fall off in those metrics. Total credit to the private sector has fallen from a recent high of 12.85% annually to only 3.49%, while commercial and industrial loans have slumped from a recent high of 8.28% annually to 2.35%.
United States Private Credit and Commercial & Industrial Loans
Related to those credit metrics is the annual growth in the money supply, broadly measured. That metric is growing at an annual rate of 4.8%, which is a hair shy of its annual trend rate of 4.86% (see chart below). Not surprisingly, aggregate demand (measured by final sales to domestic purchasers) is growing at a annual rate of 4.13%, which is below its trend rate of 4.69%. Thanks to Washington, D.C., the U.S. is in the grips of regime uncertainty trap, and a “Trump Bump” is nowhere to be found.
Money Supply (Divisia M4) and Aggregate Demand (U.S. Final Sales to Domestic Purchasers) — Nominal Annual Growth Rates