From one uncertainty to another

June 18, 2010


Anthony J. Evans is assistant professor at ESCP Europe Business School. The opinions expressed are his own. Join Reuters for a live discussion with guests as Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.

Think back to the immediate aftermath of the general election. Throughout the hung parliament epoch the term “uncertainty” was being used lavishly.

And often as if it’s a bad thing – indeed the Conservative election campaign suggested that a strong and stable government was important. Now that the coalition appears to be providing that, is it?

It is not obvious that a decisive government is always best. Indeed for most voters it depends on the policies that such power is generating. For Tories, a strong Tory government is the best-case scenario.

For Labour, it’s worst case. There’s something to be said for the balance that comes from the middle ground.
You don’t have to be a rabid libertarian to appreciate that much human suffering has stemmed from unchecked political power.

Indeed constitutions tend to be designed to reduce the ability of any single party from unleashing the full force of what they think is best.

According to economic historian Robert Higgs one of the reasons the Great Depression lasted as long as it did was “regime uncertainty”, which is the instability of the rules of the game. When politicians act they alter the incentives that investors face.

It’s possible that (despite best intentions) vast and arbitrary policy changes cause more harm than good, as people wait to see the effects.

When the government announced a five-point plan to tackle the banking system in January 2009, the Bank of England declared that it had little impact since “financial market participants were waiting for more detail on the plan”. When all eyes are on what our political leaders are doing, we can become more cautious.

In the U.S. the “Congressional Effect” refers to the relationship between congressional activity and stock market returns, and recent evidence suggests that 90 percent of Dow Jones gains came on days when congress was out of session. Perhaps political oversight isn’t as important as politicians would like us to believe.

If the Tory-Lib Dem coalition delivers on strong and stable government, one form of uncertainty (that of a hung parliament) is likely to be replaced by another. The uncertainty surrounding who will govern turns into uncertainty about what they will do. The latter case often has the bigger upside risk.

As entrepreneurs wait to see what the budget will mean to them, the recovery will falter – if the private sector is to compensate for public spending cuts, stable rules of the game become more imperative. Government doesn’t need to be strong, but predictable.

Picture credit: Former Chancellor Alistair Darling holds Gladstone’s old Budget box for the cameras outside 11 Downing Street, before delivering the annual Budget to the House of Commons in central London March 24, 2010. REUTERS/Stefan Wermuth

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