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Higgs Regime Uncertainty

Higgs Regime Uncertainty. Vaughan / Economics 639 / Fall 2012. Key Points. The economy remained in depression as late as 1940 because private investment did not recover sufficiently after its collapse during the Great Contraction.

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Higgs Regime Uncertainty

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  1. HiggsRegime Uncertainty Vaughan / Economics 639 / Fall 2012

  2. Key Points • The economy remained in depression as late as 1940 because private investment did not recover sufficiently after its collapse during the Great Contraction. • The insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. • This uncertainty arose from the character of federal government actions and the nature of the Roosevelt administration during the so-called Second New Deal (1935-1940).

  3. Insufficiency of Private Investment Shows up even more clearly in net investment. From 1930 to 1940, net private investment totaled minus $3.1 billion!

  4. Sources of Regime Uncertainty • Unparalleled outpouring of laws that significantly attenuated private property rights.

  5. Sources of Regime Uncertainty

  6. Sources of Regime Uncertainty • 1936 (on) - FDR’s anti-business / anti-wealthy rhetoric. • 1935-1937 - tax legislation aimed at punishing business / the wealthy. • 1937 - Supreme Court packing plan. • 1935 - National Labor Relations Act. • 1938 (on) – stepped up anti-trust enforcement.

  7. Evidence • Poll data – businesses bleak about the future / blame FDR. • Real stock prices languished. • Real investments that were made in the 1930s were concentrated in short-term assets. • Term premiums on long-term high quality corporate bonds rose.

  8. Term Risk Premiums Point to Uncertain Future

  9. Great Escape • In 1938, Dr. New Deal began morphing into Dr. Win the War • FDR put business titans in federal government leadership positions. • FDR froze out hard core New Dealers. • Democratic power in Congress eroded continually from 1938 onward. • FDR died in April 1945; Truman became president.

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