The Outstater: Indiana’s ‘Uncertainty Index’

August 20, 2014

For the use of the membership only.

THESE TROUBLING TIMES tend to shrink our circle of friends in high office as statehouse ambitions clash with economic reality. But we have at least one left, a state legislator, and he has an idea for unleashing investment throughout Indiana.

He would counter what the economists call “regime uncertainty” — in a sentence, the stagnation caused when investors not only have to calculate likely returns but also potential government intervention. An example would be if rumors are true that the Pence administration favors an entirely new business tax aimed at an entirely new target (the service sector).

Markets now rise and fall not on economic news but on such political news. “In recent years, stock markets in countries ranging from Japan to Mexico have rallied on mere hope for political change: specifically, the rise of new leaders who seem likely (or unlikely) to push economic reform,” writes Ruchir Sharma in “Why Markets Now Use Politics to Predict Economics.”

Our legislator, nameless lest he lose his Chamber endorsement, can explain:

“Today, business interests that have operated for years or decades without political agenda are forced to embroil themselves in government, placing reliance on political clout rather than business acumen. This is not because they are dumb but because they are smart: They see the politically connected win economically in spite of poor business models and because of solid political ties.”

The incentive, then, for Indiana businesses is to stake out political positions with all the major players in both political parties, at home and in Indianapolis. That is how investing in productivity and expansion (jobs) becomes secondary.

“Business leaders can adapt to even high taxes or stiff bureaucratic control if the rules would just stabilize,” our friend argues. “Instead, we expect them to project return on investment even as a bunch of arbitrary, politically driven moving targets are tossed into their model each legislative session. They need a predictability that allows best-case and worst-case analysis.”

How true. Since abandonment of the Justinian Code — quod principi placuit legis habet vigor (what pleases the prince is the law) — it has been understood that the less regime uncertainty there is the better. Proof can be seen in a lesson of the Great Depression highlighted by Robert Higgs in a widely circulated article for The Independent Review:

“From 1935 through 1940, with Roosevelt and the ardent New Dealers who surrounded him in full cry, private investors dared not risk their funds in the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with. But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.”

Our particular nightmare, though, is not over. And considering the stakes, someone might want to assess the damage being done. Call it the “Indiana Uncertainty Index.”

A business professor suggests the independent variable of the index might include the regulatory flux with the proxy being the amount of new regulation (number or page count) per industry segment. Dependent variables could include financial performance measures at firm level with mediating variables being the amount of political contributions, proportion of dollars directed to one party, number of lobbyists employed, etc.

Simple enough, so let’s fix it — at least for Indiana.

The problem, as you might guess, is that some of the very people in Indianapolis on whom we depend to protect us from statist folly (Republicans) have built  reputations on that potential to intervene that economists warn us about. They will work cleverly and mightily to discredit any index that measures their dirty work.

So we will just ask ourselves a common-sense question: If we were an investor, would we rather put our money in an Indiana where success is dependent on political whim and connection or in one where hard work and foresight are determinant?

If the answer is hard work and foresight, our next question is whether our political representation is concordant with that.

— Craig Ladwig



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