Uncertainty In The Wild

During the depths of the recession, a meme took hold among Republican politicians and a number of conservative wonks about “uncertainty.” The idea was that regulatory uncertainty—that the people who run businesses couldn’t tell which regulations and taxes they’d have to face in the future—was depressing business investment and therefore prolonging the recovery.

This idea was soundly and almost unanimously mocked on the Left. Aren’t our Galtian overlords supposed to be great risk-takers? Isn’t this how they derive the legitimacy of their wealth? Isn’t there always regulatory uncertainty? To many on the Left, the “uncertainty” meme was simply a whole-cloth fabrication.

At the time, I took a frustratingly middle-of-the-road view: on balance and all else being equal, I think, regulatory uncertainty can depress investment and therefore economic growth. That said, in a massive demand-driven recession like the one the US experienced, it’s highly unlikely that this is the main cause of the slough.

Now it’s Morning Again In America and so nobody’s arguing about “uncertainty” anymore. And the progress of the recovery seems to validate lefty arguments that the whole “uncertainty” thing is made up out of whole cloth.

Well, I found an example of uncertainty working as advertised in the wild.

I recently had dinner with a friend who’s an investment banker who often advises on LBOs—debt-fueled buyouts of companies by private equity funds—who tells me most if not all plans for LBOs in France have been frozen. Why? Because François Hollande, the Socialist Party’s presidential candidate and the favorite of the election, has promised a surtax on debt used to finance buyouts. So private equity funds have decided to sit on their hands until the election in May to see what exactly they’ll be socked with and plug it into their models so they can see if the deals they’re contemplating work under the new regime or not. (While presumably vigorously lobbying against any tax at all, I’m sure.)

Now this doesn’t really keep me up at night. From a business perspective, if you can’t make that deal you’re contemplating work without leverage, you probably shouldn’t do it. From a policy perspective, while the LBO boom has probably been a net positive for the economy, putting a brake on LBO activity isn’t the most damaging thing a socialist president could do. Let’s call it mostly-harmless populism. It is, of course, the wrong solution to the wrong problem: the overuse of debt by corporations is encouraged across the economy by the corporate income tax (because debt payments are deductible from the corporate tax) which should just be done away with, but that’s an idea that’s even more politically infeasible in France than it is in the US. (And, of course, one should note that Mr Hollande has an objective interest in depressing and deferring business investment until he becomes President, although I’m sure that doesn’t figure into his calculations. Really. The economy is doing crappily enough without him.)

Anyway: while this tax and the response to it aren’t going to keep me up at night, we do have here a real-life example of real regulatory uncertainty depressing real business activity and investment that would have occurred absent said uncertainty. So “uncertainty” can and does occur.

So there you go, kids: while it’s probably foolish to believe that Obama-led “uncertainty” is responsible for most of the economic morass we’ve experienced over the past few years, it’s equally foolish to dismiss out of hand the idea or the possibility of uncertainty depressing business investment.