Expectations, uncertainty and the New Deal.

Abstract

This dissertation examines whether the government's transcending the bounds of what businesspeople believe to be its legitimate role in the economy leads to uncertainty among businesspeople about the future course of government policy, and consequently reduces investment. A central premise of this thesis is that firms' perceptions of the coherence of government policy hinge, in part, on the extent to which policy conforms to businesspeoples' norms about legitimate government behavior. When the government breaks from businesspeoples' political norms, government policy appears rather incoherent and arbitrary to them. They consequently become uncertain about the future course government policy will take, and they cut back on investment spending. Such uncertainty has a depressing effect on investment because businesspeople have difficulty forming expectations of those future government policies that will influence the future profitability of present investments in fixed capital. Profit taxation and industrial regulation are obvious examples of policies influencing profitability that businesspeople must form expectations of. Uncertainty about future government policy leads to uncertainty about the future profitability of investing in fixed capital. When firms cannot form long-term expectations of profitability, investment in fixed capital assets becomes more risky. Therefore, the government faces a serious constraint on the policies it can undertake without inducing an investment slump: in so far as businesspeople view these policies as illegitimate, investment may stagnate. The business response to the New Deal is studied to determine whether this uncertainty-stagnation hypothesis sheds light on the failure of investment to recover during the New Deal. Much evidence indicates that businesspeople objected to the New Deal reforms because of the political values they held. There is also some evidence that the perceived arbitrariness of government policy arising from their normative objections to the New Deal led to uncertainty among them about future New Deal policies, as well as about profits.