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Paul Otellini – Meet Robert Higgs

By 26 August 2010 No Comment

Intel President Paul Otellini’s speech last Monday (text here; video here) expressing concern about the direction of public policy has gotten heavy ink in both the tech and the business press.

Paul Otellini

Samples:

Declan McCullagh, CNET: Intel Chief Executive Officer Paul Otellini offered a depressing set of observations about the economy and the Obama administration Monday evening, coupled with a dark commentary on the future of the technology industry if nothing changes.  . . . Not long ago, Otellini said, “our research centers were without peer. No country was more attractive for start-up capital…We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case.”

IBD: Unless government policies change, and fast, he said, “the next big thing will not be invented here. Jobs will not be created here.” . . . That’s pretty tough stuff. But Otellini was just getting warmed up.

Fast Company: The reason for this is pretty simple–the legal, tax, and financial hoops that the U.S. enforces on all industry, with a particular emphasis on startups, is to blame. Successive administrations have been blind to this problem, or have ignored it, and the situation is now so dire that from his own experience Otellini notes “it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States.”

Mr. Otellini, let me introduce you to Robert Higgs of the Independent Institute, who introduced the term “regime uncertainty” to the world.

Robert Higgs

“Regime uncertainty,” says Wikipedia, “is when business is tepid due to unknown governmental influences. Business tends to invest and grow in stable economies. A government making big changes in the economy produces uncertainty and tends to increase business trepidation, which freezes job growth and overall business growth.”

Higgs coined the term (I think) as the title of his 1997 article, subtitled “Why the Great Depression Lasted So Long,” and his point was that “business confidence” necessary to promote investment and keep an economy going is destroyed if potential investors fear that “investors’ private property rights in their capital and the income it yields will be attenuated further by government action.”

Higgs went on to the point that this mind-set is not entirely a question of the formal rules, and he quoted economist Andrzej Rapaczynski to the effect that the crucial factor is that potential investors believe that:

the political system, together with the economic pressure groups [will] ensure that the state does not go ‘too far’ in interfering with the owner’s control over assets. This politically determined thin line may be understood as the real definition of property rights . . . .  How broadly property rights are defined in this real sense and how effective states’ (largely nonlegal) commitment is to their security is a more serious problem than the issue of legal protections against the more traditional form of takings.

At present, we seem to be undergoing a severe bout of regime uncertainty — or possibly regime certainty, in the sense that the regime does not want new manufacturing facilities, and see the whole net neutrality debate, which is, after all, about the rules and attitudes necessary to promote innovation and investment in telecom.

So Intel should by all means circulate Otellini’s speech to the world, but perhaps it should send around Higgs’ article as well.

ADDENDUM (08-26, 01:45 EDT): Higgs has just (two days ago) published Regime Uncertainty: Are Interest-Rate Movements Consistent with the Hypothesis? examining interest rates on corporate bonds during both the Great Depression and the recent financial crisis. He concludes:

I view these financial data as consistent with the hypothesis of recently heightened regime uncertainty. Of course, they do not “prove” that it is true, just as the striking data I found for the 1930s do not “prove” the hypothesis as applied to that episode. But in economic history, one looks above all for the correspondence of various forms of evidence with the interpretation one places on the observations.

and:

In any event, these preliminary explorations certainly show that the hypothesis should not be dismissed out of hand because it is not “scientific” or because it is not part of the mainstream macroeconomist’s customary style of mathematical modeling. If mainstream analysts continue to disregard the role of regime uncertainty in the major depressions of the modern era, especially in accounting for their extraordinary duration, then they will only demonstrate the poverty of their own mode of analysis.

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