A number of intelligent economists appear to take the regime uncertainty argument seriously. As Russ Roberts notes there is probably some ideological component to this, but at its heart I suspect its what I think of as “real variable bias.”
There is a tendency among a lot of economists to vastly over-estimate the importance of real versus nominal variables. Real things seem like they ought to matter more. After all they are real. Nominal things making all the difference means that these massive effects we are seeing are generated from what are ultimately mistakes.
I think that misses the true nature of what it means to be nominal and that nominal should be thought of as “keeping one’s word.” That is actually quite important in massive economy, even though it can cause problems when you run into a situation where everyone would be better off to accept a round of promise breaking.
Anyway I wanted to get to one of the reasons why I think regime uncertainty is highly unlikely to explain our current economic conditions. The idea here is that government policy has created an environment where companies are afraid to invest and hire.
The problem is that in most sectors of the economy you have to jump through a lot of hoops to explain exactly why it is that the current environment is so detrimental to hiring.
Oil and Gas Extraction
This issue is made worse once you look at resource extraction in general and oil in particular.
We are just coming off the BP Gulf of Mexico oil spill. We had a Congress that passed Cap-And-Trade, a bill specifically designed to make it more expensive to operate as a greenhouse gas emitter. We have the possibility of the EPA regulating greenhouse gases. We have an administration which is openly hostile to fossil fuels and wants to promote industry which will put fossil fuel extractors out of business and we have protesters pushing the President to deny a crucial private infrastructure initiative to help develop fossil fuels – the Keystone XL project.
Yet, with all of that employment in oil and gas extraction is booming
If the government can’t scare off the oil and gas extractors, when the government’s stated goal is to replace them with solar or wind then is it reasonable to suspect other people are scared off.
That being said I do believe that loosening current day regulations on oil and gas extraction as well as working with industry on developing safe and easy to implement fracking regulations is a step in the right direction.
Our total employment numbers are still awful. We need to push for more jobs on all fronts. This includes looser monetary policy, simulative fiscal policy and easing restrictions on capital intensive sectors like oil and gas.
As I laid out I don’t think regime uncertainty is stopping the oil and gas industry from expanding but ordinary regulatory impediment is. We need to encourage not discourage new off shore drilling. We need to approve the Keystone XL pipeline. We need to support not oppose new fracking projects in the Eastern United States.
Quite frankly I also believe we need to open up ANWR, though I understand this issue has already become such a hot button that it may not be a fight worth having.
Protecting the environment is an important long run goal. Human suffering, however, has to take priority. Around the globe humans are suffering from a lack of demand. This is one industry where the demand is there. We should let it prosper.