There are some parallels between the Great Depression and now.  We are in tough economic times, but I don’t believe we have seen anywhere near the worst yet.

We are a much wealthier society than what was the case leading into the Great Depression. Obviously technology has helped us through a great deal.  Actually, I would argue that most of the government-imposed shutdowns never would have happened if not for our current technology.  Even 20 years ago, it wouldn’t have been possible to send tens of millions of people home to do their jobs.

It is also easy to take our high living standards for granted.  It was a bit of a shock in March and April to go to the store and see shelves cleared out.  I have only seen that before when a hurricane was about to hit.  In this case, it wasn’t just toilet paper.  Even meat and vegetables were largely gone off the shelves.

It showed how fragile our whole system is.  On the other hand, it also showed how resilient our system is if it is allowed to function.  When the market is relatively free, it is amazing how supply and demand can rearrange things quickly, and the seemingly right amount of products appear on the shelves.

As a follower of Austrian school economics, I believe that the central bank’s easy monetary policy of the 1920s set up America for the beginning of the Great Depression. A recession quickly became a depression due to increased involvement from government.  Both Hoover and Roosevelt were highly interventionist presidents when it came to the economy.  It was especially hard for the economy to recover when the government was trying to enact price controls and prevent wages from falling.  It also marked the beginning of a big welfare state.

One other factor that sometimes gets overlooked is the uncertainty, especially when it came to government policies.  Robert Higgs wrote extensively on what he called regime uncertainty and applied it to the Great Depression.  He said that the uncertainty of future government policies helped create an environment where investment and entrepreneurship were highly discouraged.

Regime uncertainty could prove to be highly detrimental to our economy now in the year 2020, and it could impact the economy for a long time to come.

The Next Flu?

I have asked rhetorically whether we will have to wear face masks forever because there is always some kind of flu virus out there.  I have questioned whether governors or mayors (or maybe future presidents) will just shut down the economy again any time a new virus or contagious disease gets some media attention.

If I am wondering these things, you have to think that many others are wondering the same thing. This would be especially true of investors and entrepreneurs.

There are still many businesses that are shut down due to government orders.  Most of these orders are not even really laws. They mostly came from governor and mayor orders without a legislature.  2020 has been a sight to see, and it’s not done yet.  It was amazing how a fearful populace so easily gave up their liberty.

For the brick and mortar businesses that are open, they are having to follow all of these ridiculous regulations.  They get to put up glass walls and stick lines and arrows all over their floors.  They get to play the mask police too.  Much of this is government imposed, but it is also imposed by public opinion.

If it were all voluntary, it would obviously be better.  But it is still harmful to businesses even if they are just responding to public fear.  They get angry comments that they should require masks.  They get angry comments that they shouldn’t require masks.  They get angry comments that they aren’t enforcing their mask policies good enough.  On top of it, the big businesses have lawyers telling them they better follow certain precautions for liability reasons.

How would you like to be a business owner right now who owns or leases a building that customers enter?  And what is to say that something similar won’t happen again next year or the year after that? Who is to say that we won’t still be hunkered down from the coronavirus this time next year?  I would never have guessed that this nonsense reaction would have lasted this long in the first place.

Many restaurants and other small businesses have closed.  They have closed for good.  Even if customer demand somewhat comes back for dining out, who would want to start up such a business to replace one of the restaurants that has already closed down permanently?

You are not secure in your property rights.  You can open up a nice new restaurant, and now you know the government can just shut it down at any time.

It isn’t hard to imagine hearing this now or in the future: “There is a new strain of the flu out there.  It may kill up to 100,000 Americans this year.  It’s time for small non-essential businesses to close down temporarily until we get a vaccine or get this thing under control.”

If this isn’t regime uncertainty, I don’t know what is.  And it is coming from all levels of government.  If the president doesn’t shut you down, the governor may. If the governor doesn’t shut you down, the mayor may do it.

This will be especially true in big cities.  I don’t see how New York is coming back from this any time soon.  It has been decimated.  Rent would have to be incredibly cheap for anyone to start a business there now.  Even with that, I don’t think the risk would be worth it.  On top of the threat of government shutdowns, you also have to deal with the potential threat of rioters without police protection. This is an added layer of uncertainty for the big cities.

Real Estate

Regime uncertainty also plays a factor in real estate.  Manhattan will obviously continue to be a disaster in every way, but we don’t even have to look at big cities.

I know there has actually been an increased demand for houses in many areas.  It is typically in the suburbs because people are trying to escape the big cities.  They are trying to escape the downtown areas.  This makes sense in terms of buying a house to live in.

I have to wonder though about the rental market.  Anyone who owns investment real estate has to be nervous.  It has been this way since March.  It is really devastating for a landlord to hear government officials effectively say that people don’t have to pay their rent.

They don’t exactly say it this way, but they say that they want a moratorium on evictions.  In other words, you don’t have to pay your rent and you won’t get kicked out any time soon.

Thankfully, the large majority of people are still paying their rent.  But you wouldn’t want to be a landlord stuck in a situation where you have someone renting who is not paying.  Depending on where you live, you may not be able to evict the person, even if they have the money to pay rent.  And if you can evict, you know that the courts are probably backed up in a lot of places.  How many months should a landlord have to go without getting paid any rent while the landlord still has to pay the mortgage and expenses of the property?

I have been an advocate in the past of investing in residential real estate for people who are in the right position financially.  I am rethinking this now.  I already would have said to avoid places like California or any other state that has a low regard for property rights.  This is especially true now.  But even in a more friendly state, I would be concerned now, especially when there are rules coming down from Washington DC.

Again, why am I going to buy residential real estate as an investment when the government can come along at any time and tell my renters that they essentially don’t have to pay? This has all of a sudden become far more risky for real estate investors.

Who would want to be a landlord in California?  The added regime uncertainty when it comes to property rights (or lack of) for real estate investors will further discourage the process.  It will end up reducing supplies and making rents more expensive, and it will add to the epidemic of homelessness.

If I were looking at buying rental real estate, I would be incredibly careful about where I’m buying.  Governments all over have shown that your property isn’t really your property.

And this is just for residential real estate.  I won’t even get into commercial real estate.  Maybe some of those high-rise buildings that sit mostly empty in downtowns across America can be converted into residential real estate.  But who would even want to make that investment at this point?

Investment

This all impacts investing in general too.  Many entrepreneurs rely on investors for capital.  It doesn’t just come from bank loans.

Who would want to be an investor in any brick and mortar business right now?

You might say that the stock market is booming, which is true right now.  But notice what is happening.  The investing is going towards big companies.  These are not start-up companies.  They are companies that are either deemed “essential” or they are tech companies.

It is still surprising how much of a boom there is in the stock market (as of right now) given the devastation that has taken place over the last 6 months.  I underestimated the power of massive unemployment checks and young people sitting at home with nothing to do. So they get on a trading app and use their extra money to seemingly make some easy money by pushing a few buttons on their phone.

It all reminds me of the tech bubble in the late 1990s.  But regardless of what happens with stocks, this isn’t new investment. It is people trading shares. There is a buyer and seller on each side of the equation, but the price at which the shares are being traded is higher than before.

This is largely gambling at this point.  It is hard to call it investing.  Seeing the prices of Amazon, Tesla, and Apple go higher is not a sign of American prosperity.  It is not a sign of investment.  If anything, it is a sign that people would rather digitally trade in and out of shares than use their money to start a business or buy investment real estate.  From this standpoint, the stock investing actually seems rational.

Conclusion

Regime uncertainty is going to have a major impact on our economy going forward.  If you are going to start a business, do it all online.  You don’t want to have a physical presence.  Otherwise, a governor or mayor could shut you down at any time.

The idea of property rights has been dealt a blow in 2020.  It is hard to get this back.  It will be especially hard this time, not knowing if and when the population will be so easily led into fear the next time a new virus appears.

I have no idea if we will see another Great Depression.  Regardless, our living standards will be greatly impacted.  The Federal Reserve’s monetary policy has done great harm and will continue to do great harm.  The federal government’s massive spending and regulations have done great harm and will continue to do great harm.

Now we also have to worry about the whims of governors and mayors who have been unofficially granted the power to shut down private businesses.  This is regime uncertainty not seen since the Great Depression, and it is coming from all levels of government.