James Surowiecki Forgets How To Do Marginal Analysis

His interesting piece about regime uncertainty and its role in the sluggish recovery leaves me confused.

Those who think that they are say that “uncertainty surrounding regulations and taxes,” ... is making business hold back. But uncertainty is a fact of business life,

So if there's already some uncertainty in an activity, then adding uncertainty shouldn't change your behavior? Suppose flipping a coin costs you $1 and you get $3 if it turns up heads. If the rules change to flipping two coins for $1 and you get $3 when they both come up heads this is clearly a smaller gain (in fact, your expected gains in the first are positive while in the second, they are negative). But not to Surowiecki.

and the impact of new regulations on most companies has been overhyped: unless you’re a financial-services or health-care company, Obama’s initiatives aren’t remaking your business.

But they are! Markets are linked and those two altered sectors are big and critical parts of the economy. It's not as if there was heavy reform in the knitting sector. If the financial sector is a big part of the cause of the recession (and I think it was) then uncertainty in the financial sector is likely a big part of why the recovery is slow. This doesn't even touch on people's expectations about future regulation. If the administration is willing to turn not one but two sectors of the economy upside down, then where is the line? The BP disaster already brings on calls for re-regulation in the energy sector.

If businesses aren’t hiring or investing, in other words, it’s because they don’t need to: they have enough workers and factories to meet the demand for their products. And there are few signs that this is going to change any time soon: consumer demand remains weak, economic indicators—inflation rates, consumer confidence, the stock market, bond rates—aren’t forecasting a quick return to boom times, and, just last week, the Fed chairman, Ben Bernanke, told Congress that the state of the U.S. economy was “unusually uncertain.” So it’s no wonder that companies are feeling cautious.

No doubt uncertainty about future economic growth retards current economic growth. But uncertainty about the administration compounds that uncertainty about the economy. Regulation has the potential to transform good ideas into poor ones so even if a company's willing to try out an investment despite poor confidence, regime uncertainty can cause them to hold back. If heads comes up on only one coin, the deal will still sink.

Yes, recovery is not a simple matter of "making the suits feel better" but on the margin, it does make things worse. When it comes to uncertainty President Obama is no FDR but the demand curve still slopes down.