In 1933 and 1934, America was on a trajectory to recover from the Depression. But, before recovering, the economy was to nose dive again, and never really did recover until the next decade. Historians and economists argue endlessly about this, but I am convinced that the arbitrary and capricious meddling in the economy by the Roosevelt administration caused many folks who would have started investing and bargain hunting with their capital to sit on the sidelines. The National Industrial Recovery Act (thankfully killed by a mercifully non-packed Supreme Court) was just the most egregious example of the US government making it impossible to evaluate long-term business proposals because the basic foundations of the rule of law were shifting so much.
I fear we are facing a similar danger. Everything continues to tell me that had we taken our medicine late last year, we would be entering a recovery over the next few months. However, the Obama administrations economic interventions have gotten so egregious that there is a real danger investors are going to sit on the sidelines with their capital. Who knows when your industry will get targeted with compensation restrictions, or higher taxes, or even forced changes in ownership? Who could possibly feel comfortable making 20-year investments in this environment? Dale Franks quotes Thomas Cooley:
Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that's because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.
Postscript: There is legislation pending in Congress to restrict the ability of lenders (e.g. credit card issuers) from changing rates on existing debt. They ask if it is fair for someone who took on a debt thinking it would be at 15% to suddenly find it is at 25%. But how are tax increases any different. I make 10-20 year investments in my company, and the expected tax rate is a hugely important assumption in whether it makes any sense for me to put my capital in a particular venture. How is a large increase in taxes on returns from my past investments any different than changing the interest rate on an existing debt?