Yes, Policy Uncertainty Does Matter
May 3, 2012
While covering yesterday’s speech by Amway Chairman Steve Van Andel at the U.S. Chamber, Suzy Khimm at Wonkblog dismisses policy uncertainty as simply a term businesses use to negotiate with policymakers, or “bludgeon the Beltway,” in her words. This is strange coming from Khimm since she’s written about uncertainty: here, here, here, and here.
Researchers have found that uncertainty is quite real and negatively affects the economy. Economist Tim Taylor looked at work on policy uncertainty by Scott Baker, Nick Bloom, and Steven Davis published in a Stanford Institute for Economic Policy Research policy brief. (I’ve written about their earlier work, and so did Khimm.) The three economists created an index using newspaper mentions of economic uncertainty, federal tax code provisions about to expire, and disagreement about future inflation and government spending. They estimated that a return to “2006 (pre-crisis) levels of policy uncertainty could increase industrial production by 4% and employment by 2.3 million jobs over about 18 months.”
Taylor concluded that “the calculations make a strong argument that the effects of policy uncertainty on output and employment have probably been a substantial contributor to the sluggishness of the U.S. economic recovery.”
Others agree. Looking at the fiscal policy challenges facing Washington at the end of this year, Kevin Hassett at the American Enterprise Institute writes that “uncertainty will likely break the all-time record set last year” and “the economy will suffer severely.” He explains:
Taxmegeddon is coming. This grim prophecy refers to the scheduled termination of a wide array of tax policies at the end of this year. The list is staggering. It includes the expiration of the Bush-era tax cuts, the end of the payroll-tax holiday, and the start of the new healthcare surtax and the Medicare payroll-tax increase. On top of all of that, Congress will likely hit the debt limit again around the end of the year.
On a side note, I actually think the Baker et al paper undercounts the negative effects of policy uncertainty because they only count tax provisions that are about to expire. Missing is the uncertainty stemming from regulations in the pipeline (Dodd-Frank, Obamacare, EPA). Survey’s like the U.S. Chamber’s Small Business Outlook Survey consistently show how such uncertainty keeps businesses from expanding and hiring.
Policy uncertainty isn’t the straw man argument that Khimm tries to make it out to be. Rather, it is a significant contributor to our slow economic recovery.
For a less cynical report on Van Andel’s speech, check out my colleague Sheryll Poe’s coverage.