NCPA - National Center for Policy Analysis

Uncertainty Hurts American Economy

October 18, 2011

Policy uncertainty isn't the only economic problem facing America or hurting business sentiment.  But it's likely a significant one.  Here are five reasons why, says James Pethokoukis, the money and politics columnist for U.S. News & World Report.

First, the uncertainty Index.

  • University of Chicago business professor Steven Davis has constructed a "policy uncertainty" index based on a) the frequency of newspaper references to economic policy uncertainty, b) the number of federal tax code provisions set to expire in future years, and c) the extent of forecaster disagreement over future inflation and federal government purchases.
  • Looking at a variety of events including the stimulus and debt ceiling debates, Davis concludes "policy-related uncertainty played a role in the slow growth and fitful recovery" of the past few years.

Second, gloomy entrepreneurs.

  • Uncertainty may be costing the United States some 2.5 million jobs, according to Davis.
  • The U.S. Chamber of Commerce recently conducted a survey of small businesses and found that while 53 percent said economic uncertainty was the most pressing concern, 39 percent also suffer from uncertainty about what Washington will do next.
  • Drilling down further, 79 percent said they would rather Washington "get out of the way" than offer a "helping hand," and 83 percent said the growing U.S. national debt is making them anxious.

Third, subpar business investment.

Fourth, worries about regulation.

Fifth, uncertainty matters.  A 2001 review of economic literature found most academic papers produced evidence "in favor of the hypothesis that volatility, uncertainty or political instability hurts growth."  And after examining these analyses, the author also agreed that "uncertainty related to volatility can lead to lower growth."

Source: James Pethokoukis, "Five Reasons Why Obama Really Is Freaking Out Business," Enterprise Blog, October 13, 2011.

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