Policy uncertainty and the economy: A new index to gauge the pain

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Event Summary

The world is facing a prolonged period of tepid economic growth compounded by uncertainty about what policies will govern the economy in coming years. Economists have long argued that economic policy uncertainty is often detrimental to growth, and AEI's Steve Davis presented a new way to quantify and better understand that uncertainty at an event on Friday. Davis showed how the meteoric elevation of uncertainty — driven by a nebulous tax code, political polarization, and indecision about entitlement reform — is crippling the economy's ability to recover from the 2008 financial crisis.

Greg Ip of the Economist pointed out that not all policy uncertainty is bad, but politicians need to do a better job of building consensus about policy and setting clear parameters for future regulation. John Makin of AEI then explained how monetary policy uncertainty engendered by the Fed in recent months has increased precautionary cash holdings by companies fearful of policy shocks. As the panel concluded, politicians must reduce uncertainty and get businesses to deploy their cash holdings if economic growth is to resume robustly.
--Daniel Hanson

Event Description

As the U.S. fiscal cliff looms, government debt mounts and the euro remains embattled, the topic of policy uncertainty is attracting more attention. Some economists suggest that high levels of uncertainty partly explain the sluggish economic recovery following the financial crisis and Great Recession of 2009.

In an attempt to quantify policy uncertainty and its role in economic performance, Steven Davis of AEI and two Stanford economists, Scott Baker and Nicholas Bloom, have developed a new index that draws on media coverage of uncertainty, expirations of temporary tax provisions and disagreement among professional forecasters about the future outlook of inflation and government spending. Their index offers a new tool for assessing the level of uncertainty and its effects on household and business spending, investing and hiring.

At this event, Davis will present his research on the topic and a panel of experts will discuss.

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

John H.
Makin
  • John H. Makin is a resident scholar at the American Enterprise Institute (AEI) where he studies the US economy, monetary policy, financial markets, corporate taxation and banking. He also studies and writes frequently about Japanese, Chinese and European economic issues.

    Makin has served as a consultant to the US Treasury Department, the Congressional Budget Office, and the International Monetary Fund. He spent twenty years on Wall Street as the chief economist, and later as a principal of Caxton Associates a trading and investment firm. Earlier, Makin taught economics at various universities including the University of Virginia. He has also been a scholar at the Bank of Japan, the Federal Reserve Bank of San Francisco, the Federal Bank of Chicago, and the National Bureau of Economic Research. A prolific writer, Makin is the author of numerous books and articles on financial, monetary, and fiscal policy. Makin also writes AEI's monthly Economic Outlook which pairs insightful research with current economic topics.

    Makin received his doctorate and master’s degree in economics from University of Chicago, and bachelor’s degree in economics from Trinity College.


    Follow John Makin on Twitter.

  • Phone: 202-862-5828
    Email: jmakin@aei.org
  • Assistant Info

    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

 

Steven J.
Davis
  • Steven J. Davis studies unemployment, job displacement, business dynamics, the effect of taxes on work activity, and other topics in economics. He is deputy dean for the faculty and professor of international business and economics at the University of Chicago Booth School of Business, a research associate at the National Bureau of Economic Research, and an economic adviser to the U.S. Congressional Budget Office.  He previously taught at Brown University and MIT.  As a visiting scholar at AEI, Mr. Davis studies how policy-related sources of uncertainty affect national economic performance.

  • Phone: 773-702-7312
    Email: sdavis@aei.org

 

Stan
Veuger

  • Stan Veuger is a resident scholar at AEI.  His academic research focuses on political economy, and has been published in The Quarterly Journal of Economics. He writes frequently for popular audiences on a variety of topics, including health and tax policy. He is a regular contributor to The Hill, The National Interest, U.S. News & World Report, and AEIdeas, AEI’s policy blog. Before joining AEI, Dr. Veuger was a teaching fellow at Harvard University and Universitat Pompeu Fabra. He is a board member of the Netherland-American Foundation in Washington and at The Bulwark, a quarterly public policy journal, and was a National Review Institute Washington Fellow. He is a graduate of Utrecht University and Erasmus University Rotterdam, and holds an M.Sc. in Economics from Universitat Pompeu Fabra, as well as A.M. and Ph.D. degrees, also in Economics, from Harvard University. His academic research website can be found here.


    Follow Stan Veuger on Twitter.

  • Phone: 202-862-5894
    Email: stan.veuger@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

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