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

Video

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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

 

John H.
Makin

 

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.

 

Stan
Veuger

What's new on AEI

Rebuilding American defense: A speech by Governor Bobby Jindal
image Smelling liberal, thinking conservative
image Stopping Ebola before it turns into a pandemic
image All too many reasons for pessimism about Europe
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Event Registration is Closed
Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Event Registration is Closed
Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.