We talk a lot about how Washington’s policies affect everyday Americans. But it’s not necessarily just the policies that send ripples throughout the economy, it’s often uncertainty surrounding policy that inhibits businesses from investing, making hiring decisions and generally planning for the future.
This crippling uncertainty has had a devastating affect on the American workforce and the economy as a whole.
In a must-read op-ed on Bloomberg, Scott Baker, Nicholas Bloom and Steven Davis explain that policy-induced uncertainty has very real consequences. Below are excerpt. Click here to read the full piece.
A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised shows U.S. policy uncertainty at historically high levels.
The wave of uncertainty during the debt-ceiling dispute between Democrats and Republicans this summer was, quite clearly, an outcome of the political process. Day by day, markets swung wildly as politicians parried and counter-parried.
Across the Atlantic, European policy makers have failed to develop a coherent and credible response to the Greek debt crisis. The lack of resolution has dragged down equity markets worldwide and stoked fears of contagion to other European sovereign borrowers. The crisis also raises serious questions about the solvency of major European financial institutions and the viability of the euro. These uncertainties undermine growth prospects in Europe and diminish trade opportunities for U.S. producers.
When businesses are uncertain about taxes, health-care costs and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many companies will wait for calmer times to expand. If too many businesses wait, the recovery never takes off. Weak investments in capital goods, product development and worker training also undermine longer-run growth.
So how much near-term improvement could we gain from a stable, certainty-enhancing policy regime? We estimate that restoring 2006 levels of policy uncertainty would yield an additional 2.5 million jobs over 18 months. Not a full solution to the jobs shortfall, but a big step in the right direction.
