Economic Uncertainty

It has become fashionable for politicians to blame the nebulous concept of “economic uncertainty” as the reason their opponent’s policies are holding back the economy. At least until they decide to pursue a policy (such as threatening to default on the national debt) which actually does hinder hiring and investment when the term vanishes from the debate.

But are there times when there isn’t any economic uncertainty? Yes, and that’s the best definition of a “bubble” that I can think of.

Here is a graph from the paper “Measuring Economic Policy Uncertainty” by Baker, Bloom, and Davis which I saw presented at the recent ASSA meetings in San Diego.

Baker Bloom Davis - Figure 2

First, the periods of lowest uncertainty occurred right before recessions – in the late 1990s during the tech bubble, and during the 2000s during the housing bubble. A lack of uncertainty doesn’t mean sound fundamentals.

Second, the 2011 debt fight was worse than 9/11 and much worse than the collapse of Lehman Brothers in 2008 in terms of uncertainty.

If politicians truly do believe that “economic uncertainty” is bad for the economy, then they should stop playing games with the credit of the United States, because that is the biggest threat this country currently faces.

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