The High Cost of Economic Policy Uncertainty

By McQuillan, Lawrence J. | Examiner (Washington, D.C.), The, August 17, 2013 | Go to article overview

The High Cost of Economic Policy Uncertainty


McQuillan, Lawrence J., Examiner (Washington, D.C.), The


America's economic recovery has been slow by historical standards. Growth has been slow, unemployment stubbornly high, and "green shoots" have wilted fast.

If you listen to some, such as Paul Krugman of the New York Times, the reason for the anemic recovery is that governments at all levels have been "slashing spending in the face of a depressed economy."

But that's not the reason at all. The evidence points in the opposite direction: that governments have intervened too much, not too little, creating economic uncertainty. This is what's killing the economy.

Historically after a recession the unemployment rate falls steadily as job openings increase. After the Great Recession of 2008, however, the unemployment rate has remained stubbornly high, despite increases in posted job vacancies. Why is that?

Two economists with the Federal Reserve Bank of San Francisco, Sylvain Leduc and Zheng Liu, recently looked at various explanations for the anemic jobs recovery and concluded that "heightened uncertainty about economic policy during the recovery [has] made businesses more reluctant to hire workers," keeping unemployment high.

In their paper, "Uncertainty and the Slow Labor Market Recovery," the Fed economists gauged policy-related economic uncertainty by measuring, among other factors, the volume of newspaper articles discussing monetary and fiscal policy uncertainty, the number of federal tax code provisions set to expire in future years, and the extent of disagreement among economic forecasters about future inflation rates, government spending levels and similar matters.

Their statistical analysis found that a sharp and sustained jump in economic policy uncertainty before, during, and after the Great Recession accounts for a full two-thirds of the higher than normal post-recession unemployment rate. …

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