Policy uncertainty - graph of the week
In today's VoxEU set of most recent articles, I ran into a very interesting one measuring economic policy uncertainty in the US as a way to explain the trails of the current recovery.
|Source: Baker, Bloom, Davis (2012) "Has Economic Uncertainty Hampered the Recovery"|
Baker, Bloom and Davis (first two from Stanford, the third from Chicago) devised an economic policy uncertainty index based on three types of information: "frequency of newspaper articles referencing economic uncertainty and the role of policy, federal tax code provisions set to expire soon and the disagreement among forecasters on future inflation and future government spending." They have the index database, as well as their results and methodology explained on their webpage and this short paper for the Hoover Institution Press. Here's a good summary of what they're trying to say:
"We previously argued that policy uncertainty was a key factor stalling the recovery. When businesses are uncertain about taxes, healthcare costs and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand. If too many businesses wait to expand, the recovery never takes off. Weak investments in capital goods, product development and worker training also undermine longer-run growth." (Baker and Bloom, 2012, VoxEU)
They find very interesting correlations of the policy uncertainty index and economic outcomes. They also explain for the current set of good results of the US economy by noticing a sharp decrease of economic policy uncertainty in the past few months (the drop was 40% from its August 2011 peak to January 2012).
Not surprisingly, the August peak is explained by the Congressional quarrels over the debt ceiling that brought to the historical S&P ratings downgrade. It was approximately the same time when the eurozone problems re-appeared.
The current crisis was very often depicted as the crisis of confidence. This index fully reflects that as it can provide a good insight on the proper policy instrument to resolve the recession and kick-start the recovery. The most important finding is that whatever policy chosen, it should be done transparently and with an aim of boosting confidence. The less political implication, the better.