Post Event Summary

What is causing continued slow economic growth and high unemployment in America? On Friday at AEI, Sanjai Bhagat of the University of Colorado at Boulder discussed his research exploring the correlation between job losses and persistent unemployment. Bhagat began with a presentation of the paper he co-wrote with Iulian Obreja. Noting historically high cash flows and recent capital injections from the U.S. Federal Reserve, Bhagat suggested that capital shortfall cannot explain America's currently weak economic recovery. Instead, Bhagat asserted that high business uncertainty results in a significant reduction in job creation and investment.

Adriana Kluger of the U.S. Department of Labor challenged Bhagat's assumption about the correlation between low investment and uncertainty, stressing that the paper should have used more robust econometric measures. She furthermore cautioned against interpreting Bhagat and Obreja's results to mean that policy uncertainty is the cause of low corporate investment.

Following Kluger, Kenneth Lehn of the University of Pittsburgh elaborated on the difficulty in establishing a causal relationship between uncertainty and unemployment. Lehn advised conducting event studies to determine the effect of specific policies on the uncertainty index Bhagat employed. Finally, AEI's Stan Veuger pointed out that a separate, media-tracking measure of uncertainty reached a conclusion that mirrors Bhagat's findings about the correlation between uncertainty and unemployment. Nonetheless, Veuger stressed that further work is necessary to establish a causal link.

Event Description
In this election year, the underlying causes of the continued slow growth and high levels of unemployment in the U.S. economy are of particular interest. Much of the debate has focused on whether uncertainties faced by private employers — on taxes, regulation and other costs — are responsible for the slow recovery of employment since the 2008 financial crisis. Sanjai Bhagat and Iulian Obreja of the University of Colorado have produced a paper that correlates cash flow uncertainty with job losses and declines in capital investment. In this event, participants will review the Bhagat-Obreja paper and consider the role of uncertainty in major business decisions. In addition to commenting on the Bhagat-Obreja paper, Stan Veuger of AEI will describe the uncertainty index that has been developed by AEI economists and others.