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The world is facing a prolonged period of tepid economic growth compounded by uncertainty about what policies will govern the economy in coming years. Economists have long argued that economic policy uncertainty is often detrimental to growth, and AEI's Steve Davis presented a new way to quantify and better understand that uncertainty at an event on Friday. Davis showed how the meteoric elevation of uncertainty — driven by a nebulous tax code, political polarization, and indecision about entitlement reform — is crippling the economy's ability to recover from the 2008 financial crisis.
Greg Ip of the Economist pointed out that not all policy uncertainty is bad, but politicians need to do a better job of building consensus about policy and setting clear parameters for future regulation. John Makin of AEI then explained how monetary policy uncertainty engendered by the Fed in recent months has increased precautionary cash holdings by companies fearful of policy shocks. As the panel concluded, politicians must reduce uncertainty and get businesses to deploy their cash holdings if economic growth is to resume robustly.
As the U.S. fiscal cliff looms, government debt mounts and the euro remains embattled, the topic of policy uncertainty is attracting more attention. Some economists suggest that high levels of uncertainty partly explain the sluggish economic recovery following the financial crisis and Great Recession of 2009.
In an attempt to quantify policy uncertainty and its role in economic performance, Steven Davis of AEI and two Stanford economists, Scott Baker and Nicholas Bloom, have developed a new index that draws on media coverage of uncertainty, expirations of temporary tax provisions and disagreement among professional forecasters about the future outlook of inflation and government spending. Their index offers a new tool for assessing the level of uncertainty and its effects on household and business spending, investing and hiring.
At this event, Davis will present his research on the topic and a panel of experts will discuss.
Kevin A. Hassett, AEI
Steven J. Davis, AEI and University of Chicago
Greg Ip, The Economist
John H. Makin, AEI
Stan Veuger, AEI
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Steven J. Davis is deputy dean of the faculty and William H. Abbott Professor of International Business and Economics at the University of Chicago Booth School of Business. His research interests include employment and wage behavior, worker mobility, job loss, the effects of labor market institutions, business dynamics, economic fluctuations, national economic performance, and public policy. He is a research associate with the National Bureau of Economic Research, an economic adviser to the US Congressional Budget Office, a visiting scholar at AEI and the Federal Reserve Bank of Chicago, and a senior adviser to the Brookings Papers on Economic Activity. He is a former editor and co-editor of the American Economic Journal: Macroeconomics, published by the American Economic Association.
Kevin A. Hassett is the director of economic policy studies and a senior fellow at AEI. Before joining AEI, he was a senior economist on the Board of Governors of the US Federal Reserve System, an associate professor of economics and finance at Columbia Business School, and a policy consultant to the US Department of the Treasury during the George H. W. Bush and Clinton administrations. He served as an economic adviser during the George W. Bush 2004 presidential campaign, as chief economic adviser to Senator John McCain during the 2000 presidential primaries, and as senior economic adviser during the McCain 2008 presidential campaign. Hassett also writes a column for National Review.
Greg Ip is US economics editor for The Economist’s Washington, DC, office. He covers the economy; financial markets; and monetary, fiscal, and regulatory policy. He contributes to the Economist’s blog Free Exchange. He has commented frequently on radio and television, including CNBC, BBC, CNN, MSNBC, PBS NewsHour with Jim Lehrer, Washington Week with Gwen Ifill, and National Public Radio. He is the author of “The Little Book of Economics: How the Economy Works in the Real World” (Wiley, 2010). He joined The Economist in July 2008. Before his current job, Ip was a reporter for The Wall Street Journal, most recently as chief economics correspondent in Washington, DC. He created Real Time Economics, the Wall Street Journal’s blog of Federal Reserve policies and economic news.
John H. Makin is a former consultant to the US Department of the Treasury, the Congressional Budget Office, and the International Monetary Fund. He specializes in international finance and financial markets (stock, bonds, and currencies including the euro and the US dollar). He also researches the US economy (including monetary policy and tax and budget issues), the Japanese economy, and European economies. He is the author of numerous books and articles on financial, monetary, and fiscal policy. Makin writes AEI's monthly Economic Outlook.
Stan Veuger is a research fellow at AEI specializing in the intersection of economic and political behavior, public finance, banking, and macroeconomic policy. In particular, he has researched voter behavior, political activism, banking supervision, and the impact of economic policy uncertainty. At AEI, Veuger is concentrating on the political and policy impact of the Tea Party movement, on the relationship between job losses and economic policy uncertainty, and on online financial transactions fraud.