Many commentators argue that uncertainty about taxes, government spending and other policy matters deepened the recession of 2007-2009 and slowed the recovery. To investigate this issue we develop a new index of policy-related economic uncertainty and estimate its dynamic relationship to output, investment and employment. Our index averages several components that reflect the frequency of news media references to economic policy uncertainty, the number of federal tax code provisions set to expire in future years, and the extent of forecaster disagreement over future inflation and federal government purchases. The index spikes near consequential presidential elections and after major events such as the Gulf wars and the 9/11 attack. Index values are very high in recent years with clear jumps around the Lehman bankruptcy and TARP legislation, the 2010 midterm elections, the Eurozone crisis and the U.S. debt-ceiling dispute. VAR estimates show that an increase in policy uncertainty equal to the actual change between 2006 and 2011 foreshadows large and persistent declines in aggregate outcomes, with peak declines of 3.2% in real GDP, 16% in private investment and 2.3 million in aggregate employment.