In an upcoming piece, AEI's Kevin Hassett highlights a new unique index of policy uncertainty which was developed in a path-breaking paper by Stanford economists Scott R. Baker and Nicholas Bloom along with AEI Visiting Scholar and University of Chicago economist Steve Davis. Among the key points:
- Uncertainty about taxes and fiscal policy is likely to skyrocket by the end of the year because of Taxmeggedon – the scheduled termination of a wide array of tax policies (such as the Bush tax cuts and the Medicare payroll tax increase). The heightened uncertainty is cause for significant pessimism about the U.S. economy for the second half of 2012.
- The study results imply that a 112-point rise in the policy-uncertainty index, as occurred between 2006 and 2011, would reduce real GDP by 3.2 percent and employment by 2.3 million jobs. The uncertainty effects would be especially focused on private investment, as business decision-makers wait for clarity before beginning new projects.
American Enterprise Institute (AEI) Senior Fellow Kevin Hassett is Director of Economic Policy Studies at AEI. He served previously as a senior economist at the Federal Reserve and has taught economics and finance at Columbia University Business School. He is currently an economic adviser to the Romney campaign.
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