There are two recent reports on the importance of policy uncertainty as a factor slowing down the economy. Unsurprisingly, they come to opposite conclusions.

Uncertainty IS the problem:

The first is from economists at Stanford and the University of Chicago. [link] They claim that policy uncertainty is at an all-time high:

“A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised… shows U.S. policy uncertainty at historically high levels. “

Here is the chart they show of their “uncertainty index.” 

They squarely place the blame on Congress:

“Why has policy uncertainty increased so much? One argument holds that the recent financial crisis created an atmosphere of extreme uncertainty, bringing new and difficult policy issues to the fore. No doubt, the crisis presented policy makers with difficult choices in 2008 and 2009. But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.”

Uncertainty is NOT the problem:

On the other hand, the Economic Policy Institute—a liberal think-tank—has uncovered evidence that they claim is inconsistent with the “uncertainty” story:

” An examination of current economic trends, and especially what employers are doing in terms of hiring and investment, debunks this story about regulatory uncertainty as the cause of our dismal job growth.”

Later:

“Let us start by comparing investment, specifically investment in equipment and software, in the first two years (which is where we are now) of each of the last four recoveries. Figure A does so by examining the changes in the investment (equipment and software) share of GDP from the beginning of each recovery. The data show that investment has increased more in this recovery than in the prior two recoveries and roughly the same as that of the 1980s recovery.”

Figure A:

They argue that investment in equipment is a longer-term investment than hiring new workers. If uncertainty were the problem, they say, we would see more hiring but less investment in equipment, because workers can more easily be fired than equipment can be sold.

They also have arguments related to weekly hours worked and how business owners respond to surveys. Read more at the link.

What’s the right answer?

This is a tremendously difficult question and, as shown above, hard to empirically evaluate. But here is a statement that everyone should agree with: Policy uncertainty is certainly not helping, but it is also definitely not the only problem that the economy is facing.