Paul Krugman, Noah Smith, and others have written derisively about the “Uncertainty Fairy”, alternatively the “Confidence Fairy”. What if fairies are real?
Three economists, Stanford University’s Nicholas Bloom and Scott Baker and the University of Chicago’s Steven Davis, have done invaluable work measuring the level of policy uncertainty over the past few decades. Their research (available at policyuncertainty.com) shows that, on average, U.S. economic policy uncertainty has been 50% higher in the past two years than it has been since 1985.
Based on that research, our economists at Vanguard isolated changes in the U.S. economy that we determined were specifically due to increases in policy uncertainty, such as the debt-ceiling debacle in August 2011, the congressional supercommittee failure in November 2011, and the fiscal-cliff crisis at the end of 2012. This gave us a picture of what the economy might look like if the shocks from policy uncertainty had not occurred.
We estimate that since 2011 the rise in overall policy uncertainty has created a $261 billion cumulative drag on the economy (the equivalent of more than $800 per person in the country). Without this uncertainty tax, real U.S. GDP could have grown an average 3% per year since 2011, instead of the recorded 2% average in fiscal years 2011-12. In addition, the U.S. labor market would have added roughly 45,000 more jobs per month over the past two years. That adds up to more than one million jobs that we could have had by now, but don’t.
I think that one of Bill Clinton’s unnoted accomplishments was his ability to act as cheerleader for the American economy and one of George W. Bush’s greatest weaknesses his lack of ability to create similar confidence. There was a sharp drop in the Dow when Bush took office. I attribute at least some of that to the Clinton effect. I have repeatedly questioned President Obama’s talking down of the economy, something that began even before he took office.
I’m not saying that the president should be engaging in happy talk in the face of disaster. What I think is that it’s possible to strike a balance. Read some of Franklin Roosevelt’s “fireside chats”.
And I don’t disagree that faster economic growth would have dispelled some of the uncertainty. However, if you don’t know how to produce growth (or are unwilling or unable to do what it takes to produce growth), there are other ways of fostering greater confidence. Why not try that for a change?