Goldman’s Jan Hatzius and Sven Jari Stehn put out a great note on Friday that’s generating some buzz (Krugman, FT Alphaville). The topic: Uncertainty, and whether it’s really playing a depressing role in the economy.
The GOP — along with many of the tycoons that come on shows like Squawk Box — like to slam policy uncertainty for creating an environment in which businesses are immobilized by fear of the unknown.
Hatzius and Stehn find that to be bunk.
- A common explanation for the economy’s disappointing performance in recent years is a rise in “policy uncertainty,” a term popularised by Nicholas Bloom of Stanford University and his co-authors. They suggest that the increase in their “US policy uncertainty index”— which is based on news searches, expiring tax provisions, and forecaster disagreement—has depressed real GDP by more than 3%.
- We do not doubt that uncertainty shocks depress economic activity, or that uncertainty has risen substantially since 2006. But we do not believe that the economy’s poor performance has been caused by an exogenous increase in US policy uncertainty.
- First, the observation that most forecasters have been surprised by the economy’s poor performance probably says more about the forecasters than about the economy. The historical record shows clearly that the bursting of a large asset price and debt bubble inflicts enormous and long-lasting damage on economic activity, and the recent US performance is no worse than that record would suggest.
- Second, much of the increase in policy uncertainty is probably a consequence of economic weakness, rather than its cause. Indeed, if we “purge” the uncertainty index of its correlation with past economic activity, it shows a much smaller increase since 2006.
Two charts from the report really stand out.
One is that the US recovery is very much in line with past financial crises, that were the result of a big debt bust. AKA: There’s nothing unusual about this slow economy.
Photo: Goldman Sachs
Second, they use an index that measures policy uncertainty (the index looks for the prevalence of certain words, and examines the dispersion of economic forecasts) to show that just in general, uncertainty is a byproduct of weak growth.
Bottom line: There’s really nothing to see here on this front.
“Uncertainty” is just code word for “don’t raise taxes” or “Policies made by Obama.”