How Policy Shocks Like The 2011 Debt Ceiling Debate Cost The U.S. Millions Of Jobs

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Photo: PolicyUncertainty.com

Economists look to a broad variety of indexes and metrics when judging how the economy is functioning: the Baltic Dry Index, Underemployment (U-6), Industrial Production, regional Federal Reserve Activity. The list goes on.But an index from Stamford University’s economic department, completed by PhD candidate Scott Baker and professor Nicholas Bloom, as well as the University of Chicago’s Steven Davis, is offering yet another look at how the U.S. is performing.

And the index is finally beginning to show some return from the heights hit during the debt ceiling crisis of 2011 that nearly derailed the U.S. economy.

The Uncertainty Index combines a number of indicators including newspaper coverage of economic policy uncertainty, the expiration of federal tax codes, and disagreement between economic forecasters. 

What the researchers found was surprisingly substantive.

“We see that a 112 point rise in policy uncertainty (the rise in our policy uncertainty index from 2006 to 2011) is followed by a persistent fall in real industrial production with a peak negative impact of about -4.0% at 14 months,” Baker, Bloom, and Davis write. “Similarly, there is a persistent fall in aggregate employment following a policy uncertainty shocks, with a peak response of 2.3 million jobs after 20 months.”

The index has fallen to 156.9 in January from 199.5 the preceding month, but the rate remains above pre-crisis levels. That’s relatively good news — in fact it’s right in line with the reading in January of 2011. 

This is one of many indexes economists have turned to recently.
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