American Elephants

How Uncertainty Affects the Economy by The Elephant's Child

I’ve written often about the effects of policy uncertainty on business, based on comments from businessmen. Now it has become a significant issue among economists who are doing serious academic research on the topic. Business in the private sector is risky. When do you take a chance on starting a business? When do you add a new product? How much do you have to worry about your competition? Can you add a new building, expand the office, hire more employees? Imagine how many businessmen are needing more help but reluctant to hire in the current uncertainty about health insurance.

The Dallas Fed held a Conference back around the first of October on the Causes and Macroeconomic Consequences of Uncertainty. Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas summed it up nicely: “Uncertainty matters a lot.” Business, he said, “is the process of managing under conditions of uncertainty, and business executives organize their teams and resources to minimize uncertainty of factors under their control; and they develop contingencies and operating tactics and strategies for factors over which they have no direct control.”

If there is one thing that you can confidently assert, it is that the Obama administration has been an outstanding generator of a vast fog of uncertainty, even as they claim to want to create jobs. Economists have been hearing from their business contacts, but “until quite recently the economists who study business cycles and monetary policy paid scant attention to the effects of uncertainty on aggregate job and output growth.” Their standard models assumed that people and businesses could insure away individual risk.

Gut feeling may work for ordinary people, but economists dealing in macroeconomics give direction to governments and help set policy and the distribution of shocks is currently far from normal. In his post John Taylor has listed the academic papers presented — with links, if you’re interested. It is a good thing that the profession has taken interest in the effects of uncertainty, and is trying to understand and quantify the reality.


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