Uncertainty’s down, and the economy’s back up

The political brinksmanship that left the country hanging in limbo just a few months ago has significantly subsided, and that’s helped with the economic recovery, argue VoxEU’s Scott Baker and Nicholas Bloom.

According to Baker and Bloom’s index of “policy uncertainty” — which is based on media mentions of economic uncertainty, soon-expiring tax provisions and the degree of disagreement among economic forecasts — the outlook for U.S. policy is far more stable than it was just six months ago, when Washington was roiled in the debt-ceiling debate. And Baker and Bloom argue that the stability has helped the U.S. economy get back on its feet, pointing to recent evidence of recovery.
(VoxEU)

The sharp drop in policy uncertainty is the outcome of a few obvious changes: August’s Budget Control Act should keep another debt-ceiling debate at bay until the end of 2012, while “discussions of regulatory and tax reforms have subsided; and attention has moved on to the Republican primaries,” Baker and Bloom write. There will still be a big debate over extending the payroll tax and unemployment benefits, which expire at the end of February. But there’s a general consensus that major policy reform will have to wait until the post-election, lame-duck session, at the earliest. That said, they acknowledge that “policy uncertainty still appears extremely high in Europe with the Eurozone crisis,” which could hold back the U.S. economy as well.