Stop The Uncertainty

The economic policy uncertainty, that is (With apologies to Susan Powter). Regardless of where you are on the econo-political spectrum, you should want economic policy uncertainty to be reduced. Remember all those conservative voices in the post-Global Financial Crisis saying policy uncertainty was slowing the economic recovery? Well, today is an opportunity to return considered, coherent, economic policymaking and trade negotiations.

First, here’re two indices of policy uncertainty — US news based and the US trade component, both from Baker, Bloom and Davis.

Figure 1: US Economic Policy Uncertainty index – news based (blue, left scale), and US Trade Policy Uncertainty categorical component index (tan, right scale). NBER recession dates denoted by light gray shading; most recent recession assumed to end April 2020. Orange denotes Trump administration; orange dashed line indicates election. Source. Policyuncertainty.com, accessed 11/3/2020.

Over the Trump administration, excluding the Covid-19 pandemic period, Economic Policy Uncertainty (EPU) was 31% higher (log terms) than it was during the period 2006 onward. US Trade Policy Uncertainty was 210% higher.

One effect of a reduced level of policy uncertainty would be a weaker dollar (given the dollar’s safe haven status); see this post for a statistically based explanation.

Figure 2: US Economic Policy Uncertainty index – news based (blue, left scale), and real value of US dollar against broad basket of currencies  (red, right log scale). NBER recession dates denoted by light gray shading; most recent recession assumed to end April 2020. Orange denotes Trump administration; orange dashed line indicates election. Source. Policyuncertainty.com, Federal Reserve Board vis FRED, accessed 11/3/2020.

Obviously, not all policy uncertainty would disappear with a Trump eviction, especially if the Congress remains divided with the Senate in Republican hands. However, it is hard for me to see how policy uncertainty could be further elevated — or even remain at similar levels — relative to what we’ve seen over the past four years.

Also… stop the policy insanity!