Photographer: Andrew Harrer/Bloomberg

No Uncertain Terms: What Really Makes People Nervous Is Change

Policy uncertainty is low even as partisans bicker

Given all the recent turmoil in Washington, it's no wonder that Federal Reserve Chair Janet Yellen told lawmakers on Thursday that uncertainty about what the government is going to do is ``quite high at the moment."

One small problem: the data don't seem to bear that out. As measured by an index developed by economists including Steven Davis at the University of Chicago Booth School of Business, policy uncertainty has actually declined in recent months. How can that be?

It turns out that the answer may lie in a side effect of the turmoil itself: inaction.

"Essentially all of the Trump administration’s major policy initiatives have been stalled," Davis said. "Whatever change does happen is likely to be a smaller departure from the status quo than many of us anticipated in December and January."

Davis and two of his colleagues put together the index in 2011 to measure economic policy uncertainty. That index, which uses newspaper articles, changes to the tax code and disagreement among economic forecasters to gauge uncertainty, registered some of its highest readings following President Donald Trump’s election in November.

Since then, the index has fallen by more than half. Davis attributes the decline to the roadblocks policy makers have encountered on everything from trade to tax reform.

The post-election gains, while notable, were dwarfed by the ones recorded during negotiations in 2011 over the debt ceiling debate.

The reason, according to Davis, is that the argument over the debt limit led people to believe that  "the system is falling apart. Nothing gets done. And it’s just going to get worse."

Uncertainty has been on the rise since the early 1960s after peaking during the Great Depression. In fact, since 2008, it's averaged about twice the level of the previous 23 years, according to the authors of the study. There are a couple of reasons for this, according to Davis, including the increase of political polarization and the growing involvement of the government in the economy.

And there's nothing to say uncertainty won't surge again in the future.

"The world looked like a happy place on the cusp of World War I and then we had all the dramatic upheaval of the next 40 years or so," Davis said. "Huge reversals are possible and they’ve happened before."

— With assistance by Rich Miller

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