Economic uncertainty .....

Financial crises and the dangers of 

economic policy uncertainty

                                     John H. Makin 

Economic uncertainty exists if the probability of outcomes cannot be estimated. Economic policy uncertainty exists when the probability of a given policy path cannot be estimated and the outcomes tied to alternative as-yet-unknown paths cannot be estimated either. Recovery from financial crises is so slow because they create sharply elevated economic policy uncertainty that policymakers often are unequipped to deal with or respond to poorly. Only when the Federal Reserve and lawmakers begin to take steps to reduce the uncertainty in the economic climate will the US economy begin to show signs of growth.

Key points in this Outlook:

• Economic policy uncertainty in the United States has built up since the 2008 financial crisis, hindering our economic growth.
• Uncertainty harms the economy by reducing consumers’ level of spending on goods and services and lowering levels of investment and hiring by firms.
• Economic policymakers must focus not on experimental policy responses, but rather on reducing the high level of economic policy uncertainty by simplifying the tax system and avoiding new initiatives like the Federal Reserve’s QE3.
• .................

Read more: www.aei.org/

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