Killing the Economic Engine: Is Policy Uncertainty Stalling US and Canadian Economic Growth?

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Policy conflict and fiscal crisis in the United States and Europe have spurred concerns about policy uncertainty and its economic effects. Many policymakers, businesspeople, and the media suggest that the political crisis in Washington is leading firms and consumers to postpone hiring and spending decisions, stalling the recovery from the 2007-2009 recession. This essay seeks to investigate this assertion using an index of policy uncertainty in the US. It shows that policy uncertainty normally varies over time, rising after major wars (such as the first and second Gulf Wars), elections, and terrorist attacks. However, the index shows that policy uncertainty surged upwards in 2008 and has remained stubbornly high since then. The problem with this uncertainty is that it can damage growth by leading firms to defer investment, thus creating short, sharp recessions. Unfortunately, the outlook ahead is bleak. US businesses and consumers are going to have to live with many more years of heightened policy uncertainty. Given the integrated and interdependent nature of the US and Canadian economies, this US-based economic policy uncertainty will continue to impede and adversely affect Canadian economic growth.

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