Study: Uncertainty has raised the U.S. unemployment rate by a full percentage point

From the San Francisco Fed:

Major economic downturns usually involve important economic disruptions and generate far-reaching proposals for economic policy changes, which can increase uncertainty (see Baker, Bloom, and Davis 2012). The shifts in unemployment, inflation, and interest rates shown in Figure 2 are the consequences of a modest increase in consumers’ perceived uncertainty.

During the Great Recession, the increase in uncertainty appears to have been much greater in magnitude. To examine how much the increase in unemployment during the recession and recovery has been due to increased uncertainty, we extend our statistical approach.

We calculate what would have happened to the unemployment rate if the economy had been buffeted by higher uncertainty alone, with no other disturbances. Our model estimates that uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis in 2008. To put this in perspective, had there been no increase in uncertainty in the past four years, the unemployment rate would have been closer to 6% or 7% than to the 8% to 9% actually registered.

While uncertainty tends to rise in recessions, it’s not the case that it always plays a major role in economic downturns. For instance, our statistical model suggests that uncertainty played essentially no role during the deep U.S. recession of 1981–82 and its following recovery. This is consistent with the view that monetary policy tightening played a more important role in that recession. By contrast, uncertainty may have deepened the recent recession and slowed the recovery because monetary policy has been constrained by the Fed’s inability to lower nominal interest rates below zero.

Heightened uncertainty lowers economic activity and inflation, and thus operates like a fall in aggregate demand. During the Great Recession and recovery, we estimate that higher uncertainty has boosted the unemployment rate by at least one percentage point. Policymakers typically try to mitigate uncertainty’s adverse economic effects by lowering nominal interest rates. However, in the recession and recovery, nominal interest rates have been near zero and couldn’t be lowered further. As a consequence, high uncertainty has been a greater drag on economic activity in the Great Recession and recovery than in previous recessions.

This suggests to me that it would have been wise for Washington to try and mitigate  uncertainty by, at minimum, extending Bush tax cuts and passing on Obamacare. Second, the Fed should have been more active via NGDP targeting.

3 thoughts on “Study: Uncertainty has raised the U.S. unemployment rate by a full percentage point

  1. Since the official unemployment rate does not count those who have quit looking (real unemployment > 13%), without the Obamanomics uncertaintyfactor would the economy have recovered to the point that the real and official rates would be close as they normally (pre Obamanomics) are?

  2. I am having a hard time understanding how Mr. Pethokoukis reached one of his conclusions. For anyone who believes that solving the immediate employment crisis is more important than solving the long-term problem of people without access to health insurance, his comment about the health plan is reasonable. It did create uncertainty for businesses about how much they will be paying for health care after the changes.

    However, both sides of the aisle agreed about keeping the Bush tax cuts for families making under $250,000 (less for singles). I fail to see how the uncertainty of the relatively small number of people (perhaps 4% of the population) whose taxes would increase could have that serious an impact.

  3. Here’s where we call out Jim and the entire AEI for their economic credentials.


    This I gotta hear.

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