Usually talk about the impact of “uncertainty” on the US economy refers to supposed business fears about debt, tax hikes, and Obamacare. But the new study “The Asymmetric Effects of Uncertainty” by Kansas City Fed economist Andrew Foerster looks at heightened uncertainty — as measured by the Chicago Board Options Exchange Volatility Index, or VIX — from three specific events: the May 2010 European sovereign debt crisis, the August 2011 US debt ceiling crisis, and the June 2013 confusion about the Fed’s plan to wind down its bond buying program.
Foerster finds that uncertainty generated by those key events had a big negative impact on economic growth and job creation:
High uncertainty during the current recovery has led to a relatively modest recovery by historical standards. Economic theory suggests that when uncertainty increases, firms and consumers postpone their decisions, lowering economic activity. When uncertainty decreases, economic activity may rebound, but not necessarily immediately. The empirical evidence presented in this article suggests that uncertainty has asymmetric effects and that decreases in uncertainty do not necessarily offset increases. As a result, spikes in uncertainty may produce persis tent declines in economic activity.
Uncertainty’s asymmetric effects imply that the large VIX increases associated with the European sovereign debt crisis and the U.S. debt ceiling crisis—and, to a lesser extent, the taper tantrum—led to lower growth in economic activity and employment during the recovery. Combined, these three episodes resulted in a substantial cumulative loss in employment.
Foerster estimates US employment at the end of 2013 was nearly 1 million jobs lower than it would be other wise. Less uncertainty, as measured by a counterfactual VIX, have meant the following:
… 400,000 more people would have been employed following the European sovereign debt crisis, 600,000 more after the U.S. debt ceiling crisis, and 800,000 more by the end of 2013. This cumulative deficit at the end of 2013 is equivalent to about 16,000 fewer jobs gained per month from 2010 to 2013 because of these three uncertainty episodes.