Must-read: Noah Smith: “Don’t Blame ‘Uncertainty’ for the Slow Recovery”

Noah Smith: Don’t Blame “Uncertainty” for the Slow Recovery: “Since Baker, Bloom and Davis came out with their uncertainty hypothesis…

…there has been a large and sustained drop in the index of uncertainty. But the rate of the U.S. economic recovery has remained slow and steady, leading many to question whether uncertainty is just a sideshow…. Sydney Ludvigson… Sai Ma… and Serena Ng…. Their statistical technique requires some bold assumptions, but allows for interpretation of cause and effect. Ludvigson, Ma and Ng find that financial uncertainty seems to cause every other type of economic uncertainty… finance… drive[s] the real economy. 

So what does this result mean for the policy uncertainty hypothesis?… [If] policy [were] to be the cause… it would have to do so through its impact on financial markets. Legal challenges to Obamacare or increased regulation of aircraft manufacturing would be unlikely causes of recessions. So what policies, in 2008, threatened U.S. financial markets? Before the crash, financial regulation… wasn’t a major plank of  Barack Obama’s or John McCain’s presidential campaigns…. When financial regulation actually did come, in 2010 in the form of Dodd-Frank, it did very little to hurt asset markets. Therefore there is good reason to be skeptical of the hypothesis of Baker, Bloom, and Davis. It is difficult to lay blame for the Great Recession, or the slow recovery from that recession, at the feet of either the Obama administration or the Republicans in Congress…. The financial industry imploded all on its own, and that the Great Recession was the result.

December 30, 2015


Brad DeLong
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