Uncertainty

[Direckshun]

Uncertainty has propped up our unemployment rate by a full percentage point, according to the Federal Reserve in San Fran.

This is literally a barrier we have propped up ourselves, politically. It does not have to be there.

This is a really wonky read. You've been warned.

http://www.frbsf.org/publications/ec...el2012-28.html

Uncertainty, Unemployment, and Inflation
By Sylvain Leduc and Zheng Liu
September 17, 2012

Abstract: Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.

The U.S. economy has slowed substantially in recent months. Many commentators argue that uncertainty about future economic conditions has been an important factor behind the tepid recovery. According to a recent New York Times article, “A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth.” However, evidence supporting this view is scant. In a 2011 Wall Street Journal interview, University of Chicago economist Robert E. Lucas, Jr., said he had “plenty of suspicion, but little evidence” that uncertainty was holding back the recovery.

In this Economic Letter, we examine the economic effects of uncertainty using a statistical approach. We provide evidence that uncertainty harms economic activity, with effects similar to a decline in aggregate demand. The private sector responds to rising uncertainty by cutting back spending, leading to a rise in unemployment and reductions in both output and inflation. We also show that monetary policymakers typically try to mitigate uncertainty’s adverse effects the same way they respond to a fall in aggregate demand, by lowering nominal short-term interest rates.

Our statistical model suggests that uncertainty has pushed the unemployment rate up at least one percentage point in the past three years. By contrast, uncertainty was not an important factor in the unemployment surge during the deep downturn of 1981–82. One possible reason why uncertainty has weighed more heavily on the economy in the recent recession and recovery is that monetary policy has been limited by the zero lower bound on nominal interest rates. Because nominal rates cannot go significantly lower than their current near-zero level, policy is less able to counteract uncertainty’s negative economic effects.

The demand effects of uncertainty

We use data from the Thomson Reuters/University of Michigan Surveys of Consumers in the United States and the Confederation of British Industry (CBI) Industrial Trends Survey in the United Kingdom to measure the perceived uncertainty of consumers and businesses. Since 1978, the Michigan survey has polled respondents each month on whether they expect an “uncertain future” to affect their spending on durable goods, such as motor vehicles, over the coming year. Figure 1 plots the percentage of consumers who say they expect uncertainty to affect their spending. The figure also tracks the VIX index, a measure of the volatility of the Standard & Poor’s 500 Index. The VIX index is a standard gauge of uncertainty in the economics literature (see Bloom 2009). The consumer uncertainty sample goes from January 1978 to November 2011, the latest month for which we have data. The VIX sample begins in January 1990 and ends in June 2012.

Figure 1 shows that both the VIX index and consumer uncertainty are countercyclical, rising in recessions and falling in expansions. For example, both measures of uncertainty surged in 2008 and 2009 at the height of the global financial crisis. However, they do not always track each other. The 1997 East Asian financial crisis and the 1998 Russian debt crisis led to large spikes in the VIX, but did not have much impact on consumers’ perceived uncertainty. It is possible that U.S. consumers paid less attention to financial developments in emerging markets during that period.

To study the macroeconomic effects of changes in uncertainty, we use a statistical model that includes consumers’ perceived uncertainty, the unemployment rate, the inflation rate, and the three-month Treasury bill rate. We measure inflation as the 12-month percentage change in the consumer price index. All macroeconomic data are seasonally adjusted. The sample goes from January 1978 to November 2011, matching the Michigan survey sample.

Isolating the effects of uncertainty on the economy is difficult. As Figure 1 shows, uncertainty fluctuates with the business cycle, typically falling in expansions and rising in recessions. To identify the effects of uncertainty, we take advantage of the timing of the survey interviews relative to the timing of macroeconomic data releases (see Leduc and Sill 2010 and Leduc, Sill, and Stark 2007). For example, in the Michigan survey, telephone interviews in a given month are typically conducted before that month’s macroeconomic data are released. Survey respondents do not have information about current macroeconomic conditions when they participate in the interviews. Therefore, movements in perceived uncertainty are probably not driven by concurrent economic conditions (see Leduc and Liu 2012).

We use the timing difference between the survey and data releases to build what might be thought of as a small statistical laboratory. This allows us to measure how, all else equal, an unexpected increase in uncertainty would affect unemployment, inflation, and the nominal interest rate. We compare the result with the situation in which there is no disturbance to uncertainty. As the effects of the unexpected increase in uncertainty propagate over time, we can measure how the three macroeconomic variables fare relative to the situation with no disturbance.

The three panels of Figure 2 show how an unexpected increase in the percentage of Michigan survey respondents reporting they expect uncertainty to alter their spending on durable goods affects the unemployment rate, the inflation rate, and the nominal interest rate. The solid lines represent the median responses of these variables to the increase in uncertainty. The shaded area in each panel represents a 90% probability range for the variable in question. The horizontal axes indicate the number of months after the initial increase in uncertainty. The vertical axes indicate percentage-point changes in the three variables compared with the situation with no disturbance.

Figure 2 reveals that an unexpected increase in consumers’ perceived uncertainty raises the unemployment rate and pushes down the inflation rate. The unemployment rate reaches a peak in about 15 months and returns to its trend very slowly. It remains above the level with no disturbance for at least three years. Similarly, inflation reaches a trough in about 12 months. However, the effects on inflation appear to be less persistent. Meanwhile, the bottom panel of Figure 2 shows that the nominal Treasury bill rate falls persistently.

Overall, our statistical model suggests that an increase in uncertainty has effects similar to a fall in aggregate demand. The economy slows and inflation falls. Moreover, the decline in short-term interest rates is consistent with the easing of the stance of monetary policy that would prevail if policymakers try to mitigate the negative economic effects of increased uncertainty.

These effects of uncertainty are not unique to the United States. A similar dynamic is evident in the United Kingdom. In Britain, each quarter the CBI surveys roughly 1,000 businesses on whether uncertainty about demand for their products is limiting their capital expenditures. We measure the perceived uncertainty of these businesses by the fraction of survey respondents reporting that uncertainty is a limiting factor. The sample ranges from the fourth quarter of 1979 to the second quarter of 2011.

Although our U.S. measure of uncertainty is based on a consumer survey and our British measure on a business survey, the results are similar. In both cases, perceptions of uncertainty tend to rise in recessions and fall in expansions. Applying our statistical analysis to the CBI data, we see a similar pattern to that observed in the United States: higher perceived uncertainty is associated with higher unemployment, falling inflation, and lower short-term interest rates (see Leduc and Liu 2012 for details).

The finding that an unexpected increase in uncertainty acts like a decline in aggregate demand rather than a decline in aggregate supply has important policy implications. A fall in aggregate supply depresses economic activity and puts upward pressure on inflation. If the effects of an increase in uncertainty were similar to a fall in aggregate supply, policymakers would face a tradeoff between the goals of maximum employment and price stability. By contrast, if uncertainty acts like a fall in aggregate demand, policymakers face no such tradeoff. Easier monetary policy would mitigate the decline in output and restore price stability. Our findings suggest that monetary authorities in both the United States and Britain do in fact accommodate increased uncertainty by lowering nominal interest rates.

Uncertainty during the Great Recession and recovery

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 (see Basu and Bundick 2011).

Conclusion

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.

[Ebolapox]

[AustinChief]

UH OH!

Watch out... KCNative will be along shortly to tell you that you're an idiot and don't know anything about economics and how HE knows better.

Or maybe he will just change his stance and lie again... he never really said that uncertainty wasn't bad for the economy.. and it surely doesn't limit growth! Nope, no proof of that! No sir!

[HonestChieffan]

Uncertainty means nothing to those who have never owned a business.

[cdcox]

I attended a policy symposium this week in the power generation sector. There were VPs and senior engineers from three of the biggest utilities in the US attending. These folks deal with uncertainty in fuel prices, environmental regulations, customer demand and technology all the time. They are betting billions of dollars on investments that are going to be operating for up to 60 years. A bad investment on a nuke plant can bankrupt a utility. But they don't have the luxury of sitting on the sideline waiting for the uncertainty to go away -- people need power. They solve the situation by diversifying their portfolio so that they will be able to provide their customers economical power regardless of changes in any of the factors plagued by uncertainty.

My point is that uncertainty has always been part of the business environment. It might be higher now than it has been in the past, but the fact is that it is going to be around for a long time. Deal with it or don't but quit whining about it. But the successful companies will be the ones that deal with it the best.

[AustinChief]

Originally Posted by cdcox

My point is that uncertainty has always been part of the business environment. It might be higher now than it has been in the past, but the fact is that it is going to be around for a long time. Deal with it or don't but quit whining about it. But the successful companies will be the ones that deal with it the best.

No one thinks that uncertainty isn't always around.. but that doesn't change the fact that changes in uncertainty can play a significant role in overall economic activity. Not every sector is like energy. Many businesses CAN wait on the sidelines and sit on top of cash reserves. Increased uncertainty slows growth, that is pretty well accepted and this article only goes further to prove the point.

Another key point to remember is not to confuse RISK with UNCERTAINTY. Risk is quantifiable, uncertainty is risk that by it's very nature is not. That isn't my opinion, that is how the terms are defined when applied in this context. (see Knight, 1921)

My opinion is that Obama's policies (reactions to the housing crisis, Obamacare, etc) have only INCREASED an already healthy does of uncertainty. They aren't the only cause, not by a long shot, but they have had an effect and that effect is showing through even slower regrowth. Plenty of business leaders like Steve Wynn (an ardent Obama supporter in 2008) have taken the exact same position.

[AustinChief]

For anyone interested.. there is a fantastic paper about regime(or policy) uncertainty. It basically shows how the New Deal policies directly caused the Great Depression to last as long as it did. It was only after Roosevelt had died and WWII ended that business leaders felt confident that the government was not going to further expand and cause more uncertainty, so they began to invest heavily again.

Here is an excerpt:

It is time for economists and historians to take seriously the hypothesis that the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in the minds of investors.

Of course, scholars have had their reasons for not taking the idea seriously.
For a long time, historians have viewed the statements of contemporary
businesspeople about “lack of business confidence” as little more than routine
grumbling—sure, sure, what else would one expect Republican tycoons to
have said? Historians generally report such statements as if they were either
attempts to sway public opinion or unreflective whining.

Since World War II, economists, with only a few exceptions, have overlooked
regime uncertainty as a cause of the Great Duration for other reasons,
such as the availability of standard macroeconomic models whose variables do
not include the degree of regime uncertainty and, even if one wanted to incorporate it into an existing model, the absence of any conventional quantitative index of such uncertainty. Somewhat inexplicably, most economists regard evidence about expectations drawn from public opinion surveys as scientifically contemptible. Moreover, economists crave general models, equally applicable to all times and places, and so they resist explanations that emphasize the unique aspects of a specific episode such as the Great Depression.

In opposition to these professional inclinations, one can offer several goods
reasons to take seriously the idea that the regime uncertainty created by the
Second New Deal contributed significantly to causing the Great Duration.
First, the Great Depression was not just another economic slump. In depth
and duration it stands far apart from the next most severe depression in U.S.
history, that of the 1890s. We are talking about history, not physics; unique
events may have unique causes. Second, the hypothesis about regime uncertainty makes perfectly good economic sense. Nothing in the logic of the explanation warrants its dismissal or disparagement. Third, given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, and the character of the antibusiness zealots who composed the strategists and administrators of the New Deal from 1935 t o 1941, the political
climate could hardly have failed to discourage some investors from making
fresh long-term commitments. Fourth, there exists a great deal of direct evidence that investors did feel extraordinarily uncertain about the future of the property-rights regime between 1935 and 1941. Historians have recorded
countless statements by contemporaries to that effect; and the poll data presented earlier confirm that in the years just before the war most business executives expected substantial attenuations of private property rights ranging up to “complete economic dictatorship.” Fifth, investors’ behavior in the bond market attests in a striking way that their confidence in the longer-term future took a beating that corresponds exactly with the Second New Deal.

Finally, this way of understanding the Great Duration meshes nicely with a
proper understanding of the Great Escape after the war. The Keynesians all
expected a reversion to depression when the war ended. Most businesspeople, in sharp contrast, “did not think that there was any threat of a serious depression” after the war (Krooss 1970, 217). The businesspeople forecasted far better than the Keynesian economists: the private economy blossomed as never before or since. Official data, which understate the true increase because of mismeasurement of the price level, show an increase of real nongovernment domestic product of 29.5 percent from 1945 to 1946 (U.S. Council of Economic Advisers 1995, 406). Private investment boomed and corporate share prices soared in 1945 and 1946 (Higgs 1992, 57–58). None of the standard explanations can account for this astonishing postwar leap, but an explanation that incorporates the improvement in the outlook for the private-property regime can account for it.

From 1935 through 1940, with Roosevelt and the ardent New Dealers
who surrounded him in full cry, private investors dared not risk their funds in
the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with (Higgs 1987; Hughes 1991). But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

So, the next time your socialist friends point to the New Deal.. explain to them how it was a BAD deal for America.

(caveat: some of the new deal policies and undertakings worked, there is no denying that.. of course most of those were conceived of by Hoover... but the OVERALL effect was chilling and kept us in poverty far longer than needed)

[Brock]

These companies are never going to hire all those people back, because they've discovered they didn't need them in the first place.

[cosmo20002]

Originally Posted by AustinChief

For anyone interested.. there is a fantastic paper about regime(or policy) uncertainty. It basically shows how the New Deal policies directly caused the Great Depression to last as long as it did. It was only after Roosevelt had died and WWII ended that business leaders felt confident that the government was not going to further expand and cause more uncertainty, so they began to invest heavily again.

Here is an excerpt:

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

So, the next time your socialist friends point to the New Deal.. explain to them how it was a BAD deal for America.

(caveat: some of the new deal policies and undertakings worked, there is no denying that.. of course most of those were conceived of by Hoover... but the OVERALL effect was chilling and kept us in poverty far longer than needed)

This is really quite sad. Let go already.

[cdcox]

Kyle, your arguments are in exact agreement with my point. Dollars are sitting on the sideline when there are profits to be made because investors aren't bold enough to move given the uncertainty. However, there are plenty of opportunities right now; business leaders are just afraid of which investments will pay off. Smart money would lay down a lot of investments across broad sectors; some will win, some will lose, but if you have business sense, you'll have more winners than losers because the overall market is under invested. It basically boils down to one of two cases: 1) our "job creators" aren't smart enough to invest broadly to take advantage of an under invested business situation or 2) things are truly shitty and uncertainty isn't holding anything back. If people are staying back due to uncertainty, there is a crap load of money to be made.

[AustinChief]

Originally Posted by cdcox

Kyle, your arguments are in exact agreement with my point. Dollars are sitting on the sideline when there are profits to be made because investors aren't bold enough to move given the uncertainty. However, there are plenty of opportunities right now; business leaders are just afraid of which investments will pay off. Smart money would lay down a lot of investments across broad sectors; some will win, some will lose, but if you have business sense, you'll have more winners than losers because the overall market is under invested. It basically boils down to one of two cases: 1) our "job creators" aren't smart enough to invest broadly to take advantage of an under invested business situation or 2) things are truly shitty and uncertainty isn't holding anything back. If people are staying back due to uncertainty, there is a crap load of money to be made.

Oh, I wasn't necessarily disagreeing with ya, I was just expanding on what you posted.

You are correct that there is a crap load of money to made right now, for sure. BUT this again goes back to RISK vs UNCERTAINTY. The ballsy investors are willing to take risks and win sometimes and lose others. The STUPID (in the eyes of most business people) investors are the ones who are willing to jump in completely BLIND. Yes, many of those investments will pay off, but you are counting on a a great deal of pure LUCK not business acumen. I can't stress enough how important it is to differentiate the two.

Now, what I just said is a gross simplification and plenty of examples can be found where it doesn't apply.

[AustinChief]

Originally Posted by cosmo20002

This is really quite sad. Let go already.

...and yet again you prove that you are nothing more than a pitiful little troll with nothing of value to add to a conversation.

[cosmo20002]

Originally Posted by AustinChief

...and yet again you prove that you are nothing more than a pitiful little troll with nothing of value to add to a conversation.

The conversation about the New Deal prolonging the Depression? You're right I have nothing to add--other than to say the attempts to re-write history are pathetic and you should move on already.

[AustinChief]

Originally Posted by cosmo20002

The conversation about the New Deal prolonging the Depression? You're right I have nothing to add--other than to say the attempts to re-write history are pathetic and you should move on already.

I would tell you to read the article but it would be pointless... There is NOTHING in it that rewrites history. The only thing it serves to do is clarify the common misconception among retards like you that the New Deal was a magic bullet that saved America. Most educated people know better and point to WWII as the most significant factor. This article delves into a new area explaining why the Great Depression lasted as long as it did... something that has had relatively little study.

More importantly, it promotes the idea that there is a direct correlation between regime uncertainty and slowed economic growth. Which is directly in line with the OP.

I'd go further on this but you simply are either too lazy or too stupid to have this conversation. Hopefully cdcox or Amnorix will weigh in. OH! Or Dane! That'll be fun and a helluva lot more interesting then your tripe.

[tiptap]

Originally Posted by AustinChief

For anyone interested.. there is a fantastic paper about regime(or policy) uncertainty. It basically shows how the New Deal policies directly caused the Great Depression to last as long as it did. It was only after Roosevelt had died and WWII ended that business leaders felt confident that the government was not going to further expand and cause more uncertainty, so they began to invest heavily again.

Here is an excerpt:



http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

So, the next time your socialist friends point to the New Deal.. explain to them how it was a BAD deal for America.

(caveat: some of the new deal policies and undertakings worked, there is no denying that.. of course most of those were conceived of by Hoover... but the OVERALL effect was chilling and kept us in poverty far longer than needed)

This small portion of the PDF paper had my ears ringing about Praxeology. The author does try to compromise on the use of charts and numbers and calculations. But all the arguments are made outside the tools of making his point. His measuring tool is the confidence the business investors have in what author deems is "property rights." And that is represented anti trust business rulings and laws like Social Security, labor laws and all what is the focus of present discussions about the size and scope of governmental powers compared to unrestricted business dealings. I think it is interesting that surveys were his tool and in the survey of business people for just after the war, had four choices. Single digit opinions existed that things would return to pre New Deal ideas or that the government would be Fascists or Communist in the extreme of central control. The majority of the rest of the respondents saw the Government choices being involved in some areas, this being the majority position of the two, and a more socialist position. Yet he frames these sets as totally anti investment. And yet the ability to plan based upon this framing is not a case of uncertainty being express about governmental practices, but had to then be framed as over burdensome inroads to business practices and profits.
What also is missing here is the amount of start ups outside the business elite that where able to do so as a middle class wealth allowed individuals to start new activities. In other words it was either the very rich invest or new ideas and enterprise would not take place. It didn't allow for monopolistic practices to crush upstart enterprises.