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Does uncertainty cost the economy jobs? Fed researchers call it a big problem.

Economists at the Federal Reserve Bank of San Francisco say uncertainty over future taxes and other policies has raised unemployment by one to two percentage points. That's lots of jobs.

By Staff writer / September 18, 2012

This August 2012 photo shows a trader on the floor of the New York Stock Exchange.

Richard Drew/AP/File


For several years many Americans have said uncertainty is holding the economy down. Now some researchers are pointing to evidence that the problem is a large one.

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A mood of doubt – including uncertainty about things like future tax policies – may be to blame for a large share of America's unemployment problem, researchers at the Federal Reserve Bank of San Francisco conclude in a report released Monday.

"Our model estimates that uncertainty has pushed up the US unemployment rate by between one and two percentage points since the start of the financial crisis in 2008," write Fed economists Sylvain Leduc and Zheng Liu. "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."

Given that unemployment is usually around 5 percent even in good times, their analysis suggests that as much as half the spike in unemployment since 2008 relates to uncertainty of one kind or another, felt by consumers and businesses.

That translates into lots of jobs. For a reference point, employer payrolls in the US have expanded by about 2 million workers over the past year, as the unemployment fell by 1 percentage point.

The study sheds light on an issue that's already in the public eye. In the presidential election, critics of President Obama say he failed to provide clarity on several vital fronts – from the direction of tax policy and the national debt to whether an increase in regulatory legislation will continue if voters grant him a second term.

"Washington’s policies are not meeting our country’s fiscal challenges and are prolonging uncertainty among small businesses,” economist Martin Regalia of the US Chamber of Commerce wrote in July, for example, adding to an already loud drumbeat from the business community.

The research report, published by the San Francisco Fed, isn't an argument in favor of a particular fiscal policy, or against Mr. Obama's reelection. For one thing, Fed employees steer clear of offering policy advice outside the Fed's own sphere of monetary policy. Also, the report's definition of "uncertainty" is broad, going beyond what a president can control.

But one implicit message in the report is that it would help the economy if the president and Congress can clarify what will occur at the end of this year, when a "fiscal cliff" of tax hikes and spending cuts is scheduled to take effect. Businesses and consumers are widely expecting that policymakers won't send the nation fully "over the cliff" come January, but it's unclear what will actually happen and when.


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