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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.

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Already, according to some news reports, concern about the fiscal cliff may be affecting the behavior of businesses and consumers.

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"The nonpartisan Congressional Budget Office estimates that uncertainty about the fiscal cliff alone could reduce U.S. economic growth by 0.5% in the second half" of the year, Fortune magazine's Geoff Colvin wrote recently. In an economy growing at an annual rate below 2 percent, "that's a lot, representing billions of dollars that won't be available to hire people."

It would also help if policymakers could settle on a course of action on taxes and federal spending over the next few years.

The researchers used some statistical sleuthing in their bid to quantify the impact of uncertainty. They drew on data going back to 1978, in which a University of Michigan survey has polled respondents each month on whether they expect an “uncertain future” to affect their spending on durable goods such as cars.

"We use the timing difference between the survey [interviews] and data [on the real economy] to build what might be thought of as a small statistical laboratory," the Fed researchers say in the report. "This allows us to measure how, all else equal, an unexpected increase in uncertainty would affect unemployment, inflation, and the nominal interest rate."

They conclude that a spike in economic doubts reduces demand in the near term, such as consumer spending and business investment. The researchers say the resulting slack in the economy creates wiggle room for Federal Reserve policymakers: The Fed can use easy monetary policy, to try to counterbalance the effects of uncertainty, without much fear of sparking inflation.

Fed Chairman Ben Bernanke made a similar case last week, in announcing a new round of "quantitative easing."

"We don't anticipate the economy is going to be overheating anytime soon," Bernanke said in a press conference. "We think inflation will remain close to our 2 percent [a year] target."

One challenge is that Fed policy may not be as effective now as in other circumstances. The central bank has already been holding short-term interest rates near zero for several years, making it hard for additional easing to exert much force.

This constraint on the Fed's power, the San Francisco researchers say, means that "high uncertainty has been a greater drag on economic activity in the Great Recession and recovery than in previous recessions."

Some argue that the economy needs more stimulus from fiscal policy, in the form of tax cuts or spending on things like infrastructure. That's a hot debate that the new Fed research doesn't settle.

Skeptics say fiscal policy becomes less effective in the conditions that exist today, with fast-rising national debt that could become its own drag on growth. Supporters say greater effort at fiscal stimulus could be paired with a medium- or long-term plan to reduce federal deficits.


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