By Jeremy West, Internet Truckstop Economist
Consider the following situation:
You operate a small carrier and are considering adding a few trucks to your fleet. There is a (hypothetical) politician who is campaigning for a U.S. Senate seat on a platform of further expanding the FMCSA regulations to require any commercial truck that crosses state lines to have two drivers in the cab with combined driving experience of at least twenty years. (You may think this hypothetical rule sounds ridiculous, but some opinions of the current CSA regulations indicate that such a proposal would not be that big of a leap). Suppose that this politician has a sizeable chance of winning his campaign. Are you going to buy any new trucks today, or wait (at least) until after the November election?
The above situation illustrates the role of “policy uncertainty” in shaping economic decisions. In this case, whether or not you invest in expanding your fleet will be partly determined by the outcome of the upcoming election. As a result of this uncertainty, you forgo making the decision until after the election outcome is known.
It isn’t just elections that create policy uncertainty. As was mentioned in a post to the Industry Economic Update LinkedIn group, this practice of delaying investment decisions is currently widespread in the economy. In a recent article on political uncertainty, the Washington Times notes, “[if] there’s one thing investors and employers hate, it’s not knowing what lies ahead.”
Two groups of academic researchers have attempted to quantify the effect of policy uncertainty on the economy. In their article, “Measuring Economic Policy Uncertainty” (pdf), Scott R. Baker, Nicholas Bloom, and Steven J. Davis link several measures of political uncertainty (such as the frequency of media references to policy uncertainty) to declines in real GDP, private investment, and aggregate employment. Separately, Sylvain Leduc and Zheng Liu find that uncertainty about future economic conditions is substantially responsible for the sluggish economic recovery that has followed the recession.
With an upcoming national election, a looming “fiscal cliff,” and continuing instability in the Eurozone, the economic climate is quite unclear. The outlook will remain murky until businesses and consumers can better determine the political environment in which they must operate.