Hoover Daily Report

Blame Polarization for Tepid Economic Growth?

via Wall Street Journal
Monday, January 6, 2014

Chalk up another reason to worry about intensifying political polarization.

There has been a running argument among economists on the extent to which uncertainty over U.S. government policy –taxes, spending and regulation – is a big reason the economy has been so distressingly sluggish.

In a skirmish over the weekend at the annual meeting of the American Economic Association, Harvard’s Larry Summers challenged the case that uncertainty is a big problem: Do I want my doctor to be “consistently predictable or responsive to” a particular health emergency, he asked. Better, he answered, to have a doctor “evaluating my condition and responding appropriately.”

Stanford’s John Taylor responded: “It’s great to have the all-knowing doctor,” but history bears out that the economy does better when policy is “predictable…and rules-based.”

Now the leading advocates of the case that uncertainty over policy is hurting the economy — a band of academics from Stanford, and the University of Chicago – have come up with a new hypothesis: Political polarization is adding to the uncertainty that is hurting the economy.

The partisan divide, they argue in a paper presented at the AEA meetings, leads consumers, businesses and investors to expect “more extreme policies, less policy stability and less capacity of policy makers to address pressing problems.”

An index of policy uncertainty that these economists created from surveys of newspaper articles shows an increase in uncertainty over economic policy in recent decades that parallels the increase in various measures of political polarization, both in Congress and among voters.

While the American system of checks and balances has long been seen as a way to produce stability because it tends to preserve the status quo, that isn’t always true – especially when something like a looming debt ceiling or an unsustainable budget deficit requires a change in the status quo.

This creates “tension that leads to high-stakes bargaining scenarios in which players face political incentives for brinksmanship that in turn generate high levels of uncertainty,” the economists say.

That is obvious to anyone who has been paying attention to Washington lately, but there’s more:

The economists also argue that presidents of both parties have politicized the bureaucracy by appointing partisan loyalists and shifting key decisions to White House staff not subject to confirmation. That means that regulatory policy tends to swing sharply whenever the presidency changes parties.

There are various explanations for the well-documented polarization trend: the way congressional districts are drawn, the changing political geography of the U.S. in which Democrats tend to represent the post-industrial urban core and inner suburbs while Republicans represent outer suburbs and rural areas, the proliferation of media outlets with well-defined and opposing political viewpoints (Fox News vs. MSNBC) and the widening of income inequality.

The economists don’t have a firm view on why there’s more polarization – and they caution that while they find polarization and uncertainty are rising at the same time, they can’t prove one causes the other.

The latest uncertainty research was done by Stanford’s Scott Baker, Nicholas Bloom and Jonathan Rodden; Princeton’s Brandice Canes-Wrone, and Steven Davis of the University of Chicago’s Booth School of Business.