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Event Recap

There is plentiful and growing evidence that political uncertainty stemming from elections or doubt about the direction of future policy has economic repercussions. This conference highlighted new research that explored the impact of policy uncertainty and the mechanisms by which it takes an economic toll.

The program was cosponsored with the Hoover Institution and held at its Washington, DC headquarters. It highlighted useful new data sets drawn from both  historical evidence and cutting-edge automated textual analysis, as well as new evidence on how uncertainty affects lending and cross-border investments.

Chicago Booth’s Tarek Hassan and colleagues developed a novel measure of an individual firm’s level of policy uncertainty, based on meticulous analysis of transcripts of firms’ quarterly earnings report conference calls. They found that higher levels of uncertainty within firms were associated with lower hiring and investment, Hassan reported. Rising political uncertainty was also correlated with higher stock price volatility. Effects were strongest for firms facing uncertainty about tax reform, corporate regulations, and criminal law.The study showed that firms try to hedge uncertainty by donating to political parties and engaging lobbyists. Where transcripts of the stockholder conference calls showed more discussion of uncertainty about a given political topic, researchers also found increased lobbying on that issue—particularly around health care, energy, environment, tax reform, and corporate regulation.

Other papers analyzed changes in partisanship and political polarization. Kaveh Majlesi (Lund University and IZA) and colleges analyzed voting patterns and found , there was a strong ideological realignment in localities with industries exposed to more foreign competition. The paper, coauthored with David Autor, David Dorn, and Gordon Hanson, supplies the first evidence that connects adverse trade shocks to political polarization..

Moritz Schularick made the case that partisan conflict and political uncertainty is nothing new, having played a role in slow post-crisis economic recoveries regularly throughout history. With Manuel Funke and Christopher Trebesch, he studied financial crises going back 140 years, covering 20 advanced economies and 200 elections. “Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises,” he reported. “After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners.”

Michael Bordo shared research showing that high levels of economic policy uncertainty have negative effects on the growth of bank credit—particularly for banks showing some distress on their balance sheets. This suggests that it is the reduced supply of loans as well as diminished demand for them that reduces credit growth. This work adds to growing evidence that high uncertainty contributed to the slow recovery from the Great Recession in the US by reducing credit flowing through bank lending. Hannes Mueller presented research that finds a positive relationship between political institutions with strong executive constraints and cross-border investment flows that spur development and growth.

The conference concluded with a panel featuring former Federal Reserve Chairman Alan Greenspan; Hudson Institute’s Christopher DeMuth, and conference co-organizer Steven Davis of Chicago Booth. John Taylor of Stanford, also a co-organizer, moderated. The panel was streamed live online; a video recording will be available here soon.

John Taylor’s summary of the conference is available here.

Video of the conference is available here.

Generous financial support for the conference was provided by the MacArthur Foundation.

Agenda

Tuesday, September 13, 2016
Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence over Several Decades
Michael Bordo, Rutgers University
Discussant: Charles Calomiris
Lars Peter Hansen, The David Rockefeller Distinguished Service Professor in Economics and Statistics, the Kenneth C. Griffin Department of Economics and the Booth School of Business; Director of BFI's Macro Finance Research Program
Co-authors: John Duca (Federal Reserve Bank of Dallas) and Christoffer Koch (Federal Reserve Bank of Dallas)
Going to Extremes: Politics after Financial Crisis, 1870-2014
Moritz Schularick, University of Bonn
Discussant: Jesús Fernández-Villaverde
Lars Peter Hansen, The David Rockefeller Distinguished Service Professor in Economics and Statistics, the Kenneth C. Griffin Department of Economics and the Booth School of Business; Director of BFI's Macro Finance Research Program
Co-authors: Manuel Funke (Freie Universität Berlin) and Christoph Trebesch (Ludwig Maximilian University of Munich)
Institutions, Volatility and Growth
Coauthor: Timothy Besley (London School of Economics)
Hannes Mueller, Institute of Economic Analysis
Discussant: Youngsuk Yook
Steven J. Davis, William H. Abbott Distinguished Service Professor of International Business and Economics, Booth School of Business
Co-author: Timothy Besley (London School of Economics)
Aggregate and Idiosyncratic Political Risk: Measurement and Effects
Tarek Hassan, University of Chicago Booth School of Business
Scott Baker, Professor of Law, Washington University Law
Steven J. Davis, William H. Abbott Distinguished Service Professor of International Business and Economics, Booth School of Business
Coauthors: Stephan Hollander (Tilburg University), Ahmed Tahoun (London Business School) and Laurence van Lent (Tilburg University)
Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure
Kaveh Majlesi, Lund University
Discussant: Nolan McCarty
Steven J. Davis, William H. Abbott Distinguished Service Professor of International Business and Economics, Booth School of Business
Coauthors: David Autor (Massachusetts Institute of Technolody), David Dorn (University of Zurich), and Gordon Hanson (University of Califonia, San Diego)
Closing Panel
John Taylor, Stanford University
Steven J. Davis, William H. Abbott Distinguished Service Professor of International Business and Economics, Booth School of Business
Christopher DeMuth, Hudson Institute
Alan Greenspan, Greenspan Associates