Elections, Policymaking, and Economic Uncertainty

September 13, 2016

(All day)

Hoover Institution in Washington, DC
Steven J. Davis, University of Chicago Booth School of Business and the Hoover Institution
Lars Peter Hansen, David Rockefeller Distinguished Service Professor, University of Chicago
John Taylor, Stanford University

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.

September 13, 2016 (All day)