Economists (outside of finance) and policymakers often underestimate how much uncertainty drives prices and behavior. Recent research estimates that uncertainty about the economy this past year depressed spending, even after accounting for the impact of lock-downs. Uncertainty wasn't just about the course of the virus. Policy also played a very large role. We often didn't know how long restrictions would last and what level of support workers and companies would get. The following figure plots the Economic Policy Uncertainty Index, a measure of policy uncertainty compiled by economists Nick Bloom, Steve Davis, and Scott Baker. It is not surprising that uncertainty was at record highs last spring. Though it mostly trended down even during successive waves of the pandemic. There was a small uptick last month. It could be another blip or reflect the large economic interventions of the Biden administration. The next few months will tell us.
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