High levels of uncertainty are bad for economic growth. Elevated uncertainty makes consumers less likely to spend and firms less likely to invest and hire. In addition to the direct economic consequences of widespread lockdowns, the Covid-19 pandemic has brought with it a surge in economic uncertainty that will exacerbate its impact on the United States. The figure above shows the daily values of the Economic Policy Uncertainty (EPU) Index between mid-April 2017 and mid-March 2020. Values above 100 reflect elevated uncertainty. In March, the index registered at well over 600 (whereas it registered values of just over 200 after September 11 and at the onset of the financial crisis in 2008). Of the articles about economic policy uncertainty in March, 90% mention “Covid,” “coronavirus,” “pandemic,” or other words related to present crisis.
The EPU Index is based on data from nearly 2,000 daily newspapers in the US ranging from large national papers like USA Today to smaller local papers. The index reflects the frequency of articles containing one or more instances of terms taken from three sets of terms. The first set includes “economic” or “economy.” The second includes “uncertain” or “uncertainty.” And the third includes “legislation” or “deficit” or “regulation” or “Congress” or “federal reserve” or “White House.” It reflects the real-time uncertainty perceived and expressed by journalists.
EPU was developed by Professors Scott Baker (Northwestern), Nicholas Bloom (Stanford), and Steven Davis (University of Chicago). In a recent working paper with Professor Stephen Terry (Boston University), they use the EPU Index and other measures of economic uncertainty to estimate the likely economic impacts of the Covid-19 pandemic, predicting that the US’s GDP growth will decline by 11% by the end of 2020 — the largest drop since the Great Depression. In a recent interview for City Journal, I spoke with Professor Bloom about the economic consequences of the Covid-19 pandemic and what could be done to reduce uncertainty and quicken the pace of economic recovery.
Brandon Fuller is vice president of research and publications at the Manhattan Institute. Follow him on Twitter here.
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