Economics Department

 

Date of this Version

10-29-2012

Abstract

The founding fathers purposefully designed a political system that perpetuates gridlock. Frictions in political decision-making should foster stable policies. However, in recent years, this has been turned on its head. In recent decades, Congress has passed a series of budget control acts intended to impose discipline on the budget process. These acts, by encouraging policy phase-ins, phase-outs and expiration dates, have had the unintended consequence of policy uncertainty. A growing literature is finding that policy uncertainty imposes substantial economic costs. Policy uncertainty leads individuals to misallocate resources or to incur added costs from planning for possible scenarios. Policy uncertainty, it is argued, leads investors to sit on the sidelines, rather than bet on whether or how Congress will act. In a newly released study by the Mercatus Center, we find that investors may do worse than sit on the sidelines. We argue that policy uncertainty may decrease productive business activities, like research and hiring, while increasing resources spent on unproductive investments, like lobbying government.

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