Does uncertainty hurt the economy?

Often if business investment is down and consumers aren’t spending enough, one of reasons given is uncertainty. But what exactly is economic uncertainty? And do we have any hard evidence on how it affects the economy? N.C. State University economist Mike Walden responds.

“Well, of course, I think economic uncertainty is like uncertainty in general: You have a fear of not knowing what’s going to happen, and if you don’t know what’s going to happen in the future, what the impacts are going to be, that could affect some of your decisions today.

“And economic uncertainty can come from several sources — things like natural disasters, wars and revolutions, terrorism, as well as political disputes.

“Now, we have a new study that tried to calibrate the impacts of economic uncertainty on the performance of the economy, and in general what the study found was, as we might expect, that increases in uncertainty do reduce economic growth. They make investors a little more squeamish. They reduce the likelihood that people are going to perhaps move on in education … and add to their training.

“But interestingly what the study found … was uncertainty from natural disasters — things like hurricanes, bad storms, et cetera —   appear to be the least disruptive on economic performance. And I think that may be because of there is a track record to look at. We know that storms cause bad things, but we know that we can fix them.

“On the other hand, the authors found in uncertainty from political disputes actually had the biggest adverse effect on economic growth. So, certainly a lot to think about.”

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