by Brenée Goforth
Communications Associate, John Locke Foundation
This week, syndicated columnist John Hood published an opinion piece in Carolina Journal on the economic costs of such uncertain policy. Hood writes:
[T]here is an emerging body of evidence suggesting that the uncertainty of economic policy is itself harmful to the economy. When people can’t predict with at least some degree of confidence what economic policies their government will follow, they often delay consequential decisions and park their resources in safer, lower-yielding investments.
Hood references a recently published paper to illustrate the effects of uncertain policy:
In a paper just published in the Journal of Economic Dynamics and Control, two professors at the Singapore Management University used state corporate tax systems in America to test the proposition that policy uncertainty affects economic performance. Following the lead of previous scholars, who used searches of media databases to create state-by-state measures of policy uncertainty, the Singapore researchers generated state statistics on media coverage of corporate tax debates and then looked for a relationship with economic outcomes.
They found one. For every standard-deviation increase in policy uncertainty surrounding corporate taxes in a state, the growth in new business establishments went down by about two-tenths of a percentage point. “Our result clearly shows that tax uncertainty has a significant, negative impact on business activity in the United States,” they concluded.
Hood states reducing policy uncertainty and ambiguity should be in the front of decision-makers’ minds when crafting policy:
I know we are going to continue to engage in spirited debate about taxes and other controversial issues. But lawmakers ought to take seriously the growing research literature on policy uncertainty. They should seek consensus when possible. When it’s not possible, they should strive for simplicity and predictability as they make policy changes.