The Becker Friedman Institute of the University of Chicago and the Hoover Institution of Stanford University teamed up yesterday to put on a Conference on Elections, Policymaking, and Economic Uncertainty. The conference was held at the Hoover Institution Offices in Washington D.C. Steve Davis, Lars Hansen and I organized it. The aim was to combine path-breaking research with in-depth discussions of policy, including a panel with Alan Greenspan, Chris DeMuth and Steve Davis which I moderated.
This is an interesting, quick-moving field with many new analytical techniques and “big data” developments. The complete conference agenda with links to the papers and commentary can be found on this web site, but here’s a summary of the findings and policy implications:
Mike Bordo started off by showing that there is a large and statistically significant negative impact of economic policy uncertainty—as measured by the Bloom-Baker-Davis EPU index—on the growth of bank credit in the United States. His research (joint with John Duca and Christoffer Koch) explains much of the slow credit growth in recent years when policy uncertainty has been elevated. The lead discussant, Charlie Calomiris, provided a simple model of bank lending to explain and interpret the empirical findings. Bordo’s policy suggestion to reduce uncertainty and thereby increase growth is to strive for more predictable rule-like economic policy.
Moritz Schularick then described a fascinating new historical data set that he created along with his colleagues C. Trebesch and and M. Funke on financial crises and subsequent election results over many decades. By assigning numerical codes to each historical event, their paper showed that financial crises, including the recent global financial crisis (GFC), led to gains by political parties on the right. Jesus Fernandez-Villaverde argued, however, with specific reference to developments in Greece, Italy, Ireland and especially Spain that the main political gains following the recent crisis have been more balanced, and, if anything, have shifted to the left. The discrepancy might be due to coding conventions used in the paper, a point that other commentators also noted in reference to determining what was a financial crisis and what was not.
Next came Hannes Mueller who focused on the role of politics and democratic institutions in international development. He showed (based on work with Timothy Besley) that there is a clear positive relationship between the degree of constraints (legislative or judicial) on the chief executive in a country and the amount of foreign investment flowing into the country. The discussant, Youngsuk Yook of the Federal Reserve Board, raised identification issues about how this policy measure stands up against other economic policy measures. I too wondered how this measure compared with the 17 different indicators of economic policy used in the US Millennium Challenge Corporation.
Tarek Hassan presented an amazing new data set that he has constructed (with Stephan Hollander, Laurence van Lent, and Ahmed Tahoun). Starting with transcripts of earnings reports from corporations, Hassan showed how they used novel text analysis and processing techniques to extract political references and concerns by the businesses. They then examined whether these concerns translated into economic impacts on firms’ decisions and found remarkably that they did. There was considerable discussion of the novel methodology for choosing political bi-grams (two-word combinations) and how, for example, it compared with the methods of Bloom, Baker (who was the discussant) and Davis. Baker also emphasized the importance of new researchers learning Perl and Python, the essential programming languages needed for work in this area.
The final paper of the day was presented by Kaveh Majlesi who focused on the economic influences on political developments in the United States over the period from 2002 to 2010. He presented results supporting the view that trade-related employment shocks from China imports affected political polarization in the United States: there were correlated moves to the political left and to the right during this period along with impacts of China imports to various parts of the country. Nolan McCarty presented a fascinating alternative explanation. He argued that there has been a much longer trend unrelated to trade, and that the recent movements were part of a shorter swing toward Democrats in 2006 and then Republicans in 2010 and 2014. Economists and political scientists will be trying to sort this one out for a long time.
The concluding panel discussion with me, Alan Greenspan, Chris DeMuth, and Steve Davis focused first on some very disturbing current economic problems and second on possible political solutions. Greenspan started off by stating his grave concerns about the direction of economic policy in the U.S, emphasizing that it is not a new trend and tracing the development way back to the 1896 presidential election. Chris DeMuth gave an alarming discussion of the increased power of executive branch regulatory agencies, and Steve Davis showed how a new index of global economic policy uncertainty has been going the wrong way for a while. The solutions (in a nutshell) were to control the explosion of government entitlement spending (Greenspan), reestablish constraints on government agencies (DeMuth), and form a commission to estimate credibly the costs and benefits of regulatory proposals (Davis).
Few disputed the proposed solutions, but many wondered aloud how such reforms could be accomplished in the current political environment. All agreed that research of the kind presented at the all-day conference was necessary to achieve progress in practice.