There is no such thing as business certainty. Uncertainty is a natural part of the business environment and never goes away. In our previous post, we saw evidence that rising stock prices reflect an improving U.S. economy. Still, there are plenty of noisemakers offering half-truths, mistruths and a distortion of facts who claim that uncertainty about taxation, regulation and other reforms are impeding the economic recovery. Simply listening to the media, one could easily conclude that there is widespread disagreement about how to accelerate the recovery.

In reality, however, there’s little disagreement among reasonable people. The University of Chicago Booth School of Business finds remarkable agreement among leading U.S. economists on most major macroeconomic issues, though they hold diverse political perspectives. The most surprising thing is that these economists agree, even when there is considerable disagreement on Capitol Hill. What have economists found concerning the extent to which federal policy affects business and economic uncertainty?

These findings and many others show that the current debate about tax and regulatory uncertainty are unfounded. Yet, because the U.S. economy and political system are inextricably linked, could the political climate in Washington be increasing economic uncertainty?

Davis, Bloom and Baker developed a new policy uncertainty index (PUI) and estimate its relationship to economic growth going back to 1985. They measured policy uncertainty by combining three factors: (1) the volume of newspaper coverage of economic policy uncertainty of some type (i.e., fiscal, monetary, or regulatory), (2) the extent of disagreement among professional forecasters over inflation and future spending by federal, state and local governments, and (3) the number of federal tax code provisions set to expire in future years. Davis et al discovered that PUI surges around major federal elections, political shocks such as 9/11 and wars, the bank crisis and government bailouts, and congressional debates over economic policy. PUI peaked in August 2011, when the U.S. lost its AAA credit rating following the intense debt-ceiling debate. Since then, PUI has steadily declined. Today, PUI is at its lowest level since August 2008, just before the financial collapse of Lehman Brothers, and will likely increase as the 2012 election nears and the “fiscal cliff” approaches. Davis et al estimate that political uncertainty is shrinking the U.S. gross domestic product by 3% and costing between two and three million jobs.

In the July 2012 article The U.S. Economic Policy Debate Is a Sham, economists Stevenson and Wolfers wrote what many voters already believe, “The debate in Washington about economic policy is phony. It’s manufactured. And it’s entirely political.” Wolfers further comments, “I’ve never seen the disjunction between the political debate about economics and the consensus of economists be as large as it is today.” He adds that instead of having a serious discussion about how best to end the current economic slump, Congress is gridlocked and many of the Congressional arguments are so far outside the mainstream that it is hard to find a single economist to agree with them.”

Simply by examining the actual facts, taking a broader view of the economy, and putting things in proper context, you can begin to understand that much of the debate on uncertainty is purely political and self-inflicted due primarily to the ongoing pattern of dysfunction in Washington.