The Economic Policy Uncertainty Index and the Judy Miller Problem

The Romney camp and its academic lackeys released a new white paper detailing some of Romney’s economic ideas and policies. In one part of the report, we are treated to an academic effort to codify the otherwise hand-waiving hysteria about economic uncertainty. The GOP uses the idea of economic uncertainty to get out of recognizing that the current economic malaise is a consequence of a steep fall in aggregate demand caused by the 2007-2008 collapse of the housing bubble. They also use it when convenient to provide post-hoc rationalizations for de-regulation and cutting taxes.

In service of this economic uncertainty rhetoric, the Economic Policy Uncertainty Index was created. Mike Konczal provides an amusing takedown of the index. He points out that one-third of the index relies upon word searches in ten prominent newspapers. The word search filters for “uncertainty” and “uncertain,” and then filters down more to narrow the results to articles more likely to be about government policy.

Konczal points out many glaring problems with this approach. The most comical problem is that the relevant key words may exist in a newspaper article because a right-wing hack placed them there by being quoted in it. So, if some Heritage mouthpiece or GOP politician gets called up by a reporter for comment, and provides the economic uncertainty talking point, that is likely to trigger the word search. The end result is that GOP chattering about rising economic uncertainty somehow proves that economic uncertainty is indeed rising.

This ridiculous process mirrors the terribly embarrassing Judy Miller affair from the run-up to the Iraq War. Bush administration sources anonymously provided “information” about weapons of mass destruction in Iraq to Miller. Miller reported that information in the New York Times. Then, those same right-wing sources used Miller’s reports to prove their claims about weapons of mass destruction. After all, the New York Times is reporting on them; so they must be real! This same sort of feedback loop is now being harnessed by the Romney team to prove that economic uncertainty is a major problem.

In addition to what I will call the Judy Miller Problem, Konczal provides two other critiques. First, the index does not explain what the economic uncertainty is about. There could be economic uncertainty about the shortfall in aggregate demand, not just taxes and regulations. Second, by doing simple word searches, the index does not tell us what the comments about economic uncertainty are even saying. A newspaper comment that economic uncertainty is declining would be counted by the index as an indicator that economic uncertainty is rising.

On top of all of this, there seem to be some really basic conceptual problems in play with the whole idea of blaming economic policy uncertainty on a party. In the US at least, economic policy uncertainty seems to be a function of two parties being at odds with one another over policy. Presumably if one party had pretty solid control of things, they could eliminate economic policy uncertainty altogether, no matter which party it was. The idea that electing Romney will — in and of itself — reduce economic policy uncertainty seems clearly wrong. Providing landslide victories to the DNC such that they did not have to contend with countervailing GOP power would end economic policy uncertainty just as much as anything else would.

In short then, not only is the Economic Policy Uncertainty Index kind of jokish in its methodology, efforts to twist the index in the favor of electing any specific party are clearly misguided. Yet that is what we are getting out of the Romney camp’s team of academics.