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The Fraser Institute: Policy Uncertainty, U.S. Political Gridlock Threaten Canada's Economic Recovery

VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 02/07/13 -- Economic policy uncertainty in Canada and the United States has surged since 2008, hindering recovery from the recession, argues a new report from the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

"Much of Canada's current economic policy uncertainty is due to contagion from the United States, given the integrated and interdependent nature of the Canadian and American economies," writes Nicholas Bloom, Stanford University professor of economics, co-director of the Productivity, Innovation and Entrepreneurship Program at the National Bureau of Economic Research, and author of Killing the Economic Engine: Is Policy Uncertainty Stalling U.S. and Canadian Economic Growth?

"The outlook is bleak: our analysis shows that U.S.-based policy uncertainty will continue to slow economic recovery in Canada."

Jason Clemens, Fraser Institute executive vice-president, notes that economic policy uncertainty can lead to businesses postponing hiring or investing and consumers delaying major spending decisions. This slowdown of economic activity likely contributed to the stalled recovery from the 2007-09 recession.

Bloom finds that U.S. policy uncertainty tended to rise after the first and second Gulf Wars, various elections, and terrorist attacks, then surged upward in 2008 and remains high today. Rising policy uncertainty from 2006 to 2011 explains a 2.5 per cent drop in industrial production and employment declines of 2.4 million.

"The prospects for policy uncertainty decreasing in the short term do not appear bright," Bloom writes.

Clemens points to two main reasons for pessimism: President Obama's policy agenda and the increasing polarization of the U.S. political system.

The deal reached at the end of 2012 to avert the "fiscal cliff" did little to address the long-run U.S. structural deficit, which is both large and trending upward. Political gridlock has ensued as Democrats fiercely resist controls on government spending and Republicans fiercely resist tax increases.

"Getting agreement on policies in the House and even the Senate is becoming more difficult over time as politicians polarize into one of two camps. The current scenario of the United States lurching from policy crisis to policy crisis with each new debt-ceiling deadline appears likely to continue," Clemens said.

"Unfortunately, as Professor Bloom has found, high levels of U.S.-based policy uncertainty will continue to impede Canadian economic growth."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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