Research shows that political strife and policy uncertainty affect business investment

Partisan squabbles are usually not only annoying, but additionally bad for business.

This is what my colleagues and I discovered in a recent study about how uncertainty in environmental policy affects corporate investment.

First we analyzed greater than 300 million newspaper articlessearching for keywords related to environmental policy uncertainty. We have found that this uncertainty increases during election season and has nearly doubled during the last decade.

Then we checked out one another Business investments Interest rates – a typical approach to measuring an organization's financial health – for firms in affected sectors, equivalent to agriculture, mining, energy and automotive. We found that environmental policy uncertainty reduced these firms' investment rates by 0.010%.

That may not sound like much, however it is Economists like me You know, small amounts add up over time.

For example, we found that the rise in environmental policy uncertainty leading as much as the 2008 presidential election was related to a one-time 25% decline in investment rates for firms affected by environmental policy. This effect was larger than the uncertainty related to defense, health and financial policy.

But my team also found a silver lining. We found that political uncertainty had significantly less impact on business investment when control of Congress was divided and policy changes required bipartisan support.

When the identical political party controlled each houses of Congress, environmental policy uncertainty was related to a 0.013% decline in investment rates. But when Congress was divided, that decline shrank to a much smaller 0.002%.

Why it matters

Since political uncertainty tends to extend around elections, our results suggest that the present political environment creates headwinds for corporate investment.

Our study also suggests that measures to stimulate business investment could also be less effective than previously thought attributable to the uncertainty surrounding them.

Take this for instance Inflation Reduction Actpassed in 2021, and the bipartisan infrastructure bill of 2022. Both were designed to encourage investment in clean energy technologies.

But uncertainty over whether these packages would even be passed – and if that’s the case, what these measures would come with – can have deterred investment before they took effect. And uncertainty over which facets of the laws will persist after the election could also dampen business investment.

A certain degree of uncertainty could be built into the democratic process. The faster and more secretive a government acts, the less accountable it’s to the general public. If you take a look at it this manner, some uncertainty is an unavoidable cost to a healthy political decision-making process.

Our study puts a price tag on these costs and reminds policymakers that political infighting is a drain on the economy. Our results suggest a promising path forward: bipartisanship.

What's next?

Because environmental policy is so diverse, our team is currently conducting research to search out out whether firms respond in another way to uncertainty with “carrot” measures – equivalent to subsidies or tax breaks – than with “stick” measures, equivalent to fines or other penalties .

Answering this query will help policymakers minimize the impact of uncertainty.

It can be an open query whether newspaper articles provide information to business leaders or merely reflect the knowledge they have already got. In the latter case, media coverage is probably not a superb measure of the uncertainty firms face.

To address this problem, we’re working on developing methods to measure uncertainty Earnings Call Transcripts as a substitute of newspaper articles. This may very well be a more direct solution to measure the uncertainties that drive business decisions.