The United States isn’t the only country that’s a complete basket case right now. Basically the entire world has reached record levels of political chaos and uncertainty.
That’s according to the relatively little-publicized Global Economic Policy Uncertainty Index, which just hit a two-decade high.
The index was constructed by Scott R. Baker, Nick Bloom and Steven J. Davis, economists at Northwestern University, Stanford University and the University of Chicago, respectively. It tracks the relative frequency of news coverage relating to economic policy uncertainty, based on archives from major newspapers in 18 countries. These countries collectively represent more than two-thirds of the global economy.
In January, the index surpassed 300 for the first time ever. For context, that’s roughly three times the average number over the past 20 years – as far back as the index goes.
Why does this matter?
Uncertainty about the policy environment leads to a lot of business decisions being put on pause. Moreover, research has found that big shocks in policy uncertainty – such as what we’re seeing now around the world – foreshadowed declines in investment, output and hiring.
Reversing an investment or hire is expensive, after all. When there’s more uncertainty about whether laws and political leadership will change, businesses are more likely to stand pat. Even if fully committed to hiring and expanding, they may still be less nimble because banks are reluctant to extend financing when they’re unsure what the rules of the road or economic conditions will look like.
It’s easy to blame President Trump for sowing unpredictability (one of his stated objectives) worldwide. But surprisingly, the United States does not seem to be the primary driver of this global phenomenon, at least if you look at only the American component of the index.
Uncertainty in the United States has been elevated in recent months, according to this measure, though it is nowhere near its monthly record high. That was reached in mid-2011, when a debt ceiling showdown brought the country to the brink of default. Despite the chaos and confusion of the past several weeks, the United States doesn’t seem to be in economic policy crisis mode.
The same cannot be said for the rest of the globe. Trump’s caprices are likely battering other, smaller economies, and thereby driving up uncertainty in other countries in ways that may not be reflected in just the U.S. numbers. But other countries have also been sowing plenty of their own homegrown turmoil.
Across Europe, far-right nationalism, populism and anti-establishment sentiment have unleashed great uncertainty about who will be in charge in a few months and what their economic platforms will be. Major elections coming up in Germany, France and the Netherlands have spooked financial markets – and raised questions about whether the European Union will continue to exist in anything resembling its current form.
Britons have already voted to exit the European Union, of course, but the country still hasn’t hashed out the terms of the divorce. Indeed, it’s still struggling to figure out if and when Brexit will happen. Meanwhile, other jurisdictions, such as France, are trying to lure away the lucrative British banking industry, leaving that sector’s employees in an uncomfortable limbo.
Europe is hardly the only continent with problems.
In Asia, China sees an opening to become more of a world political leader, thanks to Trump’s commitment to greater U.S. insularity. But internally, China too faces record-high economic policy uncertainty, thanks to an enormous capital exodus, a regulatory clampdown and manufacturing troubles.
Its neighbor South Korea is also grappling with political turmoil following a corruption scandal that led to the impeachment of its president, the questioning of more than 400 individuals in that investigation, and raids of 150 companies and government agencies.
On the other side of the globe, Brazil is still dealing with fallout from its own corruption scandal, which also displaced a president.
And tumult and instability have roiled Turkey, too, among other countries.
And so on.
None of this is evidence that the United States ought to retrench. To the contrary, it’s a sign that the world needs us all the more to act like the beacon of stability, leadership and liberal values that we have long declared ourselves to be. There is less room than ever for incompetent governance, hissy-fit phone calls with foreign leaders, magic math and laughable press-room lies.
Americans desperately need our elected officials to get their acts together and start behaving like grown-ups. So does the rest of the world.