A dangerous mix of polarization and uncertainty during election time

A new study by Stanford researchers indicates that the economic recovery may be prolonged because of additional uncertainty around next month’s presidential election.

The study — by economist Nicholas Bloom and political scientist Jonathan Rodden — shows that economic policy uncertainty commonly spikes around election times across many countries. And that uncertainty is even higher when a national election is a close race and the electorate is especially polarized, the study found.

Those factors in the run-up to Nov. 3 — combined with an anxiety that the election results could take months to resolve — paint an ominous outlook, particularly when set against the historical and global patterns analyzed by the researchers.

“There's a lot to worry about from both a political and economic perspective,” said Rodden. “Extrapolating from what we see in the data, it seems clear that there would be a prolonged period of uncertainty, and it would be a rather dramatic spike that would not just be there around the election, but would last potentially for months afterwards.”

“That would not be good for us as a society, but it would also not be good for the economy,” he said.

A protracted election outcome — and the uncertainty tethered to it — will stall an already tough recovery from the pandemic’s economic crush, said Nicholas Bloom, the William D. Eberle Professor of Economics at Stanford.

“It’s almost like a mini-electoral recession,” Bloom said. “It’s going to make the longer haul recovery from COVID far harder.”

In addition, “the polarized political climate is probably already slowing down the recovery from the pandemic because any households or firms impacted by government spending and government regulation — sectors like health, defense, or construction — are going to be pausing to wait until the results come in,” he said.

Bloom and Rodden are both senior fellows at the Stanford Institute for Economic Policy Research (SIEPR). Their co-authors of the study, detailed in this working paper, are professors Scott Baker of Northwestern and Steve Davis of the University of Chicago, and Aniket Baksy, an economics PhD student at Stanford.

Their conclusion is bleak: “The election is heralding potentially high levels of policy uncertainty in November 2020,” they write. “Perhaps the greatest danger, however, lies in an election that is still being contested in the courts in December or January.”

An intersection of economics and politics

Bloom’s research focuses on management practices and understanding the effects of uncertainty while Rodden’s work focuses on comparative politics and economic and political geography. Both are professors in Stanford’s School of Humanities and Sciences.

In their interdisciplinary collaboration, the team of researchers set out to better understand the three-way interplay of polarization, economic uncertainty and elections. 

Already, even before the COVID-19 outbreak, the political and economic landscape had been marked by decades of rising global uncertainty and political polarization. In fact, when it comes to deepening political divides, the U.S. now stands out above other nations. Global uncertainty has also surged following trade wars ignited by the Trump administration.

The researchers analyzed a variety of political polarization and election data on 23 countries from 1952 to February 2020, along with the Economic Policy Uncertainty Index that Bloom, Baker and Davis jointly developed in 2016 and have since expanded.

Specifically, their study found that uncertainty levels rise, on average, by 13 percent in an election month and the 30 days preceding it.

Then, focusing on the U.S., the study found that uncertainty levels were 28 percent higher in elections that were close and where the electorate was more polarized, compared to national elections that were neither.

“In the first cut, we could see the spikes in uncertainty around elections and then when we looked into the conditions under those spikes, we found good evidence that the spikes were driven particularly by close elections and elections in which the electorate is especially polarized,” Rodden said. “And both of those things have been increasing in recent years, so we see the spikes increasing over time.” 

Why worry

Normally, an incumbent victory reduces uncertainty, Bloom said. “But in this election, Trump is a one-man uncertainty machine. He’s been exporting uncertainty since he was elected in 2016.”

“And if (Democratic candidate Joseph) Biden wins, it's possible there's still some incredible turbulence in the last days of Trump,” Bloom predicted.

The worst case scenario?

“If Biden wins narrowly and Trump contests the results, then economic policy uncertainty will go through the roof because there will be a crisis in government,” Bloom said.

On top of hesitancy in business spending, stock market volatility — which follows uncertainty trends — will also likely remain high until the election is resolved, he said.

Elections aren’t always this dramatic or consequential, according to the study. But the widening gap in recent years between parties, policymakers and coalitions have translated into higher-stakes elections — where outcomes determine broad economic policies.

Based on data available from the 1950s, “this is the most polarized era we’ve ever seen,” Rodden said — a fact illustrated also in research by several other SIEPR scholars, including Matthew Gentzkow and Andrew Hall.

“With the current level of polarization, when we have increasing shares of voters who seem to suggest in surveys that they think there are conditions under which violence is justified, or law-breaking is justified — that's something I think everybody worries about,” he said. 

“In the short run, this election-related uncertainty is coming at a horrible time — when it’s stalling what people are hoping would be a rapid recovery from the COVID recession,” Bloom said. 

“And my long-run worry is that this may herald a new phase in U.S. politics where you have very polarized and unpredictable elections that will induce more instability and uncertainty for years to come,” he said. “And that’s not going to help deliver overall (economic) growth.”