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US policy gridlock holding back economy? Maybe not

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SummaryWashington thinks a resolution of the tense debate over the national debt will unlock a burst of economic growth by lifting uncertainty that has stymied investment

Washington thinks a resolution of the tense debate over the national debt will unlock a burst of economic growth by lifting uncertainty that has stymied investment.

It is a widely held view on Wall Street as well, derived from the glaring signs of weak business confidence over the last year as America struggles to get its fiscal house in order.

However, evidence for this belief is far from clear and is an issue of considerable debate, and even some businesses wonder how big a factor uncertainty is.

In Lexington, Kentucky, new sales are slipping at Gray Construction, a family-owned builder of factories and distribution centers. Clients say they are holding back because America could fall into recession if Congress and the White House don't strike a deal soon to avoid a "fiscal cliff" of some $600 billion in tax increases and government spending cuts due to begin in January.

"They're saying: 'Let's wait. Let's see what happens,'" Chief Executive Stephen Gray said.

And yet, the company, which also does design and engineering work, still has a record backlog of work and has hired about 30 people in the last six months.

The company's CEO has seen little dips in the sales pipeline before and said it's hard to know how different business would be if Washington's politicians inspired more confidence. As it is, Gray sees no reason to stop hiring: "I'm not super-worried."

Like Gray, economists are also unsure how much they can attribute business decisions to something so indeterminate as uncertainty, and they are divided over the degree to which erratic policymaking has dragged on the economy in recent years, if it has at all.

Answering this question could give important clues on how the economy will perform next year, whether or not Congress strikes a deal to avoid the fiscal cliff.

HOLDING BACK

Toward that end, researchers at Stanford University and the University of Chicago have created an index to gauge just how murky the future looks.

They count soon-to-expire tax provisions and mentions of uncertainty in major newspapers, as well as how much economic forecasters disagree on things like future government spending.

In a sample period between 1985 and 2011, they found heightened uncertainty went hand in hand with weak economic growth and hiring. Their index hit an all-time high last year when congressional gridlock nearly led the United States to default on its debt. It remains high, with a host of temporary tax cuts due to expire at

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