By Geoff Colvin, senior editor-at-large
FORTUNE — When CEOs tell me that their No. 1 concern is uncertainty, as a great many do, my first reaction is skepticism. Please. Life is uncertain. Is this moment really different?
Actually it is: Economic uncertainty, especially policy uncertainty, is greater than it has been in many years. And if you’re wondering why the U.S. economy is barely moving or why millions of workers can’t find jobs, extraordinary uncertainty is a major part — maybe the largest part — of the answer.
High uncertainty creates a loop of paralysis, and that’s what we’re in right now. Policymakers have no idea what’s going to happen, so they sit on their hands, as the Federal Reserve did recently. “Nearly all participants” in the latest Federal Open Market Committee meeting said that the economic outlook was more uncertain than it had been over the past 20 years, according to the minutes; the committee took no action, and the Dow dropped. The minutes also reported that business leaders were telling committee members that “heightened uncertainty” had led them “to put potential investment projects on hold until the uncertainty is resolved.” And what were those business leaders uncertain about? Government policy. An index of policy uncertainty created by economists at Stanford and the University of Chicago backs their view, showing that policy uncertainty has been much higher in recent months than during the previous 25 years.
The business leaders were most uncertain about tax and regulatory issues. Those things are always changeable, but the potential swings could make you dizzy. After the Supreme Court upheld Obamacare in June, Mitt Romney and Republican congressional leaders promised to repeal it if they win the election in November. So the biggest-ever regulation of the largest sector of the world’s largest economy, affecting every employer and individual in the country, either will continue as the law of the land or will disappear. Who can even think about planning in those circumstances?
It’s similar with the fiscal cliff at year-end: the killer combination of mandatory cuts in federal spending and the expiration of the Bush tax cuts. Even assuming that Congress averts a plunge over the edge, no one knows how it will happen. A short-term fix, by far the likeliest outcome, will do nothing to get the economy moving because it leaves businesspeople wondering what comes next. Investment and hiring decisions are not short-term. Research by Abdiweli M. Ali of Harvard concluded, “Lack of confidence and skepticism about the stability of economic policies force investors to postpone capital investment … They cannot undo decisions about fixed capital every time the government reverses its economic policy.”
This isn’t just economic theory. Uncertainty is creating real suffering. The nonpartisan Congressional Budget Office estimates that uncertainty about the fiscal cliff alone could reduce U.S. economic growth by 0.5% in the second half. In an economy growing at less than 2%, that’s a lot, representing billions of dollars that won’t be available to hire people.
Who’s to blame? A hyperpolarized Congress is an uncertainty-generating machine. Obamacare was enacted without a single Republican vote in either chamber; when the House voted recently to repeal the law, only five Democrats voted with 239 Republicans. The message to businesspeople: Don’t count on anything that passes without substantial bipartisan support. And little of significance seems to be enacted that way anymore.
Another thing CEOs often tell me is that the precise content of policy may be less important than its predictability. If they know the rules, they’ll play to win. It’s when they don’t know the rules, like now, that they get stuck. Give the election’s winners, whoever they are, until March to show that they’re leaders rather than kids throwing tantrums. Until then — and who knows, maybe beyond — we’re going nowhere fast.