The Uncertainty Tax: How Policy Volatility Will Harm the Economy

This commentary was updated on April 10, 2025, to reflect new changes to U.S. trade policy.

Policy Shifts and Economic Uncertainty

One week after “Liberation Day”—one of the largest tariff announcements in U.S. history—the Trump administration has reversed course again. All Liberation Day tariffs are now on a 90-day pause, except for those placed on China, which were raised to 145 percent. 

This dramatic shift follows on the heels of numerous other significant changes in U.S. policy. The administration has repeatedly announced—and then postponed—other tariffs on the United States’ largest trading partners, Mexico and Canada. It has reframed U.S. policy in the Russia-Ukraine war while reportedly drafting plans to lift sanctions on Russia. And it is restructuring agencies and institutions tasked with running the U.S. government. 

Whatever their motivation, these rapid policy shifts have injected a high level of uncertainty into both the domestic and global economy. The Economic Policy Uncertainty Index, a widely cited measure tracking economic uncertainty in major news sources, has reached a record high. This is not just an abstract concern—elevated uncertainty has tangible economic consequences, including delayed investment, reduced consumption, and slower economic growth.

While the administration’s policies target legitimate economic challenges—such as the decline in high-wage blue collar employment, bureaucratic inefficiencies, and weaknesses in the U.S. science and technology ecosystem—their erratic and inconsistent execution threatens to undermine their effectiveness. As the administration advances its economic and security agenda, it must confront the reality that uncertainty itself has economic costs.

The Macroeconomic Consequences of Uncertainty

Economic decisions—by businesses, investors, and consumers alike—are rooted in expectations about the future. Businesses expand operations based on projected demand, investors fund R&D projects in anticipation of financial returns, and households make purchases aligned with their expected real income. But as uncertainty grows and the range of potential outcomes widens, decisionmakers become more cautious. When faced with unpredictable conditions, it is safer to wait—delaying action until clearer signals emerge and the risks of costly, irreversible mistakes diminish.

This market incentive to wait, while rational on an individual level, can have major macroeconomic consequences. As uncertainty rises, firms are more likely to postpone capital commitments and hiring. This hesitation extends to households, which defer major purchases like homes or cars. Lenders, in turn, raise interest rates to price in higher risk, tightening credit conditions just as demand is softening. The cumulative effect is a broad-based slowdown in economic activity, as both firms and individuals pause for clarity before making financial decisions.

Trade Policy Volatility and Its Economic Implications

One of the most significant sources of economic uncertainty in recent months has been the administration’s erratic approach to tariffs. The Trump administration has targeted several U.S. allies with tariffs—implementing some, pausing others, and frequently shifting its trade strategy. Demonstrating how widespread the feeling of uncertainty is, some reports suggest that even senior U.S. officials are unclear about the future direction of policy.

Research confirms that this kind of policy uncertainty carries real economic costs. Trade policy uncertainty reduces both domestic economic activity and international trade. When foreign governments and firms perceive U.S. trade policy as unreliable and unpredictable, they are more likely to reconfigure supply chains, reduce dependence on U.S. markets, and seek more stable trading partners, diminishing the effectiveness of future tariff threats. This reaction is already evident, as many countries accelerate efforts to diversify trade relationships and bolster domestic industries.

If tariffs are intended to serve as a tool of industrial policy to encourage domestic investment, uncertainty can be especially counterproductive. Firms delay capital expenditures, consumers postpone big-ticket purchases, and lenders tighten credit in response to elevated risk. These effects feed on one another, creating a feedback loop that reinforces economic stagnation. In this context, any short-term leverage gained from unpredictability may be more than offset by the long-term costs to U.S. competitiveness and growth.

Uncertainty and Economic Statecraft

While economic uncertainty can be costly, it may serve a strategic purpose if it enables policymakers to use economic tools as a means of statecraft. If carefully managed, uncertainty can signal to partner countries that U.S. actions will depend on their behavior, providing a powerful mechanism for influence. In these cases, some domestic economic uncertainty may be a calculated trade-off for advancing broader geopolitical objectives. One effective example of this approach is the credible use of sanctions: When a government clearly communicates the consequences of certain behaviors, uncertainty becomes a lever rather than a liability.

But effective coercive strategy depends on clarity and credibility. The current administration has failed to communicate coherent conditions under which tariffs or other tools will be applied, introducing a second layer of uncertainty. Foreign governments are left unsure of what actions might trigger economic penalties. Meanwhile, domestic actors face unpredictable swings in policy that undermine confidence and stability. As a result, the U.S. forfeits both diplomatic leverage abroad and economic momentum at home. For economic uncertainty to serve as a viable tool of statecraft, it must be deployed with precision and credibility—something this administration has struggled to achieve.

The Risks of Dual-Purpose Tariff Policy

The costs of economic uncertainty are significant and far-reaching. The U.S. economy is already experiencing the short-term consequences: volatile markets, declining consumer sentiment, and rising inflation expectations. Federal Reserve Chair Jerome Powell has acknowledged that tariffs contribute to slower growth and higher inflation, noting that uncertainty has created economic headwinds requiring careful policy adjustments. Goldman Sachs increased the predicted probability of a U.S. recession to 35 percent, citing concerns over escalating trade wars and their economic ramifications.

If the administration intends to use tariffs as a coercive tool, some level of economic uncertainty may be a necessary trade-off. But if the goal is to foster industrial policy and economic growth, then providing clear and consistent signals to markets is essential. Currently, the administration appears to be pursuing both foreign policy and industrial policy objectives through tariffs—an approach that is inherently conflicting. Successfully achieving even one of these goals is challenging; attempting both simultaneously is unrealistic, if not impossible. They require opposing conditions: Coercion requires dexterity; investment depends on stability.

Without a strategic course correction, uncertainty will continue to discourage critical investments and weaken the willingness of partners to engage in long-term agreements with the United States. The impact of such decisionmaking on investment, consumption, and overall economic performance must remain a central concern.

Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Chris Borges is a program manager and associate fellow with the Economics Program and Scholl Chair in International Business at CSIS.

If you are interested in learning more about this topic, explore CSIS’s Executive Education course Crash Course: Trade Policy with the Trade Guys.