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Uncertainty Holds Back Growth
In the first quarter of 2010, America’s economy grew at a 3.9% rate. Let’s round it up to 4%, the goal of The 4% Growth Project. We haven’t been there since. By the first quarter of 2012, economic growth had dropped to 1.9%, or roughly half its rate of two years previously. Then last week we learned that in the second quarter of 2012, the economy’s growth rate had contracted further to a mere 1.5%. In recent months, job creation has been anemic. The unemployment rate remains above 8%, and some pundits are even predicting a double-dip recession.
Why can’t the economy gain traction, despite the lowest interest rates in memory and record amounts of fiscal stimulus? To some degree, the loss of home equity, rising energy costs, and the Eurozone crisis can be blamed. But to my mind the main culprit is “uncertainty.” Think about it. We have fiscal uncertainty. (Will the Bush tax cuts go away and budgetary sequestration take hold on January 1, 2013? What will happen to inheritance tax rates and exemptions next year? Is 2012 a good year during which to die?) We have healthcare uncertainty. (Will the Affordable Care Act be modified or repealed?) We have regulatory uncertainty (e.g. proposed EPA greenhouse gas regulations; possible federal regulation of hydraulic fracturing). And, of course, we have political uncertainty. (Who will win the White House in November, and which party will have majorities in the Senate and the House?) One might say we have uncertainty about uncertainty!
We hear over and over again that large companies are sitting on mounds of cash. But in the face of all these uncertainties, should we be surprised that businesses are reluctant to hire or to make sizeable new investments? Consumers are also hoarding cash and bolstering their balance sheets, partly because of the fiscal uncertainties they face.
Until these “uncertainties” become “certainties,” or as certain as anything can be in our politicized world, the economy will remain stuck in neutral. The next Congress and the White House, regardless of the election’s outcomes, must quickly resolve these fiscal, regulatory, and legislative uncertainties. Otherwise, we’ll never achieve the goal of 4% growth.
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