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Economic Certainty—and Uncertainty

12:00 AM, Jan 28, 2012 • By IRWIN M. STELZER
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If you are one of the many who believes that uncertainty is stalling our recovery, you should be smiling. Much uncertainty has been replaced by a surer knowledge of what policy makers have in mind for the economy, and of the direction of some of the key economic indicators. If you are sure you love certainty, you might want to think again.

Federal Reserve

Start with the state of political play. President Obama used his rousing State of the Union speech to make four things clear. First, he knows that Obamacare is an albatross he will have to wear in his reelection swings through the country: It is so wildly unpopular that he hardly mentioned it in a speech that lasted over an hour, much less offered it as his signal accomplishment, which, for better or worse, it surely is. Second, he plans to propose a series of small spending initiatives on student loans, and mortgage relief, and larger ones on infrastructure. This is the “small ball” approach that Bill Clinton so successfully used in his reelection bid. Third, he will continue to call for higher taxes on the rich, with anyone earning more than $1 million per year paying at a 30 percent rate, and for higher taxes on the merely comfortable: families earning more than $250,000 per year. Class war to some, fairness to others.

Fourth, and most important, he knows most of these measures have no chance of gaining congressional approval. This was not a policy speech; it was a political speech laying out the themes of his $1 billion reelection campaign, a campaign with historic roots in Harry Truman’s attack on a “do-nothing” Congress—except in this case the doing of nothing is in good part by a Democratic-controlled senate.

A possible exception to the likely failure of most of these measures to pass is the new provisions of the tax code the Treasury is now drafting. Foreign earnings of American companies are to be taxed, and they are to be given an incentive to “bring jobs home.” That will prove difficult for Republicans to oppose.

In sum, uncertainty about political developments this year is now removed. We are certain to see the political process paralyzed for the rest of the year, and perhaps beyond, as intransigent Republicans face off against an equally intransigent president, a clash if not of the titans, then of the ideologues. The deficit and debt will remain unattended, and the tax structure largely unchanged as Republicans argue for broadening the tax base by eliminating loopholes that favor high earners, and for lowering tax rates, and the president holds to his position that fairness requires that “millionaires and billionaires,” most notable among them his possible rival, Mitt Romney, pay their fair share—i.e., more. Every sensible person in town, and there are some, knows that the deficit can be attacked only by raising some taxes, directly or by closing loopholes, and reducing entitlements. But sense is in short supply in Washington.

Another uncertainty has been eliminated by the Federal Reserve Board’s monetary policy gurus. Unhappy with the moderate pace of the recovery, and seeing  “significant downside risks to the recovery,” the Fed has promised to hold interest rates at current near-zero levels, at least until well into 2014. Too bad for savers, whom the Fed hopes will find it more fun to spend than to save without prospect of earning any interest. Good news for borrowers, whom the Fed hopes will borrow to invest in factories and to buy homes—if they can qualify for credit from banks increasingly nervous about lending to the likes of many of the potential borrowers who enter their august halls. The Fed also will take whatever steps it deems necessary to pep up the economy if the recovery does not soon grow steadily at an annual rate in excess of the 2.8 percent rate of the last quarter of 2011, a bit of good news after a paltry 1.8 percent increase in the third quarter. But the Economist Intelligence Unit’s latest guess is that U.S. GDP will grow by 1.8 percent this year, and rise gradually to only 2.3 percent by 2016. Economists at the Lindsey Group consultancy joke that along around 2014 the Fed will issue a statement that “rates [are] to remain exceptionally low for the rest of the decade.” But remember: The interest-rate pledge extends beyond Chairman Ben Bernanke’s term, which expires in January 31, 2014. A bit of lingering uncertainty as to the durability of this new certainty.

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