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Economic Uncertainty Soon to Give Way to (Some) Certainty

12:15 PM, Oct 27, 2012 • By IRWIN M. STELZER
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Until now, most forecasters have been framing the assumptions underlying their projections on what they assume a reelected Barack Obama would do about taxes, appointments to the Federal Reserve Board, spending, the deficit and a host of other policies. Suddenly, they are back to the drawing board. Polls are showing something inconceivable to the American media and foreign observers: Mitt Romney is closing in on the president, and might even hold a slight lead. If Romney does win, and especially if Republicans, clinging to his coattails, wrest control of the Senate from the Democrats (the House will likely remain in Republican hands), economic forecasters will have to change their policy assumptions.

obama and romney

Obamacare will be repealed or, more likely, importantly changed by the new set of administrators who will be in charge of writing and administrating the law’s key regulations. That should be a plus for job growth. Obama’s subsidies for renewable energy sources will be repealed or allowed to expire, and the Environmental Protection Agency’s war on coal will be ended, as will other agencies’ stalling on the issuance of onshore and offshore drilling permits. The prospects for a more benign regulatory environment within which shale-gas drillers will operate are increased. All of that should lower projections of energy costs and raise estimates of growth.

By 2014 there will be a chairman of the Federal Reserve Board who will just say no to QE4, especially if that new chairman is Stanford economics professor John B. Taylor, a leading critic of Bernanke’s policies. That will also affect growth estimates, but in which direction is uncertain. Massive tax increases on dividends and capital gains will be off the agenda, giving share prices a fillip but making deficit reduction more difficult—maybe.

Partisans for both candidates say that if their man is in the White House, the pace of economic recovery will accelerate, millions of new jobs will be created—by government action (Obama) or by the private sector (Romney)—and the middle class will once again be able to dream the American dream of security, prosperity, and a better life for their children.

In this last, frantic week of campaigning, Romney is emphasizing the failure of the president’s policies to provide satisfactory jobs for 23 million Americans, and to get the economy growing faster than the 2 percent it racked up in the third quarter of this year, better than last quarter’s miserable 1.3 percent, but still too low to create jobs. The president, meanwhile, is arguing that his stimulus program prevented a major recession, and that given four more years he will get the economy growing faster and see to it that the rich are not the principal beneficiaries.

It is difficult to determine what all of this campaign sound and fury will some day signify, at least until we see who wins, and whether the winner will confront a friendly or a hostile Congress. But we do know something about the condition of the economy that the winner will inherit.

There is good news from at least three key sectors: energy, housing, and consumers. The boom in domestic supplies of oil and natural gas is real. Thanks to new drilling technology, part of which is the ability to get shale to yield large quantities of natural gas and oil by “fracking,” American imports of oil are dropping, manufacturers are being attracted to America by low-cost natural gas, and gas is replacing coal in electricity generation, lowering emissions. All is for the best in this best of all possible energy sectors.

Not quite as good in housing, where activity remains below pre-recession levels, but a lot better than it has been. Thanks in part to low rates produced by the Fed’s mortgage purchases—3.37 percent on 30-year mortgages—sales of both new and existing homes rose in September, as did new construction. Unsold inventories are down to half the peak levels of summer 2010. Prices are up, which adds to household wealth and should eventually feed into increased spending. Permits are also sharply up, which bodes well for the future.

The final bit of news in the “good” category is the report that earlier this month consumer confidence reached its highest level since before the recession. This is the third straight month in which confidence has increased, which helps explain the rise in the sales of the two big-ticket items: homes and cars. The portion of after-tax income consumers are spending on food, energy and financial obligations such as mortgages is at its lowest level in almost fifteen years, leaving consumers room for a bit of discretionary spending, and recent increases in house and share prices have helped strengthen their balance sheets and probably contributed to the reported rise in confidence.

Not all the news is good. Business investment is somewhere between flat and declining. GE, DuPont, and other large firms are announcing lay-offs, and third-quarter corporate earnings are declining after eleven quarters of growth. Headwinds blowing in from Europe and China are hurting multinationals and exporters. All in all, the outlook as seen around the boardroom tables is considerably bleaker than the one seen around kitchen tables these days.

The average estimate of the 79 economists surveyed by Bloomberg is that the economy will grow by 2.1 percent next year, down from their May estimate of 2.5 percent. That would make it unlikely that the unemployment rate of 7.8 percent will decline very much, if at all, especially if CEOs of leading companies go through with plans to cut jobs in an effort to shore up profit margins in the face of declining sales. Worse: if current legislation mandating year-end tax increases and spending cuts is not changed, it will be difficult to avoid another recession. Such is the received wisdom in Washington these days, with a small minority disagreeing and urging a dive over the fiscal cliff to increase tax revenues, cut expenses, and reduce the deficit.

Only ten days from now those who have not already voted go to the polls. Some of the uncertainty about tax policy, future monetary policy, and the deficit that is freezing business investment, causing firms to hoard cash, and making employers reluctant to add staff will be eliminated. Not all uncertainty, especially if the newly elected president and the lame duck Congress agree to “kick the can down the road,” avoiding the compromise needed to avoid the fiscal cliff.

John Makin, an economist at the American Enterprise Institute but with years of private-sector experience, says, “The most effective economic stimulant in 2013 would be a reduction in the high level of economic policy uncertainty that has built up since the 2008 financial crisis … [It would] lift the US economy back towards 3-4 percent growth by 2014.” Of course, if uncertainty is replaced with the certainty of massive tax increases and more and more regulation, uncertainty might seem an attractive alternative.

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