Knowns and Economic Unknowns
12:00 AM, Nov 24, 2012 • By IRWIN M. STELZER
Unfortunately, to predict with confidence that consumers will behave in 2013 as they have in 2012 is to ignore the warning by the distinguished Danish physicist Niels Bohr, who famously said, “Prediction is very difficult, especially about the future.” Doubly difficult in a world in which there are more known unknowns—things we know we don’t know—than is usually the case. We don’t know how better off consumers will react to the large tax increases that are in store for them next year. Not only is the president likely to get the increase in marginal income tax rates he is demanding—although the starting point might be families with annual incomes in excess of $500,000 rather than his preferred $250,000—but taxes on dividends and capital gains will rise, and the 3.8 percent Obamacare tax on their investment incomes will cut in, along with a host of other taxes buried deep in the bowels of the massive Obamacare legislation.
No one expects business investment, which has fallen off a cliff of its own, to be a growth-booster in 2013. A Wall Street Journal survey of the intentions of large corporations reveals that at least half are scaling back investment plans. Corporations, sitting on some $2 trillion in cash, blame the uncertainty surrounding the fiscal cliff for their unwillingness to part with cash. Well, that source of uncertainty will be no more in a few weeks, when a deal to avoid the cliff is likely (but not certainly, with the president determined to pursue “fairness” as well as cash, and Speaker Boehner throwing Obamacare back on the table) to be cut.
Unfortunately, the new certainty will include:
· a less favorable tax regime, shorn of many special benefits now enjoyed by the oil and other industries,
· rising health care costs as the provisions of Obamacare become effective,
· cutbacks in government spending on the defense and other industries,
· a flood of new regulations,
· a European recession that has shriveled exports to the EU-27, and
· pressure on profit margins and share prices.
So it is a reasonable guess that most corporations will remain reluctant to undertake major new projects.
Still, we have good reason to be thankful. Our slow growth tops the declines being experienced by many eurozone countries, our entrepreneurs continue to astound with new products, our banks are in better shape than most of those in other countries, a vigorously contested election did not see the jailing of a single dissident nor a single tire set alight, and we are about to enter an age of energy abundance that is luring manufacturing back to America. Any remaining problems can be cured by the politicians who created them.