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Ring in the New

A more hopeful economic outlook for 2010?

12:00 AM, Jan 5, 2010 • By IRWIN M. STELZER
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The important housing sector seems to have bottomed out, with sales of existing homes and prices both up a bit. But here is where policy -- difficult to forecast -- becomes crucial. If the Congress allows existing tax credits for first-time buyers to lapse, and the Fed withdraws its several supports for the mortgage market as it says it will, mortgage rates will rise, perhaps enough to abort a housing recovery that is fragile at best. Both programs are scheduled to end early this year, one in which voters will decide the fates of all members of the House of Representatives and one-third of Senators. It is anyone's guess whether these politicians, many already under pressure because of their support for the unpopular health care bill, will risk allowing these programs to die, and with them their careers in public office.

None of this is to say that policy making is all that matters. Far from it. Consumers account for some 70% of U.S. economic activity, and in the end are the ones whose reactions to policies will drive the economy. So it is good news that personal incomes and wages rose last month, and that the savings rate seems to have stabilized at around 5%, high enough to prevent a return to the negative rates of the spendthrift '90s, not so high as to put a crimp in the recovery.

Businesses, too, matter. Right now profits are good, and they are sitting on a pile of cash. But uncertainty as to the cost to be imposed upon them by the new health care "reform," the impending carbon cap-and-trade bill, and by the prospect of a huge boost in their tax bills, makes them reluctant to invest and to hire.

All in all, it is not unreasonable to guess that the wind will blow in a 2010 that is better for most people than 2009. Except for the congressmen who have to explain to their constituents why the budget deficit is projected to continue at levels that in the long run might well produce a wave of inflation, and for future generations that will have to bear the burden of trillions in government IOUs.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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