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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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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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