January 25, 2012 - In today's Financial Post, MLI's Jason Clemens examines the economic prospects of the U.S. in the current economic climate of uncertainty. He says, "It's simply impossible for those who risk capital to make reasonable decisions about investing or expanding a business in this climate. This means continued slow economic growth and higher- than-normal unemployment until November 2012." The full article is copied below:

 

U.S. angst: Uncertainty is an investment killer

Heightened uncertainty imposed on the U.S. economy by Washington is a killer for investment and business expansion: People considering business investments cannot make reasonable decisions about the future

By Jason Clemens, Financial Post, January 25, 2012

In last night's State of the Union speech, President Barack Obama put his best spin on the prospects for the U.S. economy. Canadians need and want the U.S. economy to recover because our two economies are inextricably linked, with a little over three-quarters of our exports headed south. While we can outperform the U.S. economically, as we have for the better part of a decade, we cannot achieve robust prosperity with the U.S. languishing. The main reason for its sluggishness is political, not economic.

Traditionally, economies rebound strongly after experiencing a pronounced recession like 2008, yet the U.S. recovery remains anaemic at best. Unemployment, while improving slightly, still remains stubbornly above 8% and GDP growth remains weak. (Much of the reduction in the unemployment rate is actually due to people giving up looking for work rather than job creation.)

Mr. Obama's wishes notwithstanding, the 2012 prospects are not encouraging. The independent Congressional Budget Office expects real GDP to be 2% and unemployment about 9%. These estimates were made before the current European turmoil and the apparent slowing of the Chinese economy.

Many factors lie outside the control of the U.S. government. But the heightened uncertainty imposed on the U.S. economy by Washington is a killer for investment and business expansion: People considering business investments cannot make reasonable decisions about the future.

How costly to an economy is uncertainty? Economists at Stanford and Chicago concluded that policy-induced uncertainty in the U.S. between 2009 and 2011 was at a record high, above the levels observed during the financial crisis of 2008, hurting business hiring and investment.

There is perhaps no single greater example of the uncertainty imposed on the economy than the federal government's fiscal policy, or lack thereof. The downgrading of the U.S. bond rating earlier this year should have been a call to arms for action. Not so. Mr. Obama ignored his own blue-ribbon commission's recommendations and remained silent during the deliberations of the Super Committee, which was tasked with identifying US$1.2-trillion in spending cuts or new revenues over the next decade. Indeed, Democrats and Republicans are now talking about undoing the automatic spending cuts that were supposed to occur if the committee could not agree on spending reductions (more uncertainty about future spending and deficits).

So the deficit, debt and entitlement train continues to chug along unimpeded. The CBO expects the federal government to incur US$4.7-trillion in deficits over the next decade including US$1.3-trillion this year alone. This ignores US$2.4-trillion in likely additional spending, the annual Medicare fix (US$300-billion), the Alternative Minimum Tax adjustment (US$690-billion), and some US$3.3-trillion in expiring tax cuts passed by presidents Bush and Obama. A US$4.7-trillion deficit over the next decade is the absolute best-case scenario for the U.S. right now. It's impossible for anyone, let alone business and investors, to have any reasonable idea of what spending programs and taxes will look like over the next few years.

Obamacare also heightened uncertainty. The reforms include massive changes to health-care regulation, Medicaid (health care for the poor), and a host of higher taxes. Republicans have vowed to repeal the legislation and replace it with something, not yet defined. Democrats have vowed equally as strongly to defend it. Employers simply cannot calculate the costs they will bear.

Because of these and other uncertainties, businesses, investors, and entrepreneurs have basically stayed on the sidelines. It's simply impossible for those who risk capital to make reasonable decisions about investing or expanding a business in this climate. This means continued slow economic growth and higher- than-normal unemployment until November 2012. That's small comfort for those suffering now but it seems abundantly clear that politics is and will continue to trump economic leadership until election day.

— Jason Clemens is the director of research for the Macdonald-Laurier Institute.