Washington thinks a resolution of the tense debate over the national debt will unlock a burst of economic growth by lifting uncertainty that has stymied investment.
It is a widely held view on Wall Street as well, derived from the glaring signs of weak business confidence over the last year as the US struggles to get its fiscal house in order.
However, evidence for this belief is far from clear and is an issue of considerable debate. Even some businesses wonder how big a factor uncertainty is.
In Lexington, Kentucky, new sales are slipping at Gray Construction, a family-owned builder of factories and distribution centers. Clients say they are holding back because the US could fall into recession if Congress and the White House fail to strike a deal soon to avoid a “fiscal cliff” of about US$600 billion in tax increases and government spending cuts due to begin next month.
“They’re saying: ‘Let’s wait. Let’s see what happens,’” chief executive Stephen Gray said.
Yet the company still has a record backlog of work and has hired about 30 people in the last six months.
The firm’s CEO has seen little dips in the sales pipeline before and said it is hard to know how different business would be if Washington’s politicians inspired more confidence. As it is, Gray sees no reason to stop hiring: “I’m not super-worried.”
Like Gray, economists are also unsure how much they can attribute business decisions to something so indeterminate as uncertainty, and they are divided over the degree to which erratic policymaking has dragged on the economy in recent years, if it has at all.
Answering this question could give clues on how the economy will perform next year, whether or not Congress strikes a deal to avoid the fiscal cliff.
Toward that end, researchers at Stanford University and the University of Chicago have created an index to gauge just how murky the future looks.
They count soon-to-expire tax provisions and mentions of uncertainty in major newspapers, as well as how much economic forecasters disagree on things like future government spending.
In a sample period between 1985 and last year, they found heightened uncertainty went hand in hand with weak economic growth and hiring. Their index hit an all-time high last year when congressional gridlock nearly led the US to default on its debt. It remains high, with a host of temporary tax cuts due to expire at year’s end and the debate over the fiscal cliff regularly splashed across front pages.
Nicholas Bloom, a Stanford economist who helped make the uncertainty index, says weak levels of investment, along with surveys in which businesses say they are holding back because of concerns over the direction of policy, suggest uncertainty has weighed on growth since late last year.
This year, business investment on capital goods has fallen short of what economists would expect considering the US$1.7 trillion in cash that companies were holding in the third quarter.
New orders for non-defense capital goods other than aircraft fell 7 percent in the year through October, while total business investment in the third quarter dropped the most since 2009.
Bloom says businesses would spend their cash more readily if politicians united around a grand bargain to put US fiscal policy on a stable path. Using past correlations between uncertainty and economic growth as a guide, he estimates that lifting uncertainty could add about 3 percent to GDP over the next 18 months — enough growth to create roughly 2 million jobs.