Fri, Dec 21, 2012 - Page 9 News List

Policy gridlock hurting US economy? Maybe not

Some economists doubt uncertainty has played a big role in holding back the US economy, and if they are right, growth next year could disappoint

By Jason Lange and Jonathan Spicer  /  Reuters

“There should be a surge of investment and hiring,” he said.

That would be a big boost to the lackluster 1.9 percent growth rate many economists expect next year.

A deal in Congress that avoids the fiscal cliff while taming the nation’s US$16 trillion debt over the long term may come by year-end or early next year. It is also plausible Washington will avoid the fiscal cliff but kick the can into next year when it comes to the details of longer-term deficit planning.

Republican House Speaker John Boehner, who has looked exasperated in public over the fiscal debate, has edged closer to US President Barack Obama’s key demands in the last few days, and the president made a counteroffer on Monday that could put a deal within reach. The two sides still differ on where to set tax rates and how to overhaul social spending programs.

The tense negotiations have corporate America on edge.

So far this month, companies have submitted 148 statements to the Securities and Exchange Commission expressing concern about the fiscal cliff. Last month there were 215 such warnings, up from 80 in October and none prior to May. About half of 200 big companies surveyed by American Express last month said Congress will not resolve the fiscal cliff this year.

Chemical maker DuPont is trimming its capital investment plans due to uncertainty. “We’re not going to spend as much as we thought next year,” DuPont CEO Ellen Kullman said last week in an interview.

US Treasury Secretary Timothy Geithner told CNBC earlier this month that reaching a sensible fiscal deal would get rid of the biggest roadblock to stronger growth. Many business leaders and lawmakers agree.

However, some economists doubt uncertainty has played such a central role holding back the US economy. If they are right, growth next year could disappoint even if politicians wow investors with a grand bargain.

Researchers at Goldman Sachs say the weak economy might be boosting measures of uncertainty as much as the other way around.

The bank does not rule out an “uncertainty shock” over the next few months — most economists think uncertainty must matter for something — but its researchers crunched numbers and found there might be a simpler explanation for the disappointing levels of business spending.

The bank’s economists calculated how much the business sector would normally be investing given its assets and the stage of the business cycle, and found the recent shortfall could be mostly explained by a lack of available credit.

Rather than being too scared to invest, companies might simply be having trouble getting loans. That makes sense considering many banks are still licking their wounds from the recent financial crisis.

“The evidence that a policy uncertainty shock is already depressing activity is far from unequivocal,” Goldman Sachs economists Jan Hatzius and Sven Jari Stehn wrote in a recent note.

Their research suggests some of the hype over uncertainty is overblown. Indeed, much of the country is not paying attention to the fiscal cliff debate.

A poll by Gallup conducted on Dec. 1-2 showed only 60 percent of Americans were following the talks at least somewhat closely. In the history of national events tracked by Gallup, that ranks somewhere between the Iraqi election of 2005 and the confirmation hearings for Supreme Court Justice Samuel Alito in 2006.

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