Earth to Beltway: It's the uncertainty, stupid

Earth to Beltway: It's the uncertainty, stupid by Robert Robb - Oct. 1, 2010 12:00 AM

The Arizona Republic

.What will it take for economic policymakers to understand that the chief problem today is uncertainty? And that until they quit moving significant pieces of fiscal, monetary and regulatory policy around, the uncertainty won't abate?

In many ways, there are decent underpinnings to this economy. American businesses proved themselves remarkably nimble despite the severity of the recession. Corporate balance sheets are surprisingly strong. Businesses and banks are sitting on trillions in cash. For publicly traded companies, price-earnings ratios are on the historical low side. So, irrational exuberance isn't distorting values.

Consumers are also putting themselves on sounder footing. Debt is down, savings are up, while spending is generally stable.

Yet the economy is stagnant.

Economic policymakers think that's because people don't have confidence in the future. So, they keep coming up with new things they think might bolster confidence.

The real problem, however, is that people don't know what the rules will be in the future. So, they don't know whether to have confidence or not.

The federal government is in the early stages of completely rewriting the rules for finance and health care. Until the rules are written, businesses don't really know what kind of capital markets they will be operating in or what their employee benefit costs will be.

High-income individuals and small businesses don't know what their tax rates will be after Dec. 31. This has some not readily obvious downstream effects.

The U.S. tax system provides disincentives for the distribution of profits to shareholders in the form of dividends. The Bush tax cuts partially ameliorated the disincentives. As a result, more companies paid dividends, dividends were higher, and the stock value of dividend-paying companies improved.

This was good for the economy, since it directed capital to companies that were really making money rather than those with just a good story. But as of now, no one knows what the tax treatment of dividend income will be after Dec. 31.

Rather than marching double-time to get this stuff settled, economic policymakers are instead trying to invent new stuff supposedly to bolster confidence.

On the fiscal side, both Democrats and Republicans are floating ideas for temporary and targeted tax cuts. For example, temporarily exempting small-business investments from capital-gains taxes, temporarily allowing same-year write-offs for capital expenses and a payroll tax holiday.

These temporary tax cuts either subsidize economic activity that would take place anyway, resulting in a deadweight loss to a treasury already alarmingly in the red. Or they induce economic activity that otherwise wouldn't make economic sense. The last thing this economy needs is more economically shaky activity.

On the monetary side, the Fed has had the printing presses smoking to keep interest rates down. Yet the economy is still stagnant. Rather than reach the obvious conclusion - low interest rates aren't the key to getting this economy moving - the Fed is looking to do even more.

Only this time, rather than announce a full program of what the Fed calls quantitative easing, it is contemplating smaller incremental steps. For example, if the economy doesn't perk up, the Fed might buy some treasuries. And see what happens.

In other words, embark on a monetary policy no one knows where it is headed.

Meanwhile, the price of gold is soaring, up nearly 30 percent over the last year.

I'm not a gold bug. Although gold historically has been a storehouse of value, there's no logical reason for it to be. Gold isn't a particularly useful metal. And it is subject to supply variables.

Nevertheless, its rise represents a belief that it makes even less sense to hold assets denominated in the major fiat currencies that are being systematically debased.

There's a degree of uncertainty already baked into this economy. The new rules regarding financial markets and health care will take time to settle. Future tax rates are a political battle that must be waged.

At a minimum, however, economic policymakers could quit adding new uncertainties with each passing day.

Reach Robb at robert.robb@arizonarepublic.com or 602-444-8472. Read his blog at robbblog.azcentral.com.

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