John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
The 2012 elections are finally over. Over $4 billion spent and it is not clear anything changed. The uncertainty as to what happens next is hurting our economy.
Paul Guzzi is President and CEO of the Greater Boston Chamber of Commerce. It is his job to talk to business owners. He says they are telling him there is too much uncertainty. I do not always agree with Mr. Guzzi. In this case, I am certain he is correct.
Businesses are in the business of making money. For every investment they expect a rate of return. For every expectation there is some uncertainty. If there is too much uncertainty, they will not invest.
A healthy economy requires a healthy level of private investment. In the last half of the 20th century, investment was 16 percent of GDP. In 2000, it was 18 percent.
In the last ten years the investment slice of our economic pie shrank. In 2009, at the depth of the Great Recession, investment was only 11 percent of GDP. It has increased during the recovery, but not by much. In the latest quarter investment was 13 percent of GDP.
We need a bigger investment slice to make the economic pie grow. We need investors to step up. We need entrepreneurs to take risks. We need business expectations to improve. We need less uncertainty.
Headline in yesterday’s Boston Globe: Worries curtail business spending. The subhead: US fiscal plight shows hiring, investment.
A severe recession will cause uncertainty. A financial crisis raises uncertainty to another level. Knowing who won the election does not help much. We do not know what our elected leaders will do. That makes us even more uncertain. Fear that they will do nothing may paralyze investment.
Uncertainty grows when we are heading for a “fiscal cliff.” The so-called Budget Control Act of 2011 simply postponed the important decisions. We go over the fiscal cliff if our elected leaders do not agree on decisions by January 2, 2013. Of course, they may find a way to postpone the day of reckoning.
We need a long-term plan to address our budget deficit. The fiscal cliff is immediate and indiscriminate. It does not differentiate between wasteful government spending and important investments. It cuts deeply into the defense budget. Income taxes will go up immediately. Payroll taxes, capital gains taxes, and estate taxes will all go up. Over 20 million more middle-class families will pay the Alternative Minimum Tax.
Investors will not know what to expect. The Congressional Budget Office estimates the fiscal cliff will increase the unemployment rate by a full percentage point. No one knows for sure how bad it could get. That is the point. Many economists predict going over the fiscal cliff will plunge us into another recession. It could be another severe recession.
Uncertainty grows when the sun may be setting. The tax cuts of 2001 and 2003 had sunset clauses. The tax cuts will expire unless Congress takes action. So far, the only action taken is to delay when the sun sets.
Congress did not put in sunset clauses because they made sense. The sunset clauses were an admission that permanent tax cuts were not fiscally responsible. Not taking real action on tax rates is fiscally irresponsible. It causes uncertainty. It makes investors cautious.
Recent observation from a Boston Globe small-business roundtable: The uncertainty, not knowing how you will be taxed Jan. 1, is huge. It’s just huge.
Uncertainty grows when the government ignores sound advice it asked for. The Simpson-Bowles Commission produced a balanced plan to reduce the deficit. The problem with their recommendations is that they required tough choices.
Uncertainty happens when possible solutions are rejected without reason. Over 90 percent of the Republican members of Congress have signed a pledge to reject ANY increase in marginal tax rates or tax revenue. They have left no room for compromise.
Alan Simpson and Erskine Bowles are promoting compromise. They organized a group of over 100 large-company executives. These executives recognize higher taxes are necessary to close the deficit. They know that their companies will be better off and more likely to invest. They agree that action is “conducive to long-term economic growth.”
Another recent Boston Globe headline: Wealthy willing to pay more taxes. The subhead: GOP business leaders say cuts in spending needed.
I know of no member of Congress that has signed a pledge against ANY cuts in spending. Knowing where the cuts will be and when the cuts will come is better than the uncertainty of a fiscal cliff.
The fiscal cliff is getting close and still nothing happens. Congress and the President had years to address the expiration of the sunset clauses, but nothing happens.
Recent quote from Sheila Bair, former Chair of the Federal Deposit Insurance Corporation (FDIC): Washington itself has become so dysfunctional. I think it is almost as important to make a decision and provide clarity about what we’re going to do as it is what the decision is.
Insist that Congress renounce the Grover Norquist “no new taxes” pledge. Insist that the President agree on a plan to cut expenditures. Insist on responsibility and compromise. Demand more certainty.