Sunday Times (London)
October 28, 2012
by Irwin Stelzer
Until now, most forecasters have been framing the assumptions underlying their projections on what they assume a re-elected Barack Obama would do about taxes, Federal Reserve Board appointments, spending, the deficit and a host of other policies. Suddenly, they are back to the drawing board.
Polls are showing something inconceivable to the American media and foreign observers: Mitt Romney is closing in on the president, and might have a slight lead. If Romney does win, and especially if Republicans, clinging to his coat-tails, wrest control of the Senate from the Democrats (the House will probably remain in Republican hands), economic forecasters will have to change their policy assumptions.
Obamacare will be repealed or, more likely, much changed by the new set of administrators. Obama's subsidies for renewable energy will be repealed or allowed to expire. The Environmental Protection Agency's war on coal will be ended, as will other agencies' stalling on the issuance of onshore and offshore drilling permits. The prospects for a more benign regulatory environment for shale-gas drillers are increased. By 2014 there will be a chairman of the Federal Reserve Board who will just say no to more quantitative easing — QE4 — especially if that new chairman is Stanford economics professor John B Taylor, a leading critic of Ben Bernanke's policies. Huge tax increases on dividends and capital gains will probably be off the agenda.
Partisans for both candidates say that if their man is in the White House, the pace of economic recovery will accelerate, millions of jobs will be created — by government action (Obama) or the private sector (Romney) — and the middle class will once again be able to dream the American dream of security, prosperity and a better life for their children.
In this last, frantic week of campaigning Romney is emphasising the failure of the president's policies to provide satisfactory jobs for 23m Americans, and to get the economy growing faster than the 2% it racked up in the third quarter of this year, better than the previous quarter's miserable 1.3% but still too low to create jobs. The president, meanwhile, is arguing that his stimulus programme prevented a deep recession and that, given four more years, he will get the economy growing and see to it that the rich are not the principal beneficiaries.
It is difficult to determine what all this campaign sound and fury will some day signify, at least until we see who wins and whether the winner will confront a friendly or a hostile Congress. But we do know something about the economy the winner will inherit.
There is good news from at least three key sectors: energy, housing and consumers. The boom in domestic supplies of oil and natural gas is real. Thanks to new drilling technology, part of which is the ability to get shale to yield large quantities of natural gas and oil by "fracking", American imports of oil are dropping, manufacturers are being attracted to America by low-cost natural gas, and gas is replacing coal in electricity generation, lowering emissions. All is for the best in this best of all possible energy sectors.
The news is not quite so good in housing, where activity remains below pre-recession levels but a lot better than it has been. Thanks in part to low rates produced by the Fed's mortgage purchases — 3.37% on 30-year mortgages — sales of both new and existing homes rose in September, as did new construc- tion. Unsold inventories are down to half the levels of summer 2010. Prices are up, which adds to household wealth and should eventually feed into increased spending. Permits are also sharply up, which bodes well for the future.
The final bit of good news is the report that earlier this month consumer confidence reached its highest level since before the recession. This is the third straight month in which confidence has increased, which helps to explain the rise in sales of the two big-ticket items: homes and cars. The portion of after-tax income consumers spend on food, energy and financial obligations such as mortgages is at its lowest in almost 15 years, and recent increases in house and share prices have helped strengthen their balance sheets.
Not all the news is good. Business investment is somewhere between flat and declining. GE, DuPont and other large firms are announcing lay-offs, and third-quarter corporate earnings are declining after 11 quarters of growth. Headwinds from Europe and China are hurting multinationals and exporters.
The average estimate of the 79 economists surveyed by Bloomberg is that the economy will grow by 2.1% next year, down from their May estimate of 2.5%. That would make it unlikely the unemployment rate of 7.8% will decline much, if at all, especially if chief executives of leading companies go through with plans to cut jobs in an effort to shore up profit margins. Worse: if current legislation mandating year-end tax increases and spending cuts is not changed, it will be difficult to avoid another recession.
Only nine days from now, Americans who have not already voted will go to the polls. Some of the uncertainty about tax policy, future monetary policy and the deficit that is freezing business investment and making employers reluctant to add staff will be eliminated.
But not all uncertainty, especially if the newly elected president and the lame-duck Congress agree to "kick the can down the road", ducking the compromise needed to avoid the fiscal cliff. John Makin, an economist at the American Enterprise Institute with years of private sector experience, says: "The most effective economic stimulant in 2013 would be a reduction in the high level of economic policy uncertainty that has built up since the 2008 financial crisis . . . [it would] lift the US economy back towards 3%-4% growth by 2014."
Of course, if uncertainty is replaced with the certainty of huge tax rises and more and more regulation, uncertainty might seem an attractive alternative.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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