Did you know the economy is going to fall back into another recession in the first half of next year? That’s the sad news coming from the Congressional Budget Office (CBO), in a report released this week.
If current law remains unchanged, on January 1, 2013 American taxpayers will be hit with a whopping tax increase (mainly the expiration of the Bush tax cuts) and a major decrease in government spending (the result of last year’s budget deal) as well.
All told, we’re looking at a $500 billion double whammy. But aren’t economists recommending the opposite medicine? Won’t higher taxes and reduced spending dampen economic activity and slow down the current recovery? Exactly. You can think of the January 1st fiscal tsunami as a New Year’s Day "anti-stimulus" package. The CBO is predicting that the price we will pay for that package is a "double dip" recession.
But here is something even more disturbing. It turns out that uncertainty – not knowing what Washington is going to do about all this is worse than the reality. Will President Obama and the Congress agree to put off the tax increases? Will they agree to delay the spending cuts? Not knowing the answers to those questions appears to have more impact on the decisions of businesses and consumers than if everyone simply agreed to go ahead and let the bad things happen.
Historically, "uncertainty" has been a slippery concept in the vocabulary of economists. Everyone kind of knows what it means. But a precise definition has been impossible. Until now.
Economists at Stanford University and the University of Chicago have actually created an uncertainty index and they have tracked it over time for several decades.
Here’s what they found. Their measure of uncertainty soared during the Obama years, where it has been at its highest levels over the past 30 years. It’s not just uncertainty about what will happen next January that’s a problem. In many ways, the entire Obama presidency is the problem. Public policy uncertainty alone is the apparent cause of a peak decline of 2.2% in real GDP, a 13% decline in private investment and the loss of 2.5 million jobs over the past five years.