Deal Averts Fiscal Cliff But Uncertainty Remains

Jan 3, 2013

Although Washington (barely) avoided going over the fiscal cliff, the Washington Post reports that the deal prolongs the uncertainty looming over businesses:

Martin Regalia, chief economist at the U.S. Chamber of Commerce, [is] worried that the deal — by locking in current marginal tax rates — will complicate congressional efforts to reduce rates and eliminate deductions as part of a broad tax reform package.

Executives have long complained, in testimony to Congress and anecdotal reports to the Federal Reserve, that policy “uncertainty” is keeping them from using more of their record profits on capital expenditures and hiring new workers. Regalia said the agreement this week did nothing to change that calculation.

“No one can tell me that this [deal] should make the CEO of a major corporation say, ‘We’re going to hire more, we’re going to invest more, we’re going to build more, because we see a demand building out there for our product,’ ” he said.

According to Baker’s, Bloom’s, and Davis’ Economic Policy Uncertainty Index, we see that policy uncertainty has been rising since August (There's incomplete data to calculate December’s index) and is at its highest level since December 2011. However, it hasn’t reached the August 2011 high that took place during the debt ceiling fight.

Don’t expect December’s number to go down much. The daily news index, which makes up one-half of the total index and measures how often terms like “uncertainty,” “economy,” “legislation,” “regulation,” “congress,” and “White House” are mentioned in U.S. newspapers, fell in early December but reversed course at Christmas as we neared the cliff.

As the business community is pointing out, the country’s deep fiscal problems have only been delayed. The New Year's Day deal didn’t raise the debt ceiling, and investment rating agency Moody’s warns, “The recent package mitigates part of the fiscal drag on the economy associated with the fiscal cliff but does not eliminate it.” Washington only gets a moment to catch its breath after its latest political tug-of-war then go back to crafting a solution to our fiscal troubles. Hesitant businesses stand by and wait.

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