Economy's mojo and Washington's no-go

Economic indicators are up slightly. Do consumers and investors perceive an end to the great political uncertainty in Washington (and Europe)?

Is the Great Uncertainty of 2010-11 coming to an end?

Consumer spending is up, ever so slightly. Wall Street indexes ticked up this past week. The American economy grew faster than expected. Europe may now have a handle on Greek debt.

There are even hints of Washington breaking the budget impasse in November. But hints only.

Ever since the Great Recession of 2008-09, the economy has been stuck in a cautionary mode about the staying power of the recovery. And one big cause is investor and consumer uncertainty about government action – or inaction.

“We are uncertain about the future,” say William Dunkelberg, chief economist for the National Federation of Independent Business, which represents small, job-creating firms. “And government is a high source of our uncertainty.”

People want durable decisions from Washington in order to make calm, long-term investments in their future. Instead, they are asking these still-unanswered questions:

Will taxes be raised or lowered? Will they be only temporary? Can Washington help raise home values or not? Will the new health-care law be implemented or repealed? Will proposed regulations be suspended or imposed?

President Obama is very aware of the impact of all this iffyness. In September he paused the Environmental Protection Agency’s implementation of proposed rules on power plants because of what he called a “regulatory uncertainty” on the economy. Indeed, energy companies have long pleaded with Washington to make up its mind about climate-change rules – regardless of how soft or stiff they are – so they can make decades-long investments.

On Wednesday, a World Trade Organization (WTO) report warned of too much unpredictability in the global economy – reflected in financial volatility and rising trade protectionism.

“These risks are aggravated by perceptions in markets that governments’ responses to these challenges have been inadequate so far,” the WTO report stated. It recommended that a coming summit of Group of 20 leaders tackle the uncertainty with decisive action.

The political stalemates and showdowns in Washington have pushed economists to even measure the costs of “policy-induced economic uncertainty.” A study from Stanford University has devised an index based on newspaper stories about the topic, the number of temporary tax provisions, and disagreements among economic forecasters.

The study found that the high level of uncertainty since the recession “reflects deliberate policy decisions, harmful rhetorical attacks on business and ‘millionaires,’ failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.”

If policy certainty were able to return to prerecession levels, an additional 2.5 million jobs would be created over 18 months, the report claims.

Other studies estimate the cost to the economy of not knowing when the Federal Reserve will sell its $1 trillion holdings of mortgage securities – perhaps triggering inflation – or when the Fed will raise interest rates.

The 2012 elections are a year away with political lines likely to only harden. Washington needs to quickly sort out its disputes.

It is what the people want, perhaps even more than jobs.

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