With recent fiscal calamities close in the nation’s rearview and others approaching fast, the U.S. finds itself inside the eye of a self-generated budgetary tornado. What’s more, congressional disagreement has done nothing but provide unnecessary headwinds to short-run economic growth.
At the eleventh hour, Congress addressed the tax increases and sequestration, narrowly averting the so-called fiscal cliff. Income and capital gains taxes on the top earners increased and automatic cuts to defense and discretionary federal programs were delayed until March 1.
Moreover, the White House and Congress have dealt momentarily with the debt ceiling debacle, the second in as many years, by suspending the limit until May 18.
Many people have conjectured rather forcefully that the high degree of uncertainty that such congressional dysfunction imposes on business and household decisions impedes economic progress. Although there is merit to this view, there is a sharp distinction between how firms and individuals feel about the future and the economic decisions they actually pursue.
Indeed, the whirlwind surrounding the election and subsequent budgetary challenges did impact consumer and business sentiment. For instance, the University of Michigan Consumer Sentiment Index in the fourth quarter dropped to lows not seen since the 2008-09 financial crisis.
The mood among big business painted a similarly pessimistic picture: Expected sales, capital spending and hiring into 2013 were dramatically depressed.
Those feelings about the future, however, did not translate to the actual economic activity witnessed in the fourth quarter. The private sector added 675,000 jobs, and business spending and sales rose at an annualized rate of 12.4 and 4.2 percent, respectively.
What’s more, financial markets are near pre-recession highs: the Standard and Poor’s 500 Composite Index returned over 5 percent in January alone. If the remaining 11 months of 2013 are consistent with January, investors will experience over 80 percent returns for the year!
Even though the economy reportedly contracted by 0.1 percent in the fourth quarter (which will likely be revised away at the end of February), its explanation is clear: The defense department, in accordance with the fiscal cliff agreement, decreased expenditures by 22 percent, and other federal agencies cut back in anticipation of the automatic across-the-board cuts to education, state and local safety, and scientific research (among many other programs) set to take effect on March 1.
The impact of Hurricane Sandy served as another transitory factor hindering economic growth at the end of 2012.
The fact of the matter is the economy appears to be in an ongoing battle with Capitol Hill. Congress continues to shock the system with waves of uncertainty, but so far the uncertainty bomb has not been dropped in full. That certain members of congress continue to cry wolf in the form of threats (think government shutdowns) that never seem to materialize is precarious and seemingly mindless.
Sure, the rhetoric is sensational, but it’s also misleading and unfair to the constituents.
I implore the recently sworn in 113th Congress to make much needed improvements on the behavior of its predecessor. With the bar set so low, I am cautiously optimistic. Let’s not forget that congressional ineptness brought upon the debt ceiling and fiscal cliff issues in the first place.
As it stands today, the doomsters were wrong. The U.S. economy, business activity and financial markets have all showed resilience and fortitude in the face of Capitol Hill “armageddonists” squawking at the perils of uncertainty. Alas, the economy’s ability to withstand further mindless budgetary folly may not last.
Dr. Nicholas J. Mangee is an assistant professor of economics at Armstrong Atlantic State University and can be reached at Nicholas.mangee@armstrong.edu.