This interesting note from Grant’s Interest Rate Observer (subscription only) is the piece of news that should be disturbing your sleep tonight:
Taxes may be certain — not so, tax rates. The 2011 tax-rate schedules are yet unprinted because Congress hasn’t decided what they are going to say. “Unusually uncertain,” said Ben S. Bernanke, the phrase-making central banker, in characterizing this moment in business and finance during congressional testimony last month. He could say it again.
I think that many conservatives oversell the influence of “uncertainty” in businesses’ decision-making at this moment. That $1 trillion-plus mountain of cash American businesses are sitting on top of starting building up a long time ago, and, given the state of sales, it is more than plausible that very weak demand and a lack of attractive alternative investments are the reasons why cash is king. (You can concede the Keynesians’ case about weak demand, which seems to me pretty obvious, without conceding the policies they propose, i.e., another Iraq-and-Afghanistan-wars-combined-sized pile of stimulus spending.) But there is a lot of uncertainty out there, nonetheless. Uncertainty about future taxes, future employment, future returns to individual investments, and the future of entitlement benefits almost certainly is having an effect on Americans’ spending and saving decisions comparable to the effect of actual lost income. Americans are saving at a relatively high rate; presumably, it is the employed, not the unemployed, who are saving.
Demand is low, uncertainty is high. Is there a way to address those problems without resorting to Robert Reich’s proposal for supersized investments in floating unicorn ranches? There is not an easy or obvious one that comes to mind. But there are economic benefits to be realized from paying down the debt:
1. Less uncertainty: We are the largest national economy in the world, and we are a lot bigger than the No. 2 national economy — welcome to second place, China, tough luck, Japan — about three times bigger, in fact. The the world’s No. 1 and No. 2 national economies are joined at the hip, and the ramifications of that fact are not well understood. A fiscal crisis in China will be a crisis for the United States, and vice versa. Our government’s books are a wreck, and their banks are the stuff of nightmares. Nobody knows how high a debt-to-GDP ratio the United States can withstand before somebody starts calling in the chips — and China has all sorts of weird incentives when it comes to that issue. In short: The radical expansion of the U.S. national debt under the Obama administration is not just creating an enormous risk for the economy of the United States — it is creating enormous risks for the entire world, and those risks are not well understood, because there is little or no precedent for this situation. Weighed against those facts, the case for another $26 billion in political bribery for Democratic special-interest groups is pretty weak.
2. More capital available for productive investments: We spent stimulus money subsidizing beekeepers, turning b.s. into fuel to power magical corn-gas distilleries, and getting monkeys high on cocaine. As much as I would enjoy having a platoon of coke-tweaking baboons to dispatch around town to do my bidding and collect the honey from my organic apiary, these are not exactly pressing national priorities. But that money has to come from somewhere, and the banks, which are still being subsidized with free money from the Fed, are content to park their funds in T-bills and collect the spread — which is pretty attractive when the cost of money is zero and the risk is (allegedly!) negligible. Why take a risk on making a loan to a start-up when you can ride out the storm with free money and a passel of implicit and explicit federal subsidies? People who want to make stuff and provide services need capital to get going, but Uncle is sucking a whole lot of capital out of circulation.
3. Signaling seriousness: I have to imagine that our precarious government-finance situation is dissuading investment from both foreign and domestic sources. A little bit of discipline would go a long way toward re-establishing the United States as the world’s economic gold standard. Right now, if I were an investor with significant concern about political risk, I’d have to be thinking to myself that Canada and Europe are looking like relatively good investments, ceteris paribus (and, yeah, I know, ceteris is rarely paribus).
Those unpublished tax schedules are more symbolic than substantial — but, still, a little predictability would be a welcome thing right now, something that might help our economy feel more like a productive enterprise and less like a roulette wheel.