The Corner

Uncertainty Dampens GDP Growth

In the last issue of National Review, I discussed a fascinating new paper that indicated that policy uncertainty dramatically reduced GDP and employment growth over the last few years. The article (which was written before last week’s disappointing GDP-data release) suggested that the coming Taxmageddon could be the mother of all uncertainty events, and that it could easily crush GDP growth in the second half of the year. The effects would, I wrote, “be especially focused on private investment, as business decision-makers wait for clarity before beginning new projects.”

Last week’s GDP report suggests that businesses may already be battening down the hatches. If capital spending made the same contribution to overall GDP growth in the first quarter as it has over the past two years, GDP growth would have been a solid 3.4 percent instead of the anemic 2.2 percent we saw.

#more#Since business spending tends to be more forward-looking than consumption and government spending, this negative surprise bodes very poorly for the outlook. If businesses expect bad things to happen in the second half of the year, then it is sensible for them to begin to taper down now. The fact that we are seeing that happen means that capital spending could easily tank enough to pull us into recession sooner rather than later.

Adding to the risk is the fact that the hyper-populist Obama reelection strategy appears to rely in part on a significant ramping up of the war on business.

We have come to expect crazy behavior from the Obama administration’s National Labor Relations Board, but other agencies have quietly begun to clamp down as well in a manner that seems clearly designed to deliver juicy populist sound bites to the campaign.

The Department of Justice just filed an anti-trust suit against Apple over e-book pricing, and in the last week, the government has sent signals that it intends to take Google to court on antitrust charges. Meanwhile, the president’s campaign is running ads targeting “secretive oil billionaires,” and Democrats on Capitol Hill continue to push for legislation to target not only specific successful and unpopular industries, but specific companies — in this case the big five oil companies — for big tax increases.

The Federal Communications Commission is at it as well. Economist Robert Shapiro and recently published a paper that found that the diffusion of new wireless technologies was a major source of economic strength over the past few years. That source of capital spending is also being specifically targeted.

Under the direction of Chairman Julius Genachowski, the FCC has signaled that it wants smaller companies to get more spectrum and limit new acquisitions by the two largest carriers, Verizon and AT&T — even though those two account for the vast majority of the wireless sector’s capital spending.

For example, two years ago, in approving a transaction that transferred spectrum to a private investment fund, the agency imposed conditions that barred any later deal that might make that spectrum available to the two largest carriers — even though they were not involved in the deal.

More recently, in seeking congressional approval to auction unused spectrum to wireless providers, the FCC fought fiercely for the right to impose auction conditions that could handicap the largest carriers. Congress ultimately said the auctions must be open to all, rejecting the approach of the Obama administration. However, the FCC has lots of authority, and it would not be a surprise if later this year the agency contrives auction rules that effectively limit or deny the big guys access to the spectrum they need to expand.

If you were planning capital spending for a big telecom company, what would you be doing right now, given that your regulator is eagerly attempting to deny you your essential raw materials?

Given the high level of uncertainty surrounding Taxmageddon, and given all of the other uncertainties that are heightened by Obama’s populist war on business, it would be a surprise if any firm acted optimistically right now. The latest GDP-data release indicates that the threat to an ongoing recovery is real, and immediate.

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