Recent reports are reiterating queries over why economic growth is so sluggish. The daunting question looms like a dark cloud over the heads of lawmakers and businesses who don’t know what to expect from a lethargic economy. This uncertainty is stifling action in the private sector. A disappointing May jobs report pushed the unemployment rate back to 8.2 percent, and there is already extra doubt about the modest growth estimates for the second quarter.
Historically, economic growth has been fastest after a downturn. In 1934 following the Great Depression, the U.S. economy grew an unprecedented 10.9 percent. However, since 2009, the average annual growth rate has been 2.4 percent, while the long term trend in the U.S. has been 3.1 percent since 1948. So why do we still see sluggish growth?
Among the many factors that influence the health of the economy, one reality is that the economy reacts to perception. If you don’t believe you’ll have a job tomorrow, you’re unlikely to buy a new house today. You will probably save your money instead. Likewise, a business apprehensive about prospective income is unlikely to spend money on new hires. Even with the Federal Reserve driving interest rates near zero, employers are reluctant to take risks with a lack of confidence in the recovery.
Over the last several years, a wave of new policies and political events has given rise to uncertainty in the political and economic climate. The health care overhaul will implement sweeping changes for employers beginning in 2013. Recently, I was able to attend a presentation by Gary Ellis, the Chief Financial Officer of Medtronic. He explained how the type of system adopted by the U.S. was less of a concern to them than figuring out the details of the bill. “We operate in all health care systems of the world and turn a profit,” he said. “We’re more concerned about figuring out exactly what is in this bill.” The effect this bill will have remains hazy even for those closely watching it.
Last year, the Bush era tax cuts were extended, but only until Jan. 1, 2013. Without knowing whether the tax cut will be extended again, business owners are wary of commitments. The effect of a tax cut to stimulate hiring in the economy is diminished by its short-term nature.
Last summer, Republicans and Democrats clashed over the debt ceiling until the 11th hour. This event was toxic for the markets, amplified fear over the ability to contain public debt and led to a credit downgrade for the government. Worst of all, a sequel may be right around the corner as the debt nears its ceiling again.
The press, whose favorite two words in 2010 were “double dip,” have not helped quell the uncertainty. With incessant questioning of the U.S.’s potential to relapse into recession to the current debt debacle of Europe, the financial press has been filled with fear.
Lawmakers can help ameliorate this uncertainty. First, they must provide the business community with lasting solutions, not temporary fixes. They need to be efficient in making decisions and avoid drawn out political battles. This is especially important for debate on the debt ceiling, as strong creditworthiness is crucial for the nation’s economy. Second, President Barack Obama’s administration needs to work on the clarity of the health care overhaul and finish crafting the language of the recent reforms, such as the Dodd-Frank Wall Street Reform bill. Businesses need to know what they are up against. Lastly, lawmakers should remember that real solutions often require politically tough decisions, and if the economy is doing well, the people will trust those tough decisions.
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