Uncertainty and Confidence

July 27, 2012

Americans have grown increasingly knowledgeable – and increasingly concerned – about the government’s recent explosion of spending and debt. They have also grown fearful of the great unknown: What will Washington do next?

As high unemployment and anemic economic growth continue to plague our nation, Washington continues to fuel uncertainty and a general lack of confidence about the future: will there be more jobs next year or less? What about the debt? Borrowing costs? Inflation?

No Ability to Plan

Individuals, families, and business leaders cannot plan for the future because of uncertainty about policies coming out of Washington.

  • Over the past few years, we’ve watched our government bail out financial firms, take over auto companies, and significantly increase federal involvement in the housing and mortgage markets. Are these policies that companies may expect from the federal government?
  • Companies, bondholders, shareholders, and consumers today can’t be certain when Washington will choose to act again, or under what terms. Even efforts to clarify the relationship between government and the private sector (as was attempted in the financial regulatory reform bill) grant Washington bureaucracies so much discretion that no one knows exactly how the law will work when fully implemented.

Volatile Interest Rates

What’s also troubling is the fact that interest rates on the federal debt have a strong potential to affect the economy and borrowing power of American small businesses during the next few years.

  • Interest rates on the federal debt have been remarkably low1. Meanwhile, since 2009, the federal debt has increased by nearly 50 percent2. As debt grows, so do payments on interest, which are expected, along with mandatory spending, to take up 76 percent of the projected revenue over the next 10 years3.
  • Should interest rates on the federal debt go up one percentage point higher than projected, it would increase spending by nearly $1 trillion over the next 10 years4.
  • How will other countries respond to America’s debt crisis? Will small businesses see increases in their cost to borrow money and thus grow and create jobs?
  • Will the economy, five years from now, be able to support investments businesses make today? Will Washington have to increase taxes to pay for the debt?

Families and Companies Afraid to Act

Because companies and families don’t know what new rules, regulations, and taxes might be coming from Washington, many are not investing in the economy. Instead they are playing it safe, and holding on to their assets as cash in order to avoid making a mistake in a system in which they lack confidence.

William Dudley, President of the Federal Reserve Bank of New York recently stated:

Business people tell me that the uncertainty about how Congress and the Administration will deal with the fiscal cliff—and our fiscal challenges more broadly—is already inhibiting hiring and investment. The fiscal cliff represents a threat to the recovery that is wholly avoidable. But we will only avoid it if our politicians act responsibly. We need a credible strategy for bringing down the federal budget deficit over time in a manner supportive of ongoing economic recovery.5

To view this document as a .pdf, click here.

  1. Congressional Budget Office, Federal Debt and Interest Costs. December 2010. http://www.cbo.gov/ftpdocs/119xx/doc11999/12-14-FederalDebt.pdf
  2. Calculation from Treasury Direct at http://www.treasurydirect.gov/NP/BPDLogin?application=np by comparing debt on January 2, 2009, to debt on July 16, 2012.
  3. Figure found by dividing the total net interest and mandatory spending of Fiscal Years 2013-2022 by total revenue of the same years. Congressional Budget Office. Updated Budget Projections: Fiscal Years 2012-2022. March 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/March2012Baseline.pdf
  4. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2012-2022. January 2012. Pg. 110. http://www.cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf
  5. William Dudley. “The Competitiveness of Puerto Rico’s Economy: Reducing the Cost of Doing Business and Improving Labor Market Opportunities. June 29th, 2012. http://www.newyorkfed.org/newsevents/speeches/2012/dud120629.html

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