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Learning to live with uncertainty’s economics

Everyone lives with uncertainty.
We don’t know the future, but there are times when uncertainty is more prevalent —during natural disasters or in a combat zone, for example. And during such times, one tends to avoid what would be a normal routine.
The same is true when there is uncertainty about the economy and economic policy. Spending patterns tend to change in these environments.
Consider what happened to corporate cash flows at the end of 2012. Because it was uncertain what the 2013 tax rates would be, many companies paid extra dividends before the end of 2012 and gave their employees early bonuses.
Today, economic policy uncertainty continues to have a dramatic impact on economic activity. Three academics, two at Stanford and one at the University of Chicago, recently unveiled a measure of U.S. economic policy uncertainty and found that uncertainty has been significantly higher than normal for the past two years, resulting in a dramatic impact on economic growth.
Using this research, the Vanguard Group estimated that such uncertainty has created a $261 billion drag on the economy ($800 per capita).
Over the past two years, they say, this has reduced the growth rate of real GDP by at least 1 percentage point and by 45,000 jobs per month (that’s over 1 million jobs in the two-year period).
Corporate America’s cash glut
It is well known that there are record amounts of cash on the books of America’s major corporations. Apple and GE have more than $100 billion each; Microsoft has more than $70 billion; and Cisco and Google each have more than $50 billion.
But because much of this cash has remained offshore for tax reasons, it is not available for investment or job creation here in America. Despite its huge cash hoard, Apple recently borrowed $17 billion to pay dividends to its shareholders and to repurchase stock because its offshore cash is subject to significant taxation if repatriated to pay for these transactions.
A dearth of capital expenditures
In the past five years, the rate of growth in U.S. corporate capital expenditures has been the slowest in at least 50 years. The tax code and other issues surrounding fiscal policy, including the debt and deficits, and regulatory issues like Obamacare keep corporations from investing, expanding and creating jobs in America.
Uncertainty, regulations and part-time employment
The most recent headline (U3) unemployment rate was 7.5 percent (April). In the Household Survey, the number of people employed grew by 293,000, which appears to be quite positive (that number was a negative 206,000 in March).
Unfortunately, of those 293,000, 278,000 were part-time jobs. Because the U3 unemployment measure counts part-time and full-time jobs equally, the unemployment rate appeared to decline in April from its reported 7.6 percent level in March.
But the U6 unemployment measure, which assigns different weights to part-time and full-time jobs, rose to 13.9 percent from March’s reported 13.8 percent. To confirm the movement to part-timers, the average workweek declined 0.3 percent in April.
Should we be concerned that 95 percent of the jobs created were part-time, or is this just an anomaly?
I’ve seen reports that because of Obamacare, Taco Bell, Applebee’s, Denny’s and Olive Garden are moving some employees from full- to part-time status. And, the state of Virginia, the city of Long Beach, Calif., and Youngstown State University have mandated that their part-time workers cannot work more than 29 hours per week, thus saving them millions of dollars in potential Obamacare costs. Consider that there are still 7.5 months until Obamacare is fully implemented. Could this movement toward part-timers be just the start?
Uncertainty and the tax grab
It is no secret that every federal, state and local government is looking for revenue. The result has been an explosion of rules and regulations, and the fees and fines that go with them.
This is choking small businesses. The Internet sales tax is one such example. How is a small Internet-based business going to cope with more than 9,000 taxing jurisdictions, all with different and sometimes contradictory rules?
Can you imagine having to do such accounting, and then create a payment stream for several hundred such governmental entities per month, all of which would have the right to audit your books? Don’t be fooled. This has nothing to do with “fairness,” as is being touted. It has everything to do with increased taxation to fund government. Until such uncertainty subsides, the creation of new Internet-based small business will be stifled.
This growing concern —that America will not be able to achieve a long-term plan to deal with its debt, deficits and the monetization of such —has frozen the business sector like deer in the rapidly approaching headlights.
U.S. policymakers seem oblivious to the implications that continued policy uncertainty has on economic growth.
We’ve adopted European-style policies, and today our economic growth rate is what Europe had five years ago. Perhaps Europe’s negative growth rate today is a harbinger of our own future.
Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.
Call them at 775-284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.


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