It's The Uncertainty, Stupid

I saw this article today, and it reminded me that the Democrat controlled Congress has not passed a budget in three years.

This inability to tackle the long-term horizon has left America facing a much more urgent debt fight that risks plunging the US back into recession and casting a long shadow over the rest of the world economy. As things stand, the world's largest economy will fall off what Federal Reserve chairman, Ben Bernanke, has called a "fiscal cliff" at the end of the year.

In practical terms, the cliff has two main ingredients. Firstly, tax rises that come from the expiration on December 31 of cuts introduced by George W Bush and later extended by Obama. Secondly, the start of $1.2 trillion of spending cuts that will be split between defence and other government spending.

To give a sense of the steepness of the cliff, economists at Bank of America estimate that if the tax rises and spending cuts are all allowed to happen then it will produce a fiscal tightening equivalent to 4pc of US gross domestic product. That is bigger than anything David Cameron and George Osborne have tried since taking office.

And it is the uncertainty over whether the US will fall off the cliff that is worrying Pat Conroy and his software firm in Texas. The greater hesitancy among the businesses he sells to has left Conroy unsure whether he will convert the handful of contractors the company has added this year into permanent employees.

Nor is the fog just restricting the view of America's army of small businesses. With half of the spending cuts due to come from the military budget, the country's biggest defence and aerospace companies are rattled. No one appears to know which specific programmes will be targeted when the axe falls in January. "We're entering a time frame when the uncertainty is as onerous as the cuts themselves," Jim McNerney, the chairman and chief executive of Boeing, said. "I have no choice but to adjust my costs."

If it were just Conroy's 35-person operation or even the vast Boeing company affected that would be manageable. But an increasing number of economists expect a measure of paralysis to ripple across US businesses over the rest of the year.

Analysts at Bank of America believe it will bring the US economy to a virtual halt in the fourth quarter, when it is forecasting growth of just 0.25pc. "Businesses don't have any clarity and we think we'll see them respond," said Michelle Meyer, an economist at Bank of America. "It will start showing up in the data in coming months."

Worryingly, it is not just America's businesses that are stuck with a restricted view of how much they will be taxed next year and where exactly spending cuts will fall. It is consumers whose spending still accounts for the lion's share of the economy. Should all the tax cuts, including an emergency tax on salaries, be allowed to lapse, the Tax Policy Center estimates that 83pc of households will face an annual increase in their tax bills of $3,701.

It leaves Obama in somewhat of a Catch-22: He wants to "fundamentally transform America" (i.e., crash the economy so he can impose his socialist utopia) but he needs to get re-elected.