Beyond 'fiscal cliff,' unknowns shaping economy are larger than they appear

Uncertainty on many fronts will discourage businesses and investors from driving the U.S. economy forward

The perils of looking too far out in the future when it comes to the economy are evident in a Chicago Tribune story that ran Nov. 8, 1928, two days after Herbert Hoover was elected to succeed fellow Republican Calvin Coolidge in the White House.

"See Coolidge Prosperity Continue Under Hoover," the paper said in a headline that history would render worthy of The Onion. It was not quite a year before Wall Street famously would crash.

Here we are, looking at another Nov. 8 edition of the Tribune, again two days after another presidential election, albeit without a rose-colored spyglass. The so-called fiscal cliff looms large, as reflected in Wednesday's market sell-off, and its implications extend far beyond the immediate crisis. It's the additional unknowns that will determine our economy's mid-term and long-term prospects.

"Just tell me what the ground is," Chicago entrepreneur and technology venture capitalist J.B. Pritzker said Wednesday, pointing to unresolved regulatory ambiguities and uncertain tax changes as deterrents to investment.

"Raise my taxes, lower my taxes, more regulation, less regulation — just tell what it is and I'll figure out what to do. (Even) if it's quicksand, I'll know what to do.

"When people talk about tax reform in Congress and they have these proposals, it's like, 'OK, is the ground going to shift now?' As a businessperson, you don't want to invest your cash or your capital until you know if the ground is solid, and that keeps us from (making moves). I can think of several examples where it has kept me from doing something that would result in the creation of jobs because I don't know if I really want to be in that business until I know what the regulatory environment or tax environment is going to be."

The legislation behind Obamacare, Pritzker observed, was thousands of pages long. But its lack of specificity in certain matters suggests "it could be a few pages longer."

For some, however, it's the likelihood that nothing will be changed at all that is troubling.

James Farrell, the retired chairman and CEO of Illinois Tool Works, has been a long-standing proponent for pension reform in Illinois. The financial obligation is a ticking bomb for an already debt-heavy state. Election results that only fortified House Speaker Michael Madigan's hold on the Legislature that so far has failed to take a disciplined approach to spending doesn't exactly inspire enthusiasm for investment here.

"I was hoping more rational people would see that and act well in advance of it happening," said Farrell, who sits on the boards of 3M, Abbott Laboratories and Allstate. "Now I'm afraid it's not going to happen until there's a calamity. Then they'll be stunned to see things falling apart, literally around their ears, and they'll say, 'Oh my God, we've got to change this.' I had hoped that more logical thought processes would prevail, and I've just about given up on that.

"With the same players, the same problems, the issues well known and no leadership anyplace in Springfield to move the ball down the field, (it's hard to see) how we get it solved. We're going to now be faced with cutting back serious educational dollars, cutting back serious support for hospitals in the community, police and fire (departments). Social service agencies already are taking it 50 percent in the neck. They're going to take it all the way. I just don't see how they'll get any collective effort to get it done."

Farrell sees the same budget woes in several other states, some of which he said are close to their own meltdowns.

"So they're going to turn to the federal government for help … and I can imagine the other states in the union saying, 'Hey, no problem. I balanced my budget, but you go ahead and take our tax dollars and give them to the states who can't work,'" he said. "That's going to be a fight of major proportions."

Randall Kroszner, a former governor of the Federal Reserve System who is now the Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business, expects the federal government will paste a bandage on the fiscal cliff as a temporary solution because no one wants to take the fall for whatever economic damage it threatens to cause. But the more substantive matters that businesses and investors need resolved still will need to be dealt with.

"Firms are not willing to take on long-term investment, and I include hiring as long-term investment, because they don't have a clue what the structure and level of taxes will be," Kroszner said. "Will there be different kinds of tax credits? Will some deductions be eliminated? Will the rates be 40 percent? Will they be 20 percent? Capital gains is a wide-open question. So I think the intermediate and longer-run issues are at least as, if not more important in causing people to be hesitant (to invest) now … as the short-term fiscal cliff issues."

Kroszner said there is a false debate about whether more austerity or less is needed. He believes what's needed is a closer examination of the impact of taxing and spending, much the way a business would weigh expenditures, and whether the government is getting a bang for its buck.

But that requires more from legislators than we have seen of late at both the state and federal level, serious debate followed by decisive action, and the election results affirming the status quo may not bode well.

Sometimes the future is difficult to discern. Sometimes it's just difficult.

philrosenthal@tribune.com

Twitter @phil_rosenthal

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