Will the Economic
Uncertainty Continue in 2012?

by John R. Hendrickson

Entering into a new year the economy is still the main domestic issue facing policymakers. The economy has been slowly improving, but economic growth still remains at a very slow pace. In December (2011) the unemployment rate fell to 8.5 percent, “its lowest level since February 2009,” which is a positive economic sign, but the fact is that the albatross of uncertainty still remains on the economy.[1] The uncertainty stems from policies ranging from the vast increase in regulatory activity, the Patient Protection and Affordable Care Act, looming tax increases, and the debt crisis, which continues to remain unresolved while the national debt continues to increase. Although the economy is showing some signs of progress it is too early to proclaim a general economic recovery, because the policy uncertainties, including the outcome of the European debt crisis, remain a significant factor in how the economy will perform in the New Year.

Although the unemployment rate falling to 8.5 percent is certainly good news for the economy the nation still suffers from a significant crisis in job creation. The question that needs to be answered is how many people are not included in the Bureau of Labor Statistics report that are either underemployed (part-time) or have quit looking for work altogether:

In the official unemployment rate, the Bureau of Labor Statistics measures the labor force as those who are employed or who have actively looked for work within the last four weeks. As a consequence, the official rate excludes workers who have decided to drop out of the labor market altogether because economic conditions have discouraged them, or for other reasons. The official rate also ignores those who settle for part-time work since they are unable to find a full-time job.[2]

If those individuals who are either underemployed or discouraged from looking for employment are included the unemployment rate would be 15.6 percent.[3] The Heritage Foundation in a recent analysis of the unemployment situation stated that “if employers continue to create 200,000 net jobs per month, then one year from now, the unemployment rate will still stand at 7.9 percent.”[4] The Heritage Foundation report noted that “at that pace, the unemployment rate will not return to normal levels (or 5.2 percent) for four and a half years — not until September 2016.”[5]

Overshadowing the slow economic growth and high unemployment is the massive debt crisis. The national debt is currently over $15 trillion and the federal government continues to not only function without a budget, but also engage in deficit spending. The $15 trillion national debt is now as large as or larger than the national economy:

The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion. That’s roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projects show the economy likely grew to about $15.3 trillion by December — a level the debt is likely to surpass this month [January].[6]

As Patrick J. Buchanan recently wrote:

The U.S. fiscal crisis can be simply summarized. Since 2009, the federal government has been spending 24 to 25 percent of Gross Domestic Product, while tax collections have fallen to 15 percent. When his first four years end, [President] Obama will have grown the debt by $6 trillion.[7]

The welfare state in the United States and in Europe has reached its high-water mark as government spending reaches dangerous levels. Policymakers — because of the stark philosophical differences in the role of government — have failed to find a solution to the debt crisis. Policy proposals have been offered from the Bowles-Simpson Debt Commission plan, Representative Paul Ryan’s (R-WI) “Path to Prosperity” budget proposal, and Senator Tom Coburn’s (R-OK) “Back in Black” deficit reduction plan. They are all sound policy proposals that would seriously address the debt crisis.[8]

In addition to the debt crisis uncertainty exists as to whether or not tax increases will be in the offering or if policymakers will pursue across-the-board tax reform. The level of regulations has also caused uncertainty and The Washington Times recently reported that the federal government “ended the year having saddled Americans with another 81,836 pages of regulations,” which places a substantial burden on the private sector of the economy.[9]

“Entrepreneurs are looking down the barrel of tax increases and the failure of the politicians to have a credible debt-reduction plan. In the end, it is how these job creators see the future that will determine the pace of recovery in overall employment,” noted Rea Hederman and James Sherk, both policy scholars at The Heritage Foundation.[10]

Policy uncertainty will continue in 2012 even with some positive signs of economic growth. In order to remove the uncertainty from the economy, lower the high unemployment rate, and take control of the debt crisis, policymakers must focus on an economic plan that is rooted in limited government, which includes tax reform, eliminating unnecessary regulations, reducing federal spending, and promoting a strong dollar monetary policy. In other words a pro-growth economic strategy as championed by President Ronald Reagan and other conservatives who led America into periods of economic prosperity.

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.