The $800 per Person Uncertainty Tax

On April 29, the U.S. Treasury announced that it expects to pay down $35 billion of the total national debt this quarter—the first debt reduction since 2007. Great news, right?

Not so fast.

That fat sum is miniscule compared to the size of the national debt—a mere 0.2 percent of the nearly $16.8 trillion owed by Uncle Sam.

Moreover, the Treasury Department’s scheduled debt payment may result from many factors—including the sequester, the recent collection of income-tax revenues, the higher tax rates levied on those earning higher incomes, and the payroll tax hike that went into effect last January. But it most emphatically is not a result of some lasting and meaningful improvement in the government’s fiscal habits: In the same press release in which the Treasury announced its $35 billion payment this quarter, the agency also said it expects to borrow $223 billion in the following quarter.

It should come as no surprise that some luminaries in the investment community are extremely distressed by the government’s fiscal mismanagement.

“We’ve spent so much money at this point that we cannot pay it back…ever,” writes Keith Fitz-Gerald, chief investment strategist at Money Morning. “We’re either going to default or we’re going to pay our way out of it—and the former is much more likely than the latter.”

Fitz-Gerald isn’t predicting that a default is imminent. But he worries that if policymakers don’t adequately deal with the problem in the near term, the crisis will get much worse in the long term.

The fiscal overhang isn’t a problem only for the future, however. It’s a significant drag on the economy now. Perhaps the worst damage has come from investors’ uncertainties about how the debt problem will be resolved.

Bill McNabb, chairman and CEO of the Vanguard mutual fund family, says that investors’ skittishness about the uncertainty regarding the debt-ceiling debate has cost the U.S. economy $112 billion over the past two years. Add to that amount the cost of uncertainty over regulatory policy, monetary policy, and foreign policy, and the price tag, according to his company’s economists, comes to a staggering $261 billion—more than $800 per person in the country.

“Without this uncertainty tax, real U.S. GDP could have grown an average 3% per year since 2011, instead of the recorded 2% average in fiscal years 2011-12,” he writes in an op-ed for the Wall Street Journal. “In addition, the U.S. labor market would have added roughly 45,000 more jobs per month over the past two years. That adds up to more than one million jobs that we could have had by now, but don’t.”

McNabb warns that individual investors who focus heavily on the gyrations of the stock market may lose sight of economy’s underlying vulnerabilities. “Until the U.S. debt issue is resolved for the long term,” he continues, “market gains and losses will be built on an unstable foundation of promises that cannot be kept.”

Carl P. Close is a Research Fellow and former Executive Editor for Acquisitions and Content at the Independent Institute and former Assistant Editor of The Independent Review.
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