Biggest drag on economy? Policy uncertainty and congressional dysfunction

I awoke this morning to the yawning fear that Congress will change the tax policy, and then change it again, and again, and again. The thought of this Congress changing tax policy - the current Congress - the dysfunctional and partisan Congress said by many executives to be the most divisive in their memories, frightens me.

This Congress has been unable to pass any long term measure; no environmental policy, no energy policy, only a short-term 2-year infrastructure policy. So adding more uncertainty about another long term policy - tax policy - is bound to make matters worse for those planning to make investment decisions. And uncertainty leads to deferred investment decisions, which is a drag on the economy.

The largest investment decisions for most people is buying or renting a car or a home. For Americans in the middle 60% of income - i.e. not the lowest or highest 20% - a home represents 40% to 50% of their entire asset base. And part of the financial decisions of whether or not to buy a home is driven by the mortgage interest deduction. If you borrow money to buy a home, you pay interest on that debt. If you itemize your taxes, you can deduct that interest from your total taxable income, reducing taxes by a few thousand dollars every year.

Individual investment decisions are hardly the backbone of the economy. Private and public institutions and corporations also make investment decisions - decisions to build a road or hospital, a wind farm or a hydrogen plant, a stadium or a condominium - all based on expectations of long term policies. But changing the policy could impact home purchase decisions and therefore the value of the single largest asset for most American families.

And that's the fear, that there will be a change this year, and then next year, and then the year after, as each divisive Congress aims to benefits its principal constituencies. It's impossible for investors to invest over the long term when there is no clear sight on policy. Municipalities can't build new large infrastructure if they don't know how much federal funding they will receive on their investment. Utilities can't build new power plants if they don't know long-term environmental policy. Chemical companies can't build new processing facilities if they don't know how policy will impact the availability of natural gas. We can't possibly move beyond an oil or gas-based energy system without a long term 30- or 50-year plan. The so-called Solyndra scandal wasn't a scandal so much for the government's loan guarantees as it was from the lack of any long-term energy policy, which stymied demand for the facilities products.

Businesses will adapt to whatever long term policy you put in front of them. That's what entrepreneurs do. Entrenched businesses fight tooth and nail to keep whatever policies are in place in order to maintain their advantages. Growing businesses aim to change policy so they can grow faster and more profitable in the short term (think Citicorp and Glass-Steagal. With Citigroup laying off 11,000 workers, I'm sure re-instating Glass-Steagal would give current executives the cover to split up their businesses). But with uncertainty, who benefits beyond the advertisers on the Sunday morning news programs?

This is why Congress needs to get in gear and set some long term rational and realistic policies and let businesses figure out how to profit from them. Unfortunately, until the attitude in DC changes, "long-term" is an election cycle, if not a media cycle. When policies set one year are reversed four years later, businesses can't make rational long-term investment decisions. And without long term investment decisions, businesses will merely lever up for financial not strategic investments.

When Congress can act in the long term best interest of the country to motivate investment in long-term tangible assets - roads, parks, manufacturing, energy processing - then they can refocus on long term intangible assets like life, liberty and the pursuit of happiness, not short-term media-cycle bickering that defines our current leadership.