Top White House economist: Lax demand — not reform — is stifling businesses

On her way out the door, the top White House economist dismissed the notion that American corporations are sitting on nearly $2 trillion of cash because they’re wary of how major new laws — and some policies currently under consideration — will affect their businesses.
Christina Romer, who is stepping down this week as chairwoman of the White House Council of Economic Advisers, said that the primary cause of high unemployment and slowing economic growth is “a substantial shortfall of aggregate demand.”
“While some in the business community talk about regulatory uncertainty as one reason they are cautious about hiring and investing,” Ms. Romer said in a speech yesterday, “I suspect that uncertainty about future sales is a much larger determinant of firms’ actions.”
That may well be. But businesses tend to do best when uncertainty is at a minimum. And one of the biggest sources of uncertainty for businesses — and investment advisers and their clients — is whether Congress will renew the Bush administration tax cuts that are due to expire at the end of the year. It will be perhaps the most contentious issue on the congressional agenda this fall.
Ms. Romer said that the Bush tax cuts should be continued only for families making less than $250,000. But extending tax cuts to the wealthy temporarily is dangerous because those breaks are more likely to become permanent, she said.
“That is a fiscally irresponsible measure we can’t afford,” Ms. Romer said.
Although Congress isn’t likely to settle the tax matter for months, Matthew Sommer, a director and senior retirement specialist at Janus Capital Group Inc., said that investment advisers should prepare their clients now for any eventual outcome.
Mr. Sommer is promoting a 10-point checklist for investors and their advisers to review regarding the possibility that individual, capital gains and dividend rates may increase. Personal exemptions and itemized deductions also may be phased out if Congress fails to renew the Bush policies.
Mr. Sommer’s guidance includes considering locking in profits from highly appreciated assets and reviewing sources of income and tax-deductible expenses that can be deferred. He also suggests taking full advantage of employer-sponsored retirement plans and considering a Roth IRA conversion.
Given the tax policy limbo, it’s too early to do any of those things, he noted. But it’s never too early to prepare.
“Here’s an opportunity [for advisers] to show some leadership and to lay out what the potential scenarios are so that clients can more easily act at the end of the year,” Mr. Sommer said.
Those actions will likely be guided by the state of the recovery at the end of the year. In her speech, Ms. Romer said she believes the economy will continue to struggle out of the recession. The economist, who is taking a teaching position at the University of California at Berkeley, said the current economic funk is “fundamentally different from other postwar recessions” because it began when interest rates were low and was stoked by “regulatory failures and unsound practices that contributed to a housing bubble, and eventually a full-fledged financial crisis.”
“That the economy remains as troubled as it is, despite aggressive action, reflects the fact that this has not been a normal recession,” Ms. Romer said. “Just as the downturn was uncharted territory, so is its recovery.”
That’s not exactly encouraging news for advisers, who must map out a financial plan for worried clients. “Unfortunately,” Mr. Sommer said, “most people are paralyzed because of the uncertainty.”