“Change” affects incentives

Businesspeople – like people in general? – prefer some degree of certainty to ongoing uncertainty.  They will not make a  permanent decision that affects their cost structure today (new equipment, new employees)  if they’re not sure what hits their businesses will suffer tomorrow.  They will keep their powder dry.  If you make it harder/more expensive to hire someone or purchase equipment to expand, you will get less of both.

Edward Lazear in Uncommon Knowledge:

The deficit matters because it tells us how much we’re borrowing, and since we save less than we invest, it means we borrow from abroad.  But more importantly, we really need to be focused on the level of spending.  Even if we closed our deficit – and that would mean that we’d raise taxes – we still wouldn’t be helping the economy.  Taxes hurt the economy.  Deficits hurt the economyOnce we’ve declared that we’re going to spend at very high levels, we’re really between a rock and a hard place.

Fareed Zakaria in the Washington Post:

The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets. By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century. Yet most corporations are not spending this money on new plants, equipment or workers

One CEO told me, “Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what’s in store for us for the future.” Another pointed out that between the health-care bill, financial reform and possibly cap-and-trade, his company had lawyers working day and night to figure out the implications of all these new regulations…

Most of the business leaders I spoke to had voted for Barack Obama. They still admire him. Those who had met him thought he was unusually smart. But all think he is, at his core, anti-business. When I asked for specifics, they pointed to the fact that Obama has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, that he’s made clear he thinks government and nonprofit work are superior to the private sector. It all added up to a profound sense of distrust.

Wayne Allyn Root in the Las Vegas Review Journal:

The key is to success is to avoid employees.

Gary S. Becker, Steven J. Davis, and Kevin M. Murphy  in the Wall Street Journal:

Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.

UPDATE (7/9/10) – h/t Amity Shlaes in the WaPo

But change that is too arbitrary and too frequent petrifies firms, especially before their rules have been tested in the courts. As Verizon Communications chief executive Ivan Seidenberg noted recently in a Business Roundtable speech: “By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”

This analysis echoes those of Depression-era entrepreneurs. In 1938 Lammot du Pont, head of the eponymous chemical concern, spoke of a “fog of uncertainty” slowing business and noted in the company’s annual report that arbitrary government always slowed business down: “by land and sea the universal practice under conditions of fog is to slacken speed.”

What about the old spend-or-save debate? The evidence suggests that easier money did indeed help end this second slump. But a larger factor was Roosevelt’s decision to stop attacking business and turn to foreign policy. When Republicans made gains in the 1938 midterms, it became clear that the New Deal era of mega-intervention was ending.

It is that backtracking of the later ’30s that is relevant to recovery today.

UPDATE II – h/t the editors at WSJ

However, our favorite line from yesterday’s Politico.com story is this one: “And it is more than just politics: Obama’s aides believe confidence in the general direction of White House policy has an effect on the willingness of corporations to hire, invest and push the economy toward a more solid recovery.” You think?

However late the revelation, we suppose it’s progress if Democrats are figuring out that business confidence is crucial to nurturing a fragile economic recovery into a durable expansion. U.S. companies have an estimated $2 trillion in cash that they could deploy to create new jobs or buy equipment, but they aren’t about to do so until they know what their costs will be. We warned the White House about this early on when we wrote about the dangers of a “capital strike.”

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