By Paolo von Schirach
September 24, 2011
WASHINGTON– Healthy US companies, with positive balance sheets and lots of cash in hand do not invest. And why not? In Washington you get two kinds of pre-cooked replies, depending whom you are asking. Democrats would say that companies do not invest because there is not enough demand. In order to boost demand, America would need more public spending that would create more jobs and thus more people with more spending money. Previously unemployed workers would have disposable income with which they could buy things; this way stimulating demand for more goods and services. And increased demand would be the signal that companies need to jack up their own investments and hiring, thus mopping up more idle workers who will add to aggregate demand because they will have money to spend.
Republicans: lower taxes and deregulations will do it
The Republicans would say instead that companies do not invest because they have no confidence in the broader economic and policy fundamentals. They would argue that companies look around and see too many uncertainties. They do not know about their future tax burden. They have no idea as to how the new health care law will affect their costs. They are not sure as to how the regulatory burden, in particular environmental regulations, will increase their cost of doing business. Finally, they are intimidated by out of control federal spending, year after year. They believe that large deficits with no end in sight most likely will mean higher taxes down the line. And corporations are afraid that they will be called upon to foot the bill. So, the Republican recipe for new investments and consequently more employment is federal spending cuts, lower taxes and deregulation.
There does not seem to be much room for reconciling these set views. And this causes policy impasse in Washington. The Obama administration would like to have more stimulus, (infrastructure projects, hiring more teachers), paid for through higher taxes for the wealthy. The Republicans say no to higher taxes, while they lampoon any stimulus as more of the same stupid ideas on how to throw money away. For its part, the Obama administration would never agree on spending cuts without tax increases for the better off.
With these entrenched positions, expect zero action between now and the November 2012 elections. In an ever more polarised climate, compromise would be interpreted by the rank and file on both sides as a political surrender. The belief shared by both sides is that there is more to be gained by keeping an intransigent, “pure” position.
In the meantime, with no light on what the future policy environment is going to look like, expect no new investments. Who knows really what the magic formula for business optimism should be; but this mess can hardly inspire confidence.
Huge debt load carried by the average American dampens consumption
Of course the Washington impasse is not the only issue affecting the business climate. Quite clearly, we cannot ignore that the 2008 financial crisis left millions of potential consumers not only worse off but also carrying a huge debt load. So, there is the double whammy of having lost the home or most of the home value due to market collapse (and previous equity extraction) and new debt incurred just to get by.
Even for a country that historically has had a fairly low savings rate, this high personal debt situation is highly unusual. And, as US GDP is 3/4 driven by consumer spending, when consumers cannot spend anymore because they are trying to get out of debt, there is not much that can be done to make them go to the mall. They simply do not have the cash.
This debt repayment process will take a while. Hard to say how long. Quite clearly, if the overall picture gets a little better, if people get higher salaries, then they can get back on their feet a bit faster. But if there is further decline, then expect a slower healing process.
So, corporations know that the customer is just not there. And this is hardly an inducement to invest. Simply stated: the market vanished.
Broad based tax reform, lighter regulation, spending reform would help
That said, the creation of a clearer, more business friendly environment should help. If corporate America could see tax simplification enacted, including permanent tax credit for R&D expenditures, in the context of a broad tax reform, (as opposed to short term tax fixes), more rational regulation and, say, a good long term energy policy that would give a sense of where to place strategic long term energy related investments, this would be extremely good.
And it would also help if Washington would agree on a long term, credible public spending reform plan that overtime would sensibly reduce spending and thus the national debt. This reform would have to include entitlement overhaul so that we can redesign the welfare state in a manner that will make it viable and fiscally sustainable.
A more business friendly environment may not be all, but it would help
Now, I am not sure that these structural reforms and significant changes would all of sudden re-energize business confidence. But I am sure that the creation of a policy and fiscal environment that tells business that America is business friendly and that the waters are calm would have a profoundly positive effect, not just on business, mind you, but on the entire nation. Right now Americans fear decline, while they see Washington entangled in fierce partisan fights. In other words, business is bad and no one is minding the store. New, sensible policies would change the national mood.
No chance of any action before the 2012 elections
The problem is that you can expect that none of this will be done between now and the November 2012 elections. America’s political leadership is hopelessly fractured and divided. President Obama has given up on governing and is now putting forward plans that have no chance of being passed by the Republican controlled House but that will make –he hopes– a good re-election platform. The Republicans have no interest in meeting this president half way, as they believe that their intransigence will pay off next year.
Let’s hope that nothing really bad happens between now and the elections. I doubt that this divided political leadership with no money, zero spare capacity and lots of debt would be able to do much of anything, should a real crisis come about. And it may come about, if not originated from within, probably coming from an equally challenged Europe that has even fewer chances of getting its act together on Greece, large debts and the inability to harmonize fiscal policies.