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Companies Lament Political Uncertainty; The Certainty of Austerity Should Worry Them, Too

(photo: ecstaticist)

US companies are hoarding some cash in preparation for the possibility that no debt limit deal is reached by next Tuesday, as well as lining up additional sources of financing in case the credit markets suffer. But executives are going way too far by blaming the debt limit crisis for things that were in place well before this was thought to be an issue.

A new sort of risk to growth is emerging, not from the kind of economic forces that led to the recent recession but from elected officials’ inability to agree on how to deal with them. This angst in the executive suite is reflected in this month’s uptick in lobbying by business groups eager to see a deal on the federal debt ceiling, in surveys showing falling confidence among business leaders — and, in the American heartland, by the deepening frustrations of corporate chiefs […]

The executives are hostile to President Obama and his agenda and say higher taxes would damage their business prospects and make them less inclined to invest and hire. But in contrast to congressional Republicans’ claims that any tax increases would stop job creation in its tracks, many executives say they could tolerate somewhat higher taxes if they were part of a broader plan that offered clarity on the nation’s future policies, particularly one heavy on spending cuts.

“What are the rules of the game going to be in the long term?” said Lyle Heidemann, chief executive of the 5,000-store hardware chain True Value. “What our retailers would like to have is consistency and predictability. We can handle decisions we don’t agree with, but that’s easier than not knowing what the decision is going to be.”

This is the “uncertainty” dodge, and while it wouldn’t be hard to look at Washington and assume dysfunction, it doesn’t account for the fact that businesses haven’t been hiring at a robust rate for nearly four years now. That cannot possibly be chalked up to uncertainty, especially when every survey shows that this is about demand for sales.  [cont’d.]

And what they know is that sales will only go down in the event of a deficit deal. The initial CBO reports on the Boehner and Reid plans showed minimal deficit reduction in the immediate term, but that will probably be one of the tweaks that Speaker Boehner makes to grab more support. As I’ve been saying for as long as I can remember, near-term spending cuts will materially harm the economy, and should be avoided at all costs. I fear a deal as much as I fear default, in this respect.

“The problem is that aggregate demand is very weak from consumers and businesses. If government cuts spending in the near term, raises taxes in the near term, that would be a drag on growth,” says Gus Faucher, director of macroeconomics for Moody’s Analytics. He distinguishes “good” and “bad” deficit reduction: The good kind would reduce government spending when the economy is stronger, which would reduce long-term interest rates and free up more money for the private sector to spend and invest. By contrast, the bad kind of deficit reduction “would focus on cutting spending right now, while the economy is still weak.”

And of course, the struggles of the British economy show us the blueprint for how austerity will play out.

This is what I mean when I say that there are no good solutions left. The politicians have abandoned common sense and all known economic theory. The corporate class may be angry about “uncertainty,” but the certain sting of austerity should cure them of that.

CommunityThe Bullpen

Companies Lament Political Uncertainty; the Certainty of Austerity Should Worry Them, Too

US companies are hoarding some cash in preparation for the possibility that no debt limit deal is reached by next Tuesday, as well as lining up additional sources of financing in case the credit markets suffer. But executives are going way too far by blaming the debt limit crisis for things that were in place well before this was thought to be an issue.

A new sort of risk to growth is emerging, not from the kind of economic forces that led to the recent recession but from elected officials’ inability to agree on how to deal with them. This angst in the executive suite is reflected in this month’s uptick in lobbying by business groups eager to see a deal on the federal debt ceiling, in surveys showing falling confidence among business leaders — and, in the American heartland, by the deepening frustrations of corporate chiefs […]

The executives are hostile to President Obama and his agenda and say higher taxes would damage their business prospects and make them less inclined to invest and hire. But in contrast to congressional Republicans’ claims that any tax increases would stop job creation in its tracks, many executives say they could tolerate somewhat higher taxes if they were part of a broader plan that offered clarity on the nation’s future policies, particularly one heavy on spending cuts.

“What are the rules of the game going to be in the long term?” said Lyle Heidemann, chief executive of the 5,000-store hardware chain True Value. “What our retailers would like to have is consistency and predictability. We can handle decisions we don’t agree with, but that’s easier than not knowing what the decision is going to be.”

This is the “uncertainty” dodge, and while it wouldn’t be hard to look at Washington and assume dysfunction, it doesn’t account for the fact that businesses haven’t been hiring at a robust rate for nearly four years now. That cannot possibly be chalked up to uncertainty, especially when every survey shows that this is about demand for sales.

And what they know is that sales will only go down in the event of a deficit deal. The initial CBO reports on the Boehner and Reid plans showed minimal deficit reduction in the immediate term, but that will probably be one of the tweaks that Speaker Boehner makes to grab more support. As I’ve been saying for as long as I can remember, near-term spending cuts will materially harm the economy, and should be avoided at all costs. I fear a deal as much as I fear default, in this respect.

“The problem is that aggregate demand is very weak from consumers and businesses. If government cuts spending in the near term, raises taxes in the near term, that would be a drag on growth,” says Gus Faucher, director of macroeconomics for Moody’s Analytics. He distinguishes “good” and “bad” deficit reduction: The good kind would reduce government spending when the economy is stronger, which would reduce long-term interest rates and free up more money for the private sector to spend and invest. By contrast, the bad kind of deficit reduction “would focus on cutting spending right now, while the economy is still weak.”

And of course, the struggles of the British economy show us the blueprint for how austerity will play out.

This is what I mean when I say that there are no good solutions left. The politicians have abandoned common sense and all known economic theory. The corporate class may be angry about “uncertainty,” but the certain sting of austerity should cure them of that.

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David Dayen

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