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Wednesday, June 01, 2011

THE HIGH COST OF UNCERTAINTY

"It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to [be] competitive. It is not a viable, feasible strategy and we will not engage in it."
-Tim Geithner

ROLL THE DICE
Although according to economists we're technically out of the great recession, the economy continues to creep along sluggishly and unemployment still hovers near double digits. Businesses have plenty of money, so why aren't they hiring?

The Washington Post reported last year that American non-financial businesses are sitting on a combined 1.8 trillion dollars of disposable income, yet hiring is low, and jobless claims continue to increase. The USA Today recently reported on big business profits:
Profits at the Standard & Poor’s 500 big companies are expected to jump 15% this year to record levels, on top of a 47% jump last year.

Shareholders are reaping the benefits, with stock prices almost doubling since the 2009 low and companies adding a 7% dividend kicker in 2010. And companies spent $299 billion buying back their own stock last year, a record 117% jump from 2009.
Are these businesses run by cold, heartless money grubbing brutes who are doing this just to punish workers? Is their scrooge-like greed so great they cannot bear to part with any money?

Stephen Carter teaches law and ethics at Yale, and he had a conversation with a businessman recently while traveling that helps make sense of what's going on:
The man in the aisle seat is trying to tell me why he refuses to hire anybody. His business is successful, he says, as the 737 cruises smoothly eastward. Demand for his product is up. But he still won’t hire.

“Why not?”

“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.
See, the reason hiring and expansion of business - and thus the economy - is slow right now is that the uncertainty of the Obama administration's plans and actions for the future has not gone away.

Some hoped that the 2010 elections breaking the supermajorities the Democrats held in congress would ease concerns of business owners, but the Obama administration has repeatedly demonstrated that they're willing to bypass congress and use agency regulations to apply greater burdens on business.

The Obama administration is a bit confused about why this hiring is not taking place. The last round of "Quantitative Easing" was designed to inject money into the economy for businessmen to hire and expand their businesses with.

The problem is that businesses were not short on cash, they are short on confidence. If the future holds greater costs, then a business cannot increase their expenses. Without being comfortable that long term planning won't collapse under sudden regulatory costs, its smarter and safer to be cautious and work smaller.

So all QE2 did was trigger inflation and lower the value of the dollar, hurting the economy even further by injecting cash into the system that had no actual value.

Until the Obama administration demonstrates through tangible action that they are not hostile to business, or leaves office, things are not likely to change for big business in America. That's not good news for any of us.

When I posted this on the Washington Examiner Opinion Zone a commenter rejected the uncertainty idea, saying:
By this argument, no business would EVER be able to expand. Political winds will always continue to change over time and the pendulum of public opinion continues its unending arc. What this article is clamoring for is something that has never existed, and it never will. Get over it!

For many businesses, hiring hasn't increased because they're still convinced there's more blood left to be squeezed from the efficiency turnip. Also they're ensuring healthy margins in part by continued downward wage pressure.

For some other businesses, decisions are made based on ideological presuppositions, just as they are for many individuals. I feel sorry for employees of such businesses, because decisions are being made based upon politics rather than economics.
There is something to the efficiency argument, I believe to a certain degree businesses have found that they can get by with slightly fewer workers than they have in the past, but that represents a difficult burden for the workers - lots of overtime, extra work load, etc.

Welcome to UncertaintyHowever, as another commenter noted, while uncertainty is always with us, there are degrees. I'll never know exactly what will happen in the future or how to react perfectly to it. I have no doubt some economics professor named this point, but there is a point in any endeavor in which that ordinary, constant level of uncertainty reaches a point which becomes extraordinary and you change your behavior in response.

At present, we're facing that kind of uncertainty for businesses. Every month or sooner the Obama administration announces a new policy, new regulation, or new effort to restrict and burden businesses further. The Democrats in congress and President Obama himself keep talking about how they want to raise taxes and cut back on tax breaks further for businesses. Their rhetoric is one of constant hostility toward achievers and earners in the country and how they must pay their "fair share" and are making too much.

That's a climate of uncertainty a giant leap beyond the ordinary level businesses always must work under, and responding to that with caution and changes in your level of aggressiveness is not partisan, its simply common sense. Until that level of uncertainty changes or shows signs of realistically changing soon, business will not respond positively.

2 Comments:

Anonymous Eric said...

The bottom line is this, and yes it is so simple as to be stupd: jobs will be created when more workers are needed. They certainly won't be created just because employers are sitting on piles of cash. Politicians and pundits who cite that factoid as some kind of attack on business display a stunning lack of basic economic knowledge.

There are plenty of other factors that play into it, such as the uncertainty and efficiency issues you name here, but at the end of the day increased demand for human beings to produce and deliver products and services trumps all those other factors. That's what creates jobs, and there is no real long term substitute for it.

12:01 PM, June 01, 2011  
Blogger Philip said...

In certain states (New Jersey comes to mind), once your company exceeds X workers, a whole new set of taxes and regulations kick in.

So quite a few small companies maintain an X-y employee level, where y is a percentage that keeps them out of legal trouble. Such companies also don't hire long-term temporary workers, use short term temporary workers only in dire situations, and try to use independent 'Form 1099' contractors for specific set-term projects. The majority of the work gets farmed out overseas.

Speaking of the 1099 - that's why there was the requirement in the health care bill to require all companies to record the purchasing or sale of goods and services in excess of $600.

6:20 PM, June 01, 2011  

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