03 Jun 2011 Uncertainty – The Economic Killer

A basic tenant in negotiating is to start with an extreme position from which you allow your opponent to gain ground against, but only to a point that is better than or at your original objective. Have we as a ‘civilization’ gotten so accomplished to negotiating/posturing our own objectives that we completely lose sight of the greater good? You name the arena and it seems that leaders on both or more sides are so entrenched in their own beliefs and positions that no middle ground exists. Seemingly unsolvable conflicts abound, in the NFL, state houses, Washington, Pakistan v. India, Pakistan v. US, even Israel v. the US: The sense of urgency or the bigger picture are held hostage by ideology or greed. It’s the story of mankind, but it just seems louder and more prevalent lately. 

As leaders posture and bicker, the world’s problems get worse. We suggested in March that there would be an impact on US economic numbers caused by interruptions of Japanese supply lines resulting from the devastating earthquakes and tsunami. There is no doubt that these interruptions partly explain this and last weeks’ disappointing manufacturing numbers; but only partly. This week we’ll forego the details of the mostly bad economic news. I’m sure you’ve heard most of it anyway on the commercial-driven news channels.  Instead, let’s take a 35,000 foot view of what’s going on and why this economy can’t seem to free itself from the quagmire.

Quite simply, the unprecedented and historically slow recovery this nation and its people have suffered since the Great Recession ‘ended’ is due primarily to UNCERTAINTY. Since the 2008 crash our leaders have made huge politically-driven mistakes that have increased uncertainty, rather than answered it. One glowering certainty though is that our national debt is 32% higher than it was two and a half years ago. Now with political stalemate, it seems no progress is being made to solve the country’s biggest uncertainties regarding taxes, entitlements and regulations. Both action and inaction have increased the level of uncertainty. Uncertainty is the worst enemy of stock, bond, and business investors, with the latter being the most important at the moment.

The unemployment rate, announced today, inched up from 9% to 9.1%. Unemployment is a clear indicator of both current business conditions and the confidence employers have for future business conditions. Mitt Romney said something brilliant yesterday as he announced his candidacy for President (this is not an endorsement of him). He said that there was a third way to get the deficit down beyond tax increases or reduced spending; that is to grow the economy. He said we “need to have a president who understands how to get the economy growing so we can add jobs, more people are paying taxes.  Companies are profitable, so they’re paying more taxes.  You balance the budget by restraining the growth of government and encouraging the growth of the private sector.” Growth breeds confidence.

There is considerable argument over whether tax increases hurt the economy and job growth and studies have been used by both sides to prove their case. However it seems obvious and common sense to me that if the objective is to incent an employer to hire, one would want to make the process as easy (by eliminating unnecessary regulations) and as profitable (taxes reduce profits) as possible. But there is a more important issue facing business leaders/employers today than the fact of taxes and regulations. It is that they have NO IDEA where tax rates, regulations, and the economy are going. Consider how likely you would be to invest in a new employee if you didn’t know how much he or she would cost you next year in benefits (Healthcare Reform/Social Security/Medicare)? Or, given a significant tax increase you might suddenly find that the marginal profits you based your decision on, were going to taxes?

While the Congress and Obama argue, Moody’s bond rating service announced this week that they would put the US government’s Aaa credit rating under review for a downgrade unless there’s progress on increasing the debt limit by mid-July. I believe this is the first time the quality of US sovereign debt has been so uncertain since the early days of the Republic when Jefferson and Hamilton were setting up credit lines to establish global trading credibility.

Employers will not necessarily wait for more certainty on all three – taxes, regulations and economic growth to begin hiring again, but promises and certainty from Washington on the first two would go a very long way toward making the third, economic growth, a sustainable and certain reality. It is conceivable that even a reasonable tax increase and new streamlined regulations would fly if assurances were made by congress that they would stand for a reasonable length of time to allow for planning. Washington’s incessant stirring of the pot of regulations and taxes that exasperate employers and frustrate any meaningful attempts at long-term planning.

Until we see the quality of leadership from this President or the next one that is capable of bridging entrenched political differences and forging endurable policies on taxes, regulations, defense, and entitlements, this economy will continue to struggle pulling the increasing dead weight of inefficient government. As for the consequences, we need only look at socialist Europe with its latest set of woes from its most socialist countries; Greece, Spain, and Italy.

It is possible for a President to lead this country out of despair and uncertainty. The most recent and significant example was President Ronald Regan. He was able lift the spirits of Americans from one of the most depressing periods in our history. He energized them to ‘speak’ to their representatives in Washington to get Congress (dominated by his opposing party) to go along with his agenda for reform and recovery. It can be done again by Mr. Obama or his successor. He doesn’t have to solve the whole problem himself or through his Administration; that is what this country’s world-class free enterprise system is great at doing.

To make it happen, our President must develop a vision that captures the passion and imagination of this country’s creative, innovative, and entrepreneurial. He must have a plan that sets forth the policies that will guide for decades the size and boundaries of government, its complimentary and protective role with free-enterprise, how it will tax its citizenry, what it will do to protect its good credit, and how it will operate in the world diplomatically and militarily to primarily defend its people and borders, as well as cooperatively defend the rights and freedom of others in peril. All we need Mr. President is a plan where there is uncertainty and consensus where there is deep division: Difficult, but not impossible.

Have a nice weekend.