Why Aren't Businesses Spending? (Hint: It's Not Because of a Radical Agenda in Washington)

By fusing the personal political and economic preferences of many business people with anecdotes and national level opposition to President Obama, conservative think tanks and pundits have spent the last months offering a damning narrative about the president’s agenda over the course of his term. It’s been powerful – the president had created uncertainty, they said. Health care reform and the prospect of higher taxes left businesses uncertain about what they were going to face in the years ahead. Even the stimulus, which poured $800 billion into the economy, including the broadest tax-cut in American history, was supposedly contributing to a perfect storm of radical liberal economic illiteracy that was ensuring that unemployment remained at 9.5 percent. 

The only problem with that narrative is that it’s completely untrue and devoid of actual economic evidence. Today in the Washington Post, Neil Irwin writes (emphasis added):

CHICAGO -- Corporate profits are soaring. Companies are sitting on billions of dollars of cash. And still, they've yet to amp up hiring or make major investments -- the missing ingredients for a strong economic recovery.

Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.

But here in the heartland of America, senior executives say neither side's assessment fits.

They blame their profound caution on their view that U.S. consumers are destined to disappoint for many years. As a result, they say, the economy is unlikely to see the kind of almost unbroken prosperity of the quarter-century that preceded the financial crisis.

…

What role is government policy playing in fostering corporate caution?

The executive class in the Chicago region is none too pleased with many of the policies of President Obama, their former hometown senator. They criticize his willingness to let Bush-era tax cuts expire at year's end for households that make over $250,000 and allow the capital gains tax rate to increase. They dislike aspects of his landmark health-care law, and some fear that the financial overhaul legislation enacted this summer will make it harder for them to get loans.

"Congress has been very tough on businesses," said Jason Speer, chief executive of Quality Float Works of Schaumburg, Ill., which makes the industrial equivalent of toilet ball floats, items that sell for up to $1,200 and are used to measure water levels in farm and industrial equipment. The company also makes the metal balls that go on the top of flagpoles.

Fundamentally, executives objected to Obama's policies on the grounds they would make the United States a less competitive place to operate in the long run.

But when Speer and other executives were pressed on the role that tax and regulatory policies play in hiring, they drew only vague connections. Speer said his decision whether to hire is driven primarily by demand for his products. Orders are coming in strong enough that he is running about 20 hours a week of overtime. So he is weighing whether to hire two or three additional manufacturing workers.

None of the executives interviewed linked a specific new government initiative with a specific decision to refrain from hiring.

On one hand, it would be great if these conservatives were right – it would make our economic problems much easier to solve. The President just could have gone on vacation on day one, and the economy would have fixed itself – No stimulus package, no reforming 1/6 of the American economy, no reigning in the excesses of a financial system that was clearly out of whack. Maybe, if he’d just gone away, business people wouldn’t be passing on profitable investments sitting under their noses instead of hoarding all this cash. (If conservatives are truly right, then, when they take over, they’ll just shrink government, and everyone in America will be healthy, wealthy, and wise. Oh wait…)

Even a cursory examination of the economic data reveals that the conservative narrative has no basis in reality. It’s tempting to interview a conservative business person, let them tell an anecdote that is informed mostly by their personal political preferences, and write that they’re “on the front lines of the economy.” Happily, Neil Irwin didn’t do that – instead he put their views to the test. And, while the business people Irwin talked to didn’t see the case for more stimulus, many economists do. On the flip side, it’s hard to find mainstream economists out there backing up the conservative narrative.

Here’s the real point – we can all agree that the economy is in truly bad shape. Tremendous structural challenges remain, and businesses have no reason to assume that consumers will come flooding in their doors within the year. American consumers, first hit with a lost decade of wage stagnation and median household income decline followed by the destruction of personal wealth, primarily in housing, do not possess the ability to drive the American (much less the global) economy as they have in the past. 

What Irwin’s article says to me, more than anything else, is that the current state and future outlook for the economy are unacceptable, so a robust economic agenda isn't a hindrance on growth, but rather a necessity. Nice words about the business community from Congress and the President won’t actually improve the economy, but policies that allow everyday Americans back into the game and build a 21st century economy – so that businesses can see more capable consumers in the future – will.