Weekly Standard Online
June 11, 2011
by Irwin Stelzer
There are times when anecdote trumps data, when a general impression gives a clearer picture of what is going on in the economy than a data-laden description, especially when the data point in opposite directions, or cover only one month. This is such a time. So here are some impressions gathered from conversations with numerous CEOs and corporate executives, the former masters of the universe on Wall Street, and some anecdotal evidence – all aimed at explaining why our economy is failing to grow at a rate that creates the needed millions of new jobs.
The key here is uncertainty. Not uncertainty as to whether short skirts will sell better than long skirts, or muted colors will prove to be the fashion choice for the autumn, or even whether interest rates will rise. That's the sort of uncertainty businessmen have lived with ever since there were markets, and for which they get the big bucks to predict accurately. It is political uncertainty.
Talk to any banker and, if candid, he will tell you he can live with almost any regulation that comes out of Washington. He will either figure a way around it, or learn to live with it, perhaps passing on its cost to consumers. But when somewhere out of sight hundreds of regulators are working on thousands of pages of regulations to implement the Dodd-Frank law, he takes fright. Not knowing what is coming down the road, uncertain whether the president will decide once again that he needs bankers to serve as piñatas to provide impetus to his flagging reelection campaign, he becomes gloomy. That affects not only how investment bankers run their own businesses, but how they advise clients who are sitting on $2 trillion of excess cash, earning almost nothing, and too uncertain to invest it in new plant and jobs.
The holders of some of that cash pile tell me that about half of it is held overseas, profits from ventures there. With wage costs rising rapidly in Asia, and having stabilized in the U.S. in recent years, and with the Chinese yuan finally appreciating somewhat in value, the comparative cost advantage enjoyed by China, Vietnam, and other countries is narrowing rapidly. So these executives are giving serious thought to repatriating these overseas earnings for use here in America. Small problem: If they do that, they will have to give over a third of those earnings to the government. So the money sits overseas, ticketed for investment there.
That is not the only disincentive I hear about. To fund Obamacare, the president pushed through a 2.3 percent special excise tax on makers of medical devices, from stents to hips. This excise tax raises the effective tax rate on device manufacturers to more than 50 percent, and must be paid even by companies that have no net profit. Result: companies in this industry can avoid the tax on sales to overseas customers by locating their next plant in, say, Canada. My Hudson Institute colleague Diana Furchtgott-Roth estimates that the tax might cost 50,000 jobs in an industry that employs over 400,000 very well paid workers.
The effect of this tax, however, does not stop at the boundaries of the industry directly affected. Other CEOs worry that an administration willing to levy such a fee might have them in its sights. They see the sad tale of Boeing, which decided to open its second Dreamliner airplane production line in South Carolina, a state in which employees cannot be compelled to join a trade union. That, says a government regulator, is a way of avoiding expansion in the state of Washington, in which Boeing has faced several strikes. Never mind that Boeing is also expanding in Washington. Strikes, says the National Labor Relations Board, are "a legally protected activity," and a company cannot respond to them by locating production to another state. If that doesn't make other companies want to sit on their cash, and frighten foreign investors, nothing will.
Then there is the saga of Delta Airlines, the only major carrier to remain largely non-union. A majority of the fifty thousand Delta workers the union would like to add to its dues' payers have voted four times to reject the trade union seeking to represent them. That, says the relevant regulatory agency, might mean that Delta management pressured the workers not to join. So it is investigating, and can order still another election in the hope that Delta's workers will finally come up with the answer President Obama's campaign team wants. That, too, makes CEOs in other industries wonder when their workers will be asked to vote, and vote again, until they get an answer that will bring trade union work practices into their plants.
Word out of Chicago, home of the president's reelection organization, is straightforward. The president is in trouble, no surprise given the 9.1 percent unemployment rate, and the obvious failure of his economic program to "transform" the energy, health care, and financial sectors. David Axelrod, the president's most influential political advisor, is telling his boss that it is essential that he hold the trade union vote, financing, and doorbell ringing that helped propel him to the White House in 2008. The agencies of government are marching to the tune of the trade union drummers.
Adding to the uncertainty is Obamacare. It is proving so onerous for employers to meet the terms of the new legislation that the administration has issued 1,372 temporary waivers to employers – many of them trade unions – who say they cannot afford the cost of the mandated benefits. And 50 percent of employers who have studied the new law tell McKinsey & Co. they will stop offering workers health insurance in 2014, when Obamacare cuts in, and instead pay the $2,000-per-worker fine that will be imposed on companies with more than 50 employees that offer no coverage. All of this adds up to one simple fact: employers cannot predict their labor costs – except that they know those costs will rise if they allow new hires to take their total work force beyond 50 employees.
There is more: Will taxes on entrepreneurs and what Obama various calls "the rich" and "millionaires and billionaires" rise as part of a deficit reduction settlement? Will the Environmental Protection Agency revive plans to force huge new investments in carbon emission reducing equipment? Will the administration allow the oil industry to get on with drilling, and hire the thousands of workers it would need?
No one knows. So hoard cash, and wait for clarity or, perhaps, a less anti-business administration. Result: Don't look for the private sector to fuel an investment-led recovery very soon. With consumers too nervous to spend freely – high unemployment and falling house prices do not generate confidence – that is a serious matter, indeed.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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