Businesses have to deal with nearly unprecedented levels of uncertainty due to Washington’s inability to give them a clear roadmap of what policy changes lay ahead. A large part of this uncertainty is about the level of future taxes and increased regulations. Businesses are reluctant to hire when they could be facing additional labor costs due to government policies. This, at a particularly vulnerable time due to the credit crunch and financial crisis, spells a death sentence for many small businesses, and stunts the growth of others. The health care debate typifies what has become all too clear to political observers—that liberals in Washington will jam through Congress whatever high-tax-and-spend legislation they can. Whether or not the American people want the new rules and regulations to them is of no concern. Most importantly, this leaves the small business owner in the dark when preparing for the future.
The problem is that businesses don’t know if liberals will get their way or not. Unforeseen circumstances such as the recount that brought Al Franken to power in Minnesota, or the upset victory of Scott Brown in Massachusetts can not be predicted before they occur. Those events changed what type of laws Congress could legislate with a disregard of the willingness of the American people, and changed the political landscape that small business owners have to deal with. Will they have to pay thousands of dollars extra per employee for government mandated health insurance or won’t they? Will they have to pay a 45 percent death tax on their business’s assets when they die, or will they pay a zero percent death tax? Whether or not the healthcare bill will be enacted into law, or whether financial regulations will be tightened to prevent future financial crises, will at least indirectly affect small business owners who must plan for the future, which is currently uncertain and unpredictable. It makes a difference regarding how much money business owners have to hold in rainy day funds for rain that may never arrive. If the rain isn’t coming, these business owners would gladly invest in growing their businesses instead.
Until there is a sense of predictability of exactly what major legislation is going to be enacted into law, businesses will simply remain on the sidelines, biding their time, and waiting to expand their companies and hire new workers. High productivity from the critical workers who have not lost their jobs means that businesses can delay hiring with little consequences. This is not the attitude that we need from the private sector when the unemployment rate is hovering at 10 percent. This pending legislation could make the cost of labor more expensive. Small business’s reluctance to hire means no jobs will be created until Washington removes the problematic uncertainty and the American people will continue to struggle with a crisis of confidence.
Increasingly, policy experts are concerned about the effect Washington’s policies are having on the economy. There has been a chorus of support for clarifying what future red tape business owners may or may not have to face. Afterall, one in 6.25 small business owners (PDF) who say now is not a good time to expand their businesses say the uncertain political climate is the reason.
Narayan R. Kocherlakota, the president of the Federal Reserve Bank of Minneapolis recently lamented: “I see two areas of concern. First, there is a great deal of uncertainty related to major policy initiatives under consideration in Washington. Congress is considering proposals for enormous changes in health care and in the structure of financial regulation. These proposals have generated a great deal of uncertainty, for the capricious winds of politics seem to change them on a near-daily basis. As bankers, you know that too much uncertainty in a business plan makes for a risky loan. The same is true for the economy as a whole. I see this kind of political uncertainty as problematic for the prospects of rapid recovery.”
Meryl Witmer, General Partner at Eagle Capital Partners recently told Barron’s magazine,
“What is it going to cost? In the past six months, whenever I have talked to a company I asked the chief executive or chief financial officer what it would take to bring jobs here. They said, ‘You know, the workforce isn’t that good, and there is so much regulation. I’m moving jobs out of the U.S.’ The government needs to cut back on regulation and taxes and open things up for business, or the jobs will continue to leave.”
Maine Senator Olympia Snowe asked U.S. Secretary Timothy Geithner this on February 2: “Would you put your money on the line? That’s the issue,” she said. “And I heard it over and over again, and rightfully so. So until we get certainty on taxes, on regulation, on the issue of health care and how that’s, you know, boomeranging off the walls here between the House and Senate, we’re not going to experience job creation.”
Finally, this from Dennis P. Lockhart, the President and Chief Executive Officer of the Federal Reserve Bank of Atlanta speaking on February 18, 2010:
“I’ve heard anecdotal comments from retailers that they have been willing to forgo sales to avoid an unwanted building of inventory. This inventory caution could very well continue. On the other hand, if uncertainties lift, businesses may be less inclined to give up revenues for inventory cost savings. If significant inventory replenishment does occur, growth could be much stronger this year than my forecast suggests.
A second factor is just the atmosphere of uncertainty and the effect this has on business investment. What are the uncertainties weighing on business decisions, especially capital expenditure decisions? I would cite problems in the commercial real estate sector that could compromise the repair of credit markets and banks and, as a consequence, business access to credit. I would also cite public policy coming out of Washington in areas such as health care, tax, regulation, and the federal deficit.
Business spending slowly trended up through 2009 from a quite negative growth rate at the beginning of the year to a barely positive growth rate at the end of the year. Because of the cloud of uncertainty, my forecast does not include much further improvement of capital spending in 2010. But again, if some of that uncertainty lifts, business spending could push the economy higher.”
This blog post was co-authored by Aleksey Gladyshev.