From the November 6, 2009 Washington Examiner
November 6, 2009
by Irwin Stelzer
There are times when the economic data point in one direction, and businessmen in the privacy of their boardrooms point in another.
A case in point is the recent report that the recession is over: The housing and manufacturing sectors are recovering, and retailers have sheathed the hara-kiri knives they sharpened in anticipation of a gloomy holiday season as major categories of goods sell at the most robust pace in a year.
"I'll believe it when I see it on my top line," seems to be the attitude of most businessmen, who are hoarding cash in record amounts. The Wall Street Journal estimates that corporate cash hoards now total over $1 trillion, or about 11 percent of assets, compared with $846 billion, or less than 8 percent of assets not much more than a year ago.
Show us the demand, not statistics about the demand, corporate executives seem to be saying, and we will dip into our ample treasuries and begin investing and hiring.
Which might in the end be very good news indeed, and add to other bits of evidence about the durability and speed of the recovery that seems to be under way.
The pieces seem to be in place for a rapid recovery. The pile of cash on which corporations are sitting is available for investment and hiring at the first signs of a durable recovery in consumer demand.
Inventories are low enough to encourage restocking. The dollar is weak and weakening, which should encourage exports and discourage imports, meaning more jobs for American workers.
The Federal Reserve Board's monetary policy gurus met earlier this week and the inflation doves routed the inflation hawks, meaning that interest rates will remain low for the foreseeable future. Good news for housing and other interest-rate sensitive industries.
All of that should add up to a decent recovery -- unless. ... There is a nagging fear among those who closely watch not only the economy but government policy that these nascent economic forces might be murdered in their crib by the current administration.
Small-business men I met with this week tell me they are in a state of paralysis as they watch the debate over the health care "reform" bill wending its way through Congress. Lurking in its 1,502 pages (the Senate version) are provisions that will markedly raise their costs, and their personal taxes. So even as business gets better, they won't take on more staff because they can't figure out what it will cost them to do so.
Then there is the turmoil over all aspects of the financial services industries. The bonus brawl is the most widely publicized, with bankers somehow stunned that the public should resent their record takings after being bailed out by the government and, in cases such as Goldman Sachs, continuing to benefit from government guarantees of their debt.
More important, indecision on how to reform the financial sector continues to weigh on growth, as banks develop ever more stringent restrictions on credit availability while they wait to see who wins the battle between the Obama White House, which wants to give more power to the Fed, and the Congress, which wants to give the Treasury Department authority to close down any financial institution it deems unfit.
This is no small matter, as the at-least partly nonpolitical Fed is less likely than the completely political Treasury to move against an institution for purely partisan political reasons.
Then there is that old bogey taxes. Economists who have the administration's ear just do not believe that higher marginal tax rates will slow economic growth.
They are flirting with such things as an effective 60 percent rate on the incremental income of very high earners or, in the case of congressmen searching desperately for a way to fund the president's $1 trillion health care plan, a "millionaire's tax" on the order of a 5 percent surcharge on the taxes of anyone earning that sum.
They are convinced that markets don't work the way that traditional economists believe, that money incentives do not drive risk taking and hard work, and that therefore appropriating a larger portion of national income for the state will not affect the growth rate.
So when deciding whether you believe we are headed for a rapid recovery, or a tepid one, or none at all, weigh the positive signals from the economy against what some, myself included, believe to be the effect of the policy errors that are in store for us.
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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