Business, Politics, Economics, Leadership

Second in a series of posts examining the Ten Tyrants of Uncertainty – ten factors causing US business to sit on the economic sidelines and contributing to the extended ‘jobless recovery’.

Previously, we identified concerns about the US mid-term elections as one key factor driving the ‘decision paralysis’ that is prevalent in the US business community – with the result that businesses are not investing in growth, and not creating the jobs needed to accelerate consumer confidence and consumer spending, create a definitive end to the recession and turn the corner on unemployment.  Another political factor reinforcing the decision by businesses to sit on the sidelines of the economy, which is particularly relevant when you consider that a GOP victory that will hand control of at least the House of Representatives and possibly the Senate to the Republicans, is a growing concern that the Administration will try to use the ‘Lame Duck’ session to force through unpopular and economically damaging policies that will further undermine the outlook for recovery.

For those who may not be familiar with the way the US legislative system works, a Lame Duck session occurs when control of either House or Senate switches hands to the period between the day the election results become known – mostly the day of and the day after the election, which takes place in November – and the day that the newly elected representatives are seated, which occurs on January 3. During this period, incumbents who lost their seats in the election remain in office until the balance of their term runs out, and continue to form a majority.

The political calculus here is that, as these individuals have already lost, they may no longer feel constrained (to the extent that they ever did) by the wishes or best interests of their constituents, and may be prepared to vote in support of measures that they would have rejected when they still needed electoral support to retain their seats.  In recent history, Lame Duck sessions have been largely uncontroversial, but there have been disastrous examples in the past – most notably, the 1860-1861 session that at least contributed to if not directly caused the Civil War, and the 1932-1933 session that massively amplified the effects of the recession, caused thousands of bank failures and was one of the root causes of the Great Depression.  However, based on the disregard displayed by the administration during the last two years for majority opinion, despite the recent history of respecting the verdict of the electorate during the Lame Duck session, this time might be different.

Business is particularly concerned about the vast and complex proposed legislation focused on energy policy – often referred to as ‘Cap & Trade’ (by proponents) or ‘Cap & Tax’ (by opponents).  While a small number of business that have carefully positioned themselves to profit from it would cheer loud and long if such legislation were rammed, many (possibly most) business decision makers are very concerned that the impact on their businesses (and therefore on our economy) would range from crippling to devastating.  The cost of all manufacturing activities, all production activities, all distribution activities, all business travel would escalate substantially – and this cost would inevitably have to be passed on to their customers.  Demand would be reduced by the escalated prices, and business revenues and profitability would likely be reduced.  The economic impact would be far reaching; consumers having to pay more for food (because the fertilizers, pesticides, feed and distribution costs that that drive price all went up) will have less to spend on discretionary items; businesses trying to reduce cost in order to remain price competitive with foreign goods while struggling with reduced demand from consumers will lay off workers and move more work offshore; the total tax take will go down because corporate profits will be reduced, unemployment will rise even further, and individual earnings will be reduced – while the welfare costs will raise as even more people are driven below the poverty line (because the poor will bear a disproportionate share of the burden as a much higher percentage of their total net income is dedicated to food and energy costs).

Of course, the Administration’s green energy policy is not the only big or controversial piece of legislation that may result from the Lamer Duck session, but it serves as a great exemplar for why the business community is worried about could happen, and why they are reluctant to commit to significant investment strategies that could be completely derailed if such sweeping legislation were to pass.

The Bottom Line: Even though they may be reassured about the mid-term future if (as most expect) the mid-terms break strongly in favor of the Republican party, many US businesses will continue to sit on the sidelines, deferring the investment programs that would create the jobs that would start to drive unemployment back down, until they have a clearer line of sight into how the anticipated Lame Duck session will play out – and as a consequence the ‘jobless’ recovery will likely continue through the year end.