Photo by Sonya Abrams
Left to right: Dr. Jed Kolko, Brian Riley, Dr. Gloria Duffy, George Scalise and Tom Campbell at The Bank of America • Walter E. Hoadley Annual Economic Forecast in San Francisco.
ernment do to help with private economic hiring? From the Federal Reserve minutes, the same source as before, a number of the members of the Open Market Committee noted that their business contacts had become optimistic about the outlook for sales and production; nonetheless, many contacts remained cautious about hiring and investment, with some concerned about the potential effects of government policies. This is absolutely right. One is hesitant to hire when one does not know the environment of a regulatory nature that will be imposed by government upon those new hires. For the last two years, there was a prospect of card check as a way of increasing union membership. So you might hire a worker and end up with a unionized labor force that wasn’t unionized when you began. With the new health-care law, the cost of employers to comply has obviously led to a substantial number of employers announcing that they will drop health insurance, because it’s cheaper to pay the fine. Well, how much longer will that be? If the fine goes up, that obviously will cause employers to re-think dropping people and the cost of hiring somebody goes up as well. In the financial sector, [there was] the unparalleled degree of delegation to the Department of Treasury to write regulations in that area after the Congress passed a huge [financial industry] deregulation bill with very few details. The overall effect has been documented by the Office of Advocacy of the Small Business Administration – part
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of the federal government – that, whereas the effect of federal corporate income tax is 21 percent, there is in effect a federal regulatory tax of 14 percent. My point is, it’s high and it’s potentially rising, or at least it’s uncertain, which is why employers are hesitant to hire. You need certainty to know what your costs will be. Good news: On Tuesday, [January 18, 2011], President Obama announced that he is giving orders to the Office of Information and Regulatory Affairs to try to reduce the regulatory burden. I’m glad he’s done that, and I certainly wish them success in doing so. Other friends suggest that the answer is to just lower taxes on corporations, investors and high-income individuals, and that will fuel the recovery. Well, first of all, it’s always a good idea to lower the cost of doing business, and the tax that the government derives is the cost of doing business. But I don’t see that as the fundamental engine of getting us out of the recession. Rather, I think that we are in a crisis of confidence, and we need to restore confidence. Here’s why I say that: We happen to have in our economy now a ton of investment money; it’s a very technical economic term: a whole lot. Cash on hand in U.S. companies is now $1.8 trillion, the highest as a percentage of total assets since 1963, according to The Wall Street Journal of September 13. After-tax corporate profits have increased 7 percent since the recession began. The personal savings rate has doubled, and recent
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merger activity shows there’s no shortage of cash. [For example, the purchase of data storage and information management company] 3Par by HP for $1.5 billion. Potash [Corporation] tried to acquire BHP Billiton, and they’re willing to put $39 billion in cash on the table. NewAlliance Bank shares by First Niagara Financial for $15 billion. McAfee by Intel for $7.7 billion. No, [the problem in the private sector] isn’t a lack of cash, nor is there a lack of corporate ability to borrow from the Fed. Net debt financing by U.S. non-financial corporations continues to be robust. Gross issuance of corporate bonds was very heavy, particularly for speculative-grade firms. To the extent that there’s a shortage of funds, there’s a shortage of funds going to small businesses, not large businesses that can offer bonds or equity.
Lighten the burden
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here you see an issue that I’m going to return to in my remarks today, of the regulatory burden. The burden here being that the banks, particularly the small banks, are worried about how much they can put on their balance sheet. So a regulatory burden on the banks is causing them to become very, very hesitant to lend to small business. Now back to this point of, What can the government do? It can limit the degree of regulatory burden and increase the degree of regulatory certainty. There’s a quote from The Wall Street Journal of last August from the executive director of economic research at the Milken Institute, Ross DeVol: “Small businesses need access to more bank credit to create jobs. Banks feel conflicted by calls from the Obama administration to increase lending while regulators are instructing them to add to their reserves. Regulators need to be reminded that some risk is necessary in a market economy.” Yes, while regulators need to be reminded, that seems to me as important as incentivising funds by the tax laws. Other areas of potential growth: Can we expect Europe to help us out? Uh, no. I think you’re probably going to see a split in the euro zone. The patience of the German taxpayers for bailing out Spain and Greece and Ireland I think has reached a point that will tolerate little else, little more, if that comes to that. No, it has to be U.S. domestic demand,