By Steven Pearlstein
Wednesday, July 7, 2010; A09
Business executives dislike the uncertainty created by health-care reform and financial regulation, and the political stalemate over climate change and immigration. They hear the demonizing rhetoric directed at the health insurance industry, Wall Street and oil companies. They see a wave of new regulation heading their way after years of writing their own rules. They know that balancing the budget will almost certainly mean higher taxes.
It's all true, and it's coming at a terrible time for the economy. And with trust in big business now down near single digits, it's no wonder these chief executives are feeling like the political deck is suddenly stacked against them.
"When citizens distrust big business, governments will follow suit," Jeff Immelt, the chief executive of General Electric, wrote to shareholders earlier this year. "We can find ourselves in a sort of 'dark cycle,' where the people who can make our economy better are considered its worst enemies. The rallying cry becomes, 'Why can't you clowns just create some jobs.' "
That was in February. Today, many of those overpaid and coddled chief executives have convinced themselves that they're not the ones to be blamed for the lack of private-sector job growth, but rather the anti-business clowns at the White House and in Congress.
There's little doubt that businesses are holding back. Right now they are sitting on more cash than they know what to do with, thanks to strong profits, depreciation that exceeds new investment and meager spending on researching, developing and marketing new products. Business investment as a percentage of economic output is at its lowest level in more than 40 years, while hiring continues to lag behind growth in output.
While it is possible that this reluctance to hire and invest is the result of anxiety over taxes and regulation, experience suggests other explanations are more likely.
We know that this kind of groupthink and herd behavior are all too common, with irrational exuberance now giving way to a period of equally irrational and widespread pessimism and caution.
We know that financial markets have become particularly risk-averse, ready to punish any company that makes investments in long-term growth that might negatively impact short-term profits.
We know that, during the bubble years, companies misallocated capital buying up their own stock, making overpriced acquisitions, overpaying executives and bidding up financial assets. That money could have been used to develop new products and new markets. Instead, too many firms went into this downturn with a meager pipeline of ideas.
We also know of companies such as Google and Apple that didn't get the memo about the looming threats from Washington and have continued to invest and innovate. They're also making gobs of money.
Indeed, as James Surowiecki recently pointed out in the New Yorker, it has always been thus. The reason that Kellogg pulled ahead of Post in the cereal business, that Kraft came to dominate the mayonnaise market, and that Texas Instruments built a big lead in transistor radios, is they took advantage of downturns to make the investments needed to grow markets and market share. But then, as now, most firms prefer to hunker down.
Jeff Pfeffer, a professor at Stanford's business school and a man who knows his way around a boardroom, says that if corporate executives are looking for someone to blame for weak job growth, they should take their eyes off Washington and try looking in a mirror. "They follow the crowd, do what is conservative and play a very short-term game," he said.
While administration officials bristle at corporate leaders' accusations, they have largely refrained from returning fire, if for no other reason than they understand the importance of business confidence in any economic recovery. They also take some comfort from the fact that other Democratic presidents -- Roosevelt, Truman, Kennedy and Clinton -- likewise found themselves at odds with the business community early in their terms. The truth is that this is a fight that neither the White House nor the business community can win -- but everyone will lose if it continues to escalate. It would be useful if both sides could focus on finding common ground.
The business community could demonstrate its good faith by resolving its internal conflicts and agreeing on a credible plan to meet the widely accepted goal of reducing carbon emissions without adding to the deficit. For business leaders to blame Obama for creating that uncertainty is the height of hypocrisy.
For its part, the White House might find that it could enlist the support of the business community for extended unemployment benefits if it would pair the extension with a tax bill that would allow all businesses to deduct the full cost of investments and research in the year they were made. Tax reformers have always supported this idea, small firms can already do this, and because it would shift the timing of taxes rather than the overall amount that companies pay, it wouldn't add to the long-run deficit. In the short run, however, it will provide a big incentive to business investment.
Without retreating on other initiatives, the administration could also win back some business support by devoting more resources and high-level attention to winning those competitions for big new plants and research facilities that, increasingly, are winding up someplace else. Americans may be unaccustomed to presidents and Cabinet secretaries acting as glorified economic development directors, but in a globalized economy this is how the game is played and won.
Snaring multibillion-dollar projects with a midnight meeting at the White House or a last-minute pitch from a won't-take-no-for-an-answer secretary of commerce -- a few wins like that would generate more votes and goodwill from the business community than those set-piece presidential factory visits peddling the latest version of "jobs, jobs, jobs."