When Federal Reserve Chairman Ben Bernanke takes his seat before Congress to discuss the economy on Wednesday, Americans shouldn’t expect anything dramatic.
Bernanke may want to fine tune here and there to keep deflation at bay. But by and large, the Fed has done everything it can do to prime the U.S. economy. That goes for Congress and other federal agencies too.
This would, then, be a terrific time for official Washington to give itself a rest. Left to its natural ebbs and flows, the U.S. economy should continue its slow mend.
But that’s not the strategy that every politician, political adviser or lobbyist wants to embrace. Especially in an election year. Read the public prints and you’ll find calls for the government to do this or that to give the economy a shove — more stimulus money for infrastructure projects, more bailout money for flailing state governments (why hello, Illinois), more, more, more.
That’s a risky approach: In these fragile, early days of an economic comeback, an overly aggressive government can hurt more than it helps. We hear a frequent complaint from small business owners that Washington is turning them more skittish about making investments for hiring and expansion.
Why so? Because they’re desperate for stability. They want to be able to anticipate their costs. Instead, they’re facing potential new burdens, thanks to government actions, that make them hesitant to hire or expand.
Item 1: Businesses are trying to gauge the real cost of the national health care law. It could be substantial.
Item 2: They’re concerned that the new financial regulation law will tighten credit.
Item 3 (arguably most menacing): They’re worried that the breathtaking cost of government stimulus spending will make a tax hike inevitable. At federal, state and local levels, panicky pols are threatening tax increases because they aren’t accustomed to managing in times of shrinking revenues.
Add it all up and it’s no wonder employers remain hunkered down. Much as we’d like to predict a full recovery in hiring and expansion, remember: Virtually every business still open today has learned to do much more with much less. Often with many fewer employees. Those businesses don’t ever again want to go through the painful downsizing they’ve endured. Employers will grow, yes, but they may do so very cautiously, with the desire for new hires tempered by fears of what further government actions will do to their costs of operation.
That’s why it’s important for Washington, for states such as Illinois and for cities such as Chicago to ease the costs of doing business, not aggravate them.
Employers’ prevailing sense of uncertainty has its roots in the financial crisis. The recession that began in December 2007 was no ordinary downturn. A banking disaster on that scale leaves lasting damage. For the first time in decades, a collapse hurt everybody: rich and poor, coast to coast. We’re still adjusting to our diminished prospects.
Government played a helpful role in the bleakest moments. Credit the Bush and Obama administrations for maintaining a sense of calm during a political transition at a highly risky moment.
As the economy has slowly stabilized, however, government has kicked into overdrive instead of getting out of the way.
As it stands, no one can be confident in the recovery picking up steam. Markets remain volatile in the U.S. and especially Europe.
Hiring and expansion remain slow. It’s natural for business owners to play it safe in times of doubt by raising cash and sitting on it. By their reckoning, there’s no reason to gamble on business expansion when government keeps changing the rules. Case in point:
We’re seeing those doubts hold back the banking sector. Community bankers want to boost reserves, not take a flyer on another condo development. Amen to that. Eventually, as uncertainty gives way to recovery, they will start lending again to credit-starved small businesses with sensible expansion plans and jobs should follow. If, that is, the government doesn’t artificially restrain the banks.
Similar dynamics are playing out in other corporations. Profits have soared and cash is piling up at the 500 biggest nonfinancial U.S. companies — $1.8 trillion at the end of March, the highest level as a percentage of assets in nearly 50 years. Once confidence improves, we hope to see upgrades of facilities and equipment, a rise in mergers and acquisitions, and yes, job creation.
As for consumer spending, don’t expect much of a boom when everybody’s still scared and still absorbing the diminished value of their homes and investments. Holding your own in this environment amounts to a victory. If and when the job market improves, people will feel like they’re standing on solid ground again, and they’ll spend.
This recovery will take years, though, and as it bumps along, it will be tempting to keep calling on government to “do something” to push growth. Be careful what you wish for; every government intervention makes business owners that much more skittish.
We appreciate the hardships in many households. But the federal government can’t drive sustainable private-sector growth by continuing to spend and borrow. That pathology drains resources from taxpaying employers — and further delays economic expansion.
The best the government can do is give a sense of confidence and certainty to employers about what it will cost them to grow. Confidence, that will be the best stimulus.
