It doesn’t take an economist to figure out that last week’s employment report was bad news. The unemployment rate jumped from 9.6 percent to 9.8 percent, not a significant approval from the 10 percent that marked the lowest point of the recession. The number of long term unemployed remained about the same at 6.3 million, or 41.9 percent of the unemployed. The numbers are even worse when comparing them to economists’ forecasts. Economists expected payrolls to actually increase by 140,000 and the unemployment rate to remain unchanged. Whoops. Wrong again.
The question is, why are we still getting bad news?
It’s not because of a lack of corporate profits. As Economics21, a great online resource for economics information and analysis explains,
“Rather than putting this money to work in the form of employment growth or investment spending, companies have instead build up massive cash reserves. Moody’s estimates large corporations have $1 trillion of excess cash on balance sheet. Data from the Fed show that U.S. nonfinancial businesses hold over $2.4 trillion in cash in aggregate. This sort of cash hoarding is unprecedented.”
All that idle cash is doing little to help spur hiring. In that regard, some may interpret corporation’s decision to save rather than spend as a problem of greed. If only they were willing to sacrifice some of their profits, we could get this economy going again.
That is the wrong way to look at things. Corporations, just as individuals, will do whatever is in their best interests. If you are anything like me, you are pinching pennies. I could go out and spend thousands this holiday season in an attempt to prop up consumer demand. I don’t. Not because I want the economy to remain in its current doldrums, but because I’ve made the personal economic choice, based on the market as it currently exists, that I had better have a savings cushion should something unforeseen happen.
Can I then begrudge corporations for doing the same thing? In my view, no.
That doesn’t mean that something can’t be done. In fact, the “unforeseen” in my case, and the “uncertainty” in the case of corporations, is largely a result of government-created forces. Back in July, well-respected Washington Post columnist Fareed Zakaria asked business leaders why they were reluctant to invest despite sitting on historic cash levels. One CEO told him, “Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what’s in store for us for the future.”
One of the problems is the uncertainty over future tax liabilities. As Economics21 explains, this is largely the results of a structural budget deficit that will, at some point, necessitate higher taxes.
The current budget deficit of 9% of GDP is the second largest in peacetime history next to the 10% deficit recorded in 2009. While a significant portion of that deficit is cyclical, the structural component could be as much as 6% of GDP. In current dollars, this equates to $885 billion of required deficit reduction. How much increased taxation will be required to close this deficit? Will taxes on capital income – corporate income, capital gains, dividends, and noncorporate business income taxed at the individual level – be raised? What will be the impact on consumption and investment?
Corporations’ inability to answer these questions is what is holding back spending. The recently announced deal between President Obama and Congressional Republicans should provide a boost in confidence. At least for the next few years, businesses will be certain of their tax liability and be able to invest accordingly. However, these figures show that if we truly want businesses to get off the sidelines and into the game, something must be done to address long-term deficits. Our ability to solve our structural deficit, through some sort of entitlement reform, is necessary to ensure that tax rates remain stable in the long-term.
The recent jobs numbers were bad news, but hey, what else is new. Fortunately, corporations have the money to begin hiring and investing again. All we need now is for the government to get out of the way.
by Brandon Greife, Political Director of the College Republican National Committee