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Column: The anti-business president's pro-business recovery

GR2010080606828.gifThis White House has "vilified industries," complains the U.S. Chamber of Commerce. America is burdened with "an anti-business president," moans the Weekly Standard.

Would that all presidents were this anti-business: According to the St. Louis Federal Reserve, corporate profits hit $1.37 trillion in the first quarter -- an all-time high. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter and is up by 13 percent against 2009. And the Obama administration has cut taxes for small businesses and big ones alike. Maybe the president could be anti-me for a while. I could use the money.

The reality is that America's supposedly anti-business president has led an extremely pro-business recovery. The corporate community has recovered first, and best. The populist tone that conservative magazines and business groups decry is partly in reaction to this: As corporate America's position is getting better and better, the recovery is looking shakier and shakier. Unemployment is high. Housing looks perilously close to a double dip. Job growth is weak. And so businesses, for all their profits and capital, aren't hiring. The 71,000 jobs the private sector added in July aren't sufficient to keep up with population growth, much less cut into the ranks of the unemployed.

That is the catch-22 of the recovery: Businesses will start hiring when the economy recovers. And the economy will start to recover when businesses start hiring.

Read the rest...

By Ezra Klein  |  August 9, 2010; 3:48 PM ET
Categories:  Articles , Economic Policy , Economy  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Where does the Laffer curve bend?
Next: Certain about uncertainty


You should also mention the exchange rate as a possible method by which to generate an expansionary impulse to the economy. A dollar devaluation sufficient to bring us to balanced trade (exports = imports) would have increased 2010q2 gdp by about 2.7 percentage points, or an overall growth rate of about 5%. At such a growth rate, unemployment would surely be falling. And the key point is that the Administration has unilateral control of this policy lever. They don't need Congress or the Fed to do anything in order to generate further stimulus.

Posted by: rwclayton7 | August 9, 2010 4:36 PM | Report abuse

Buzz'ed out?

Posted by: tuber | August 9, 2010 4:40 PM | Report abuse

"A dollar devaluation sufficient to bring us to balanced trade..."

Wouldn't that have a negative impact on interest rates in the US and increase the federal budget deficit?

Posted by: tuber | August 9, 2010 4:44 PM | Report abuse

Given the expectation of increased capital gains taxes next year,

the rational response by businesses is to hold off on hiring until January, and squeeze through as much profit to their stockholders as possible right now while the rate remains low.

In a world where businesses were operating in that rational manner, you'd expect to see muted job growth and mediocre GDP growth matched by otherwise inexplicably high reported business profitability over the next two quarters. Hmmm.

Posted by: eggnogfool | August 9, 2010 4:58 PM | Report abuse

Demand drives growth; and expectations regarding demand help to drive or hinder investment.

This whole argument about business "uncertainty" over tax and regulatory policy hindering investment is just pure unadulterated b.s. The overwhelming majority of businesses won't invest in new hires until demand increases in the economy for their product or service.

Posted by: JPRS | August 9, 2010 5:12 PM | Report abuse

Funny...this is exactly what I read in the JournoList comments section this money. Fancy that.

Posted by: luca_20009 | August 9, 2010 5:24 PM | Report abuse

tuber: first of all, devaluing the dollar would increase exports and reduce imports (in dollar terms). The result would be to increase GDP. I stipulated a big enough devaluation to bring exports and imports into balance, but any devaluation would have this affect to some degree. Since the budget deficit is inversely correlated with GDP growth (the deficit gets smaller if GDP grows faster), we should expect a devaluation to reduce, not increase, the federal budget deficit.

As to interest rates, its likely that the immediate effect of a devaluation would be to increase inflation, since the price of imports would increase more quickly than purchasers can switch to non-imported substitutes (and for some imports, there may be no non-imported substitute). If the Fed were already happy with the inflation rate, such an increase could be enough to lead the Fed to raise interest rates. But right now, the inflation rate is well below the Fed's target, and seems to be heading lower. So I think there is very little possibility that the Fed would respond to a devaluation with any interest rate increase, let alone one large enough to completely offset the effects of the devaluation. Bear in mind that the interest rate and the exchange rate are interrelated (you would expect higher interest rates to lead to a more expensive dollar in foreign currency terms), and that statutorily the Treasury, and not the Fed, has authority over the exchange rate. So the Fed would likely be very cautious about appearing to undo (even in part) Treasury's deliberate policy with respect to the exchange rate, because the Fed would not have legal authority to do that.

Posted by: rwclayton7 | August 9, 2010 5:31 PM | Report abuse

Devaluing the dollar would cause the value of dollar denominated assets to fall relative to other currencies. Since the US is forced to run large deficits as far as the eye can see, interest rates on Treasuries issued to finance the deficit would have to increase to attract the same level of buying from foreigners. Outlays for interest payments would increase and so would the federal budget deficit, not a good kind of deficit financed economic stimulus.

Also, if the interest rate on Treasuries increase then the cost to issue corporate and other private debt would likely increase too.

Posted by: tuber | August 9, 2010 6:00 PM | Report abuse

1986 shows that a capital gains tax hike causes capital gains activity to spike and then head for a decade long slowdown. We didn't reach 1986 capital gains revenues again until 1997.

Of course, the Obama backers don't get it. Obama can claim to be pro business all he wants. It might even be true. Doesn't mean that business is going to buy it.

What matters is what business thinks that obama thinks of business. What does not matter is what obama thinks obama thinks of business.

Posted by: krazen1211 | August 9, 2010 6:05 PM | Report abuse


With respect to interest rates this might happen, although most of the lending comes from domestic buyers denominated in USD, so the increase in interest would almost certainly be off-set by an improvement in the import-export balance.

e.g. the recovery of the Asian tigers post 1998 collapse was largely the result of export fueled growth. The flight of foreign investment hurt for a time, but the benefits vis a vis trade with Europe and the U.S. with the cheaper currency more than off-set the loss of foreign investment.

Unfortunately, we don't really have the option of decreasing the value of our currency as a policy lever (e.g. because of our free-floating currency, and because of restrictions against currency manipulation). The USD and USD assets are still the assets of choice for investors.

An increase in GDP will primarily need to come from a boost from domestic sources -- especially public ones (if the goal is to see an accelerated recovery).

@krazen1211, capital gains are just one economic measure.

As far as opinions go -- what Obama thinks of business is irrelevant; and what business thinks of Obama is irrelevant. If there's strong demand for a firm's products and the firm needs to expand capacity to meet the demand, then the firm will tend to expand capacity.

If there is weak demand for a firm's product or services, and the firm has excess capacity, in most cases they won't go on a hiring binge.

Businesses don't expand if they can meet consumer demand with their existing capacity. This is the situation that we're in right now.

Posted by: JPRS | August 9, 2010 8:42 PM | Report abuse

Corporations are doing exactly what you'd expect them to do while anticipating a year-end tax hike: shifting profits into the current year as much as possible.

It's no proof of recovery, which you'll learn that hard way in 2011. This administration's ill-considered war on business has consequences, which we all continue to feel as the economy fails to recover as it should.

Posted by: bgarst | August 10, 2010 1:00 AM | Report abuse

@JPRS: "Demand drives growth; and expectations regarding demand help to drive or hinder investment.

This whole argument about business "uncertainty" over tax and regulatory policy hindering investment is just pure unadulterated b.s. The overwhelming majority of businesses won't invest in new hires until demand increases in the economy for their product or service."

This is a pretty significant misconception. Yes, production/manufacturing/construction is closely tied to current demand. I make about as many widgets this quarter as I plan to sell; if I don't think I'm going to sell many I may lay off staff and not rehire until I see things are turning around. Fine.

But for long term investments, maybe building a new nuclear plant that would go online in 2016, or beginning development on a new hybrid car engine technology that I expect to be part of marketed vehicles 5 years from now,

I don't give a rat's ass what demand is right now, or what it will be next year. I do care about what will happen to the Bush tax cuts at the end of the year, I care a great deal about the specifics of any upcoming energy/climate change bill, and I care about any upcoming R&D subsidy policies, upcoming CAFE standards, and I need to have my plan for dealing with nuclear waste written in to my business model, and so forth.

I can make an educated guess about any one of those, but if I'm even slightly wrong I've just flushed a billion dollars down the toilet.

There seems to be this belief that when business types say they want certainty, they mean they want low taxes and deregulation, and that's not the case. They want low taxes and deregulation, but they absolutely cannot and will not make long term investments without knowing how government action will affect their investment. Under any given set of regulations, there are profitable ways to invest, but you need to know the what the regulations are in order to what such an investment will be.

Posted by: eggnogfool | August 10, 2010 9:01 AM | Report abuse

"Unfortunately, we don't really have the option of decreasing the value of our currency as a policy lever (e.g. because of our free-floating currency, and because of restrictions against currency manipulation). The USD and USD assets are still the assets of choice for investors."

Devaluing the dollar is not a good idea in the short or long term for the US. However, run the US printing press faster than other countries can theirs and the result will be inevitably be a devalued dollar. The dollar as reserve currency argument is valid but has been somewhat weakened by China relying on a basket of currencies rather than the dollar.

Also, while most purchasers of Treasuries are domestic, foreign buyers still hold more than 30% of the outstanding. If Treasuries were faced with a haircut by a hypothetical devaluation, holders would sell and guess what? Interest rates would rise. Choking off growth in the domestic economy to enhance exports wouldn't be a good tradeoff for the US as it would be for more export oriented economies like South Korea.

Posted by: tuber | August 10, 2010 1:03 PM | Report abuse

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