James Pethokoukis

Politics and policy from inside Washington

Obama’s CEO Meeting: the Uncertainty Principle lives!

Dec 15, 2010 22:46 UTC

So the POTUS met with a bunch of CEOs:

President Barack Obama, trying to improve strained relations with the corporate world, prodded America’s top business executives on Wednesday to spend more money to boost U.S. hiring and the economy. ”We focused on jobs and investment and they feel optimistic that, by working together, we can get some of the cash off the sidelines,” Obama told reporters after spending more than four hours with 20 company leaders to discuss job creation.

Obama wanted to pick the brains of America’s business executives, and he estimated they were sitting on around $2 trillion that could be deployed to employ more U.S. workers. The meeting with corporate bosses, including Jeffrey Immelt, chief executive of General Electric Co, and John Chambers, chief executive of Cisco Systems Inc, took place as the U.S. Senate passed tax cuts sought by companies.

A few thoughts:

1) Is is demand or uncertainty? Well, we just ran a 2-year experiment where we flooded the economy with economic and monetary stimulus while at the same time wrecking business incentives via tax and regulatory threats. The results have not been pretty.

2) Obama’s meeting with CEOs is itself evidence that the White House also believes that it has negatively affected business attitudes which has increased their caution. This also why they have been trying, unsuccessfully, to find a CEO to replace Larry Summers.

3) Here is a fun fact: In 2007, a year the economy grew 1.9 percent, there were 250 IPOs raising some $60bln. Although the economy is growing faster than that this year — and despite a big IPO backlog — IPOs activity is only half what it was in 2007. That goes right to the issue of animal spirits.

4) There’s a rich vein of academic research supporting the premise that policy uncertainty can paralyze the private sector. America’s Great Depression may have been extended thanks to “regime uncertainty,” or the New Deal’s avalanche of regulation and taxes. Federal Reserve Chairman Bernanke offered a similar explanation for poor U.S. economic performance in the 1970s. In his MIT thesis, Bernanke partly blamed the decade’s weak business investment on “uncertainty” about long-term domestic policy, concluding that “caution is the order of the day for investors.”

COMMENT

Another fine column, James.

It’s not clear, at least to me, whether Mr. Obama has truly absorbed the lessons of the recent mid-terms OR if he’s just play-acting. Time will tell, I suppose, but I find it hard to believe that Bill Clinton hasn’t had a chat with Mr. Obama – especially after this tax cut business – about political reality and the need to go with the flow.

Posted by Gotthardbahn | Report as abusive

Obama and CEOs finish year warmer but still wary

Dec 15, 2010 19:02 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

President Barack Obama’s meeting Dec. 15 with U.S. business leaders is a symbolic step towards mending the White House’s longstanding rift with Corporate America. That should complement other business-friendly steps, such as a Korea trade agreement and bipartisan tax deal. But to truly narrow Obama’s schism with CEOs, corporate tax and regulation reform need to be high on the administration’s 2011 agenda.

More immediately, CEOs may be mildly disappointed with Obama’s next move, picking a replacement for Larry Summers as director of the National Economic Council. The administration has few members with significant experience outside of government. Summers’ departure created an opening, the chieftains hoped, for someone who has built a business and met payroll. An investment banker isn’t quite what Main Street CEOs probably had in mind. Still, leading candidate and Evercore founder Roger Altman would be preferable to short-listers like Gene Sperling, NEC director under President Bill Clinton; or Yale’s Richard Levin. Altman, after all, runs a successful public company.

Longer term, the more important decision for business will be the White House’s emerging effort at revamping the complex and uncompetitive corporate tax code. If Tokyo follows through on efforts to lower its rates, it would leave Japan tied with the United States as having the highest levy on business among advanced industrial economies. While the Treasury Department is still cooking up a proposal, lowering the top U.S. rate as well as replacing the current system of depreciation allowances with an immediate deduction for investments would be a good bridge to business — and potentially lower unemployment.

Business would also like some regulatory relief after this year’s sweeping rule changes in healthcare and finance. On that front, the White House should consider a proposal from Senator Mark Warner, a Virginia Democrat and cofounder of Nextel. His simple plan: For every new regulation a federal agency wants to impose on business, it must eliminate an existing rule. Republicans would surely applaud. And if the policy focused regulators on truly important matters, it could actually make for more effective regulation.

But dealing with the deficit is still the biggest overhang. In a new report, the Congressional Budget Office notes that under current law, public debt will exceed $16 trillion by 2020, with annual interest payments reaching 3.4 percent of GDP. Just a 1 percent rise in long-term interest rates would tack on another trillion to that total. As the CEOs will surely tell Obama, they’d be unlikely to run their businesses with similar fiscal characteristics.

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