"Maybe the president could be anti-me for a while. I could use the money."
Slow to Spend
The anti-business president’s pro-business recovery.
by Ezra Klein
August 07, 2010
This White House has “vilified industries,” complains the 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. The Obama administration has dropped 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 corporate America, for all its profits, isn’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.
Pundits have expended a lot of energy on this puzzle, but there’s actually no puzzle at all. A look at the history of financial crises shows that our slow, halting recovery is right on schedule, and the business community’s caution is predictable.
In their book, This Time Is Different, Carmen Reinhart and Kenneth Rogoff look at every financial crisis over the last 800 years. It’s an exhaustive study, and its conclusions are depressing for a country that believes itself exceptional even in its suffering: we’re not special.
If you look at unemployment, housing prices, government debt, and the stock market, Rogoff says, “the U.S. is just driving down the tracks of a typical post–WWII deep financial crisis.” In some areas, we’re even a bit ahead of the game: economic output usually drops by 9 percent. We held the drop to 4 percent.
Even the unevenness of our recovery is predictable. “Housing and employment come back much slower than equity and [gross domestic product],” Reinhart says. GDP usually falls for two years and then recovers. Equity can move even faster, which helps explain corporate America’s rapid recovery. But employment tends to fall for five years, and sometimes it never quite recovers. And housing? That’s usually a six-year slide.
So business may be back, but its customers aren’t. That’s the Catch-22 of our recovery. Businesses will start hiring when the economy recovers. And the economy will start to recover when businesses start hiring. But that shouldn’t obscure what is, in fact, sort of good news (the frustrating stuff recoveries are made of): businesses can expand, they’re just waiting around to do so. “If you’re running a business, you can’t start hiring on speculation [that the economy is getting better],” says Joseph Kasputys, chairman of IHS Global Insight. “You have to wait until you see market signals that things are getting better. The smart businesses are looking for the early signs so they get the first advantage. They’re ready to move.” That’s a lot better than a world in which they don’t have the ability to move.
So what can we do to speed things along? More government stimulus—either through direct spending or further tax cuts—could offer some quick help, but Senate Republicans won’t allow anything large enough to make much of an impact. The Federal Reserve could step into the breach, but so far it’s been reluctant to do so. The Republicans want to see the Bush tax cuts extended and Obama’s health-care and financial-regulation bills repealed, but none of that will make a big short-term difference.
Instead, we’re left with that frustrating old standby: time. A financial crisis, Reinhart says, “is not something that policymakers can undo quickly. If you look at the big, historic panorama, deleveraging takes time. That’s not the answer people want to hear, but these [recoveries] are lengthy.”
So businesses are watching consumers, consumers are watching businesses, and everyone is pointing at Washington. But given the history of financial crises—and in the absence of further government intervention—there’s not much left to watch but the clock.