The CEO problem

Fareed Zakaria provides an interesting diagnosis to the economic woes that continue to plague the US as Barack Obama’s second year in office grinds towards the midterms.  He spoke to a number of CEOs, many of whom voted for Obama in November 2008, in order to get an idea of why these companies aren’t putting their resources to work in creating jobs and economic expansion.  Their answer?  They now see Obama as fundamentally anti-business and don’t want to take the risks:

The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets. By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century. Yet most corporations are not spending this money on new plants, equipment or workers. Were they to loosen their purse strings, hundreds of billions of dollars would start pouring through the economy. These investments would probably have greater effect and staying power than a government stimulus. …

So why are they reluctant, despite having mounds of cash? I put this question to a series of business leaders, all of whom were expansive on the topic yet did not want to be quoted by name, for fear of offending people in Washington. …

One CEO told me, “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.” Another pointed out that between the health-care bill, financial reform and possibly cap-and-trade, his company had lawyers working day and night to figure out the implications of all these new regulations. Lobbyists have been delighted by all this activity. “[Obama] exaggerates our power, but he increases demand for our services,” superlobbyist Tony Podesta told the New York Times.

Most of the business leaders I spoke to had voted for Barack Obama. They still admire him. Those who had met him thought he was unusually smart. But all think he is, at his core, anti-business. When I asked for specifics, they pointed to the fact that Obama has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, that he’s made clear he thinks government and nonprofit work are superior to the private sector. It all added up to a profound sense of distrust.

Once again, we have another road-to-Damascus opportunity for leaders of the business world: you don’t elect class warriors and expect pro-business policies to result.  None of the data in the last paragraph in the excerpt holds any new information.  Obama’s campaign had few business leaders on board, too, and his lack of executive and private-sector experience was clear from the beginning of his campaign.  Obama’s populist rhetoric throughout 2007 and 2008 made his antipathy towards the private sector and his predilection for government control all too obvious — as we repeatedly warned throughout the campaign.

Oddly, Zakaria offers a hair-of-the-dog solution in the short term, demanding another government stimulus package in the summer.  Why?  Because teachers will lose their jobs, Zakaria claims, falling into the same trap that the national media bought in the wake of Porkulus.  Never mind that dozens of state- and local-based media reported accurately that those jobs were never actually in jeopardy, as the “education” funds received by the states allowed them to shift resources to protect jobs in other bureaucracies.  Zakaria spends most of his column showing how destructive the government interventions have been, and then argues we can’t live without just one more round, like an alcoholic who promises to swear off the bottle tomorrow.

In order to unlock the capital in those ledgers, the US needs to set a fiscal course that demonstrates deficit reduction and elimination through substantial spending cuts rather than future tax hikes.  That means an end to government interventions, especially those added or enhanced in the last few years that took the annual federal budget from $2.77 trillion to over $3.8 trillion in just three fiscal years.  Capital markets need to see pro-capital policies, run by people who actually understand capital markets, and not by ivory-tower intellectuals whose closest experience to private-sector management was a case study published by the Harvard School of Business.  And until Washington starts producing those kinds of policies, investors will continue to shield their capital — or find other markets in which to invest it.

Update: King Banaian analyzes this and calls it regime uncertainty.  That’s an understatement, and as King notes, it doesn’t just apply to Obama.  Be sure to read it all.