Five years ago I began my first "real" job, but the experience came with its hurdles. Since I was only eleven at the time, I could not draw payroll. Instead, my boss offered to pay me with U.S. Treasury bonds. Did I ever feel grown up! Researching interest rates became an obsession; I thought fondly (and frequently) of my "investment portfolio". But then the stock market crashed. As various crises rattled the world, I gradually saved more and invested less. The more uncertain the future appeared, the more cautious I grew.
The same phenomenon is occurring in the business community. According to The New York Times, "Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964." Although businesses have the capital to invest, they are choosing caution over risk. As a result, the future looks bleak. America's unemployment rate rests at 9.6%, and the Congressional Budget Office estimates that it will not fall below 8% before 2012. Moreover, in the last quarter, real GDP grew by a meager 1.7%. The question now is, how do we convince the private sector to move our economy forward?
In a word, the answer is, "patience". Today businesses face unprecedented levels of uncertainty, driving firms to hedge their bets. The New York Times reports that, "In a burst of rule-making, federal agencies have toughened or proposed new standards…. Over the last year, the Obama administration has pressed forward on hundreds of new mandates, while also stepping up enforcement of rules by increasing the ranks of inspectors and imposing higher fines for violations." Besides the expanded role of federal regulatory agencies, Congress has recently passed landmark bills—health care and financial reform—that will fundamentally change the corporate landscape.
Furthermore, the outcome of tomorrow night's midterm elections, the future of the Bush tax cuts and the alternative minimum tax, as well as the possibility of a resurrected cap and trade bill will alter firms' decisions. In addition to political and market volatility, the Congressional Budget Office warns that according to international experience, "Recoveries from recessions that begin with financial crises tend to be slower than average. Following such a crisis, it takes time for equity and asset markets to recover, for financial institutions to restore their capital bases, and for businesses to regain the confidence required to invest in new plant[s] and equipment."
But finally, here's the good news. Much of the uncertainty we see today will be better illuminated by at least the first quarter of next year. The midterms will be over. The Bush tax cut debate will be decided, if only for a time. The statistics on the economy will give us a better sense of direction. The effects of previous laws and the course of future legislation will be easier to judge. As long as we give the free market time to adjust to new realities and greater challenges, it will champion prosperity.