After Fiscal Cliff Deal, 'Uncertainty' Still Bedevils Business

January 4, 2013

US News & World Report

DANIELLE KURTZLEBEN

The business community isn't exactly patting Congress on the back for reaching a deal on the fiscal cliff. Rather than giving lawmakers a hearty thanks and a congratulatory handshake, business leaders seem to have copped the sort of attitude you might have once you've gotten the neighborhood kids to clear the toilet paper they left all over your lawn overnight: Clean up the mess, and don't let it happen again, you punks.

The new deal that lawmakers struck to avoid the cliff has cleaned up some of the mess, most notably by making permanent several tax cuts that have been "temporary" since early this decade. But the economic landscape is still littered with uncertainty—that nebulous concept that business owners have for months blamed for keeping them from investing in equipment and hiring more workers. This uncertainty is often cited as an explanation as to why businesses are sitting on nearly $2 trillion in cash, and Fed Chair Ben Bernanke has blamed it for stifling investment.

Given the current murky political outlook, business leaders indicate that they are still on edge, despite the new deal.

"This package averts a crisis, but it doesn't solve the underlying problems in the medium and longer term," says Tim Pawlenty, a former Minnesota governor who is CEO of the Financial Services Roundtable, an organization representing the finance industry. "Markets appreciate stable policies and environments, because if you're going to deploy capital, you want to know the rules of the road for more than 30 days at a time."

Pawlenty's worries include an upcoming squabble over raising the debt ceiling—and the credit downgrade it might bring. Automatic spending cuts that were a key part of the fiscal cliff have also been delayed until March. In addition, he points to the need for reforms to entitlement programs like Social Security to deal with unsustainable deficits. The nation's financiers aren't alone in their concerns.

"It's hard to view this [deal] as a standalone. It's part of a larger problem and larger issues that we need to address," says Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers.

The U.S. Chamber of Commerce, the world's largest business organization, also voiced its displeasure. "[W]hen it comes to cutting spending and controlling the national debt, this deal does not even begin to address the serious fiscal challenges we face," said President and CEO Thomas Donohue in a statement this week.

Which is not to say that the fiscal cliff deal was entirely unproductive. Congress members proved that, albeit with much kicking and screaming, they can come to agreement on avoiding a potential economic catastrophe. And they also managed to end some tax uncertainty, permanently fixing the alternative minimum tax and extending Bush-era tax cuts for most Americans.

That's a significant step forward. For decades, lawmakers have had to regularly "patch" the AMT; this deal eliminates that problem by indexing the tax to inflation. Businesses also now know for sure how much to withhold from employees' paychecks. And for companies like S corporations, whose shareholders are taxed at individual rates, tax levels are now set.

Despite all this talk of uncertainty, job growth has managed to hang on, albeit at a sluggish pace. The last six jobs reports from the Labor Department have shown an average of around 140,000 new jobs per month, barely over the rate that some economists say keeps pace with population growth. However, nonresidential fixed investment—business investment in things like equipment and buildings—slowed considerably over the course of 2012.

Achieving a landscape where businesses feel more comfortable increasing their spending may be an incremental matter, says Pawlenty, as lawmakers slowly move issues off their plates, starting with the debt ceiling and sequestration, then potentially moving on to tax reform, entitlement reform, and cutting deficits.

Even with all of these challenges in the future, one might argue that businesses just need to, in technical terms, suck it up. Isn't making investments that may not be profitable an essential facet of capitalism? Exactly how much "certainty" do companies want?

Coming up with an objective measure of exactly when the landscape will be solid enough for businesses to ramp up investing again may be impossible. Rather, says one expert, the risk environment for any investment must simply slip below a certain unnamed threshold.

"There's different types of uncertainty," says Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. In recent months, he explains, businesses and investors have mostly only seen negative uncertainty. "It's not the good uncertainty where there's the equal possibility of a pleasant surprise. It just seems like it could be OK or bad. It's no longer the case that it could be good or bad."

The deficit is one example of this. Jacobsen explains that, according to one economic theory, governments running deficits essentially "signal" future tax increases, as all of that excess spending has to be paid for at some point. The expectation of higher taxes can cause businesses and individuals to pull back. Coleman agrees that constant deficits have made manufacturers leery of investing.

"Companies don't make investment decisions on a dime. So if they see an unstable fiscal situation continuing ad infinitum, it's going to be a concern to them," says Coleman.

Still, there is no set threshold for when the deficit will be low enough to make businesses empty their coffers a bit.

It's also important to remember that Washington is not the only force acting upon business sentiment. If the economy were growing at 4 percent, the fiscal cliff discussion would likely have been much less panicked, as the threat to a more resilient economy would have been smaller. Likewise, says Jacobsen, regardless of how conciliatory lawmakers are feeling this year, businesses will look to their balance sheets in deciding their next moves.

"What I think will get businesses to spend money is when they see revenues increasing," he says. "It's only when there's that prospective growth that it's going to actually entice them to put that money to work."

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