The Competitive Edge: Playing Chicken with Our Economic Future

Policymakers in the nation's capital are often, justifiably, accused of enacting well-intended policies that have significant unintended economic consequences.

But what can you say about politicians who intentionally set the economy on a collision course with recession? In August 2011, Congress—stalemated on a process for stabilizing the national debt as a share of GDP and with little real leadership from the White House— kicked the can down the road again by passing the Budget Control Act of 2011. It was thought the specter of massive automatic tax hikes and defense-spending cuts on Jan. 1, 2013, would motivate lawmakers to negotiate a bipartisan resolution to fix the long-term fiscal-deficit problem. So perilous was the consequence of inaction—equivalent to about 4% of GDP in calendar-year 2013—that Federal Reserve Chairman Ben Bernanke dubbed it the "fiscal cliff."

Such a risky strategy might have worked with a legislative body with more political courage and effective leadership. But not with this Congress.

United They Stand

It takes a lot to unite the American business community. But the thought of elected officials playing a game of chicken with America's economic future has done the trick. In particular, American manufacturers—already threatened by the sovereign-debt crisis in Europe, unremitting sluggish growth in Japan and a sputtering recovery in China—have become increasingly concerned about the prospects for a government-instigated sharp contraction in the first half of 2013.

A recent MAPI survey asked senior finance executives in manufacturing how they are responding to the potential fiscal cliff. The findings: The vast majority are clearly nervous, even though responding firms only derive 10% or less of their revenue from defense spending—a reflection of the business community's general anxiety.

Among the results of the survey, contained in MAPI's quarterly "Survey on the Business Outlook," we found:

83% of responding finance executives say Congress's inability to act will have anywhere from a moderately negative to very negative impact on their companies.
Many companies already have started taking action in preparation for some first-quarter contraction in 2013. One-third of them have delayed hiring because of their concerns, and 17% have scaled back or put on hold planned capital investments.
16% said they were considering sending Worker Adjustment and Retraining Notification Act (WARN) notices to a portion of their employees in anticipation of layoffs.

Sitting on the Sidelines

Some of the significant slowdown in manufacturing over the past two quarters—from an annual rate of 10% growth in the first quarter to 1% growth in the second quarter and a decline of 0.9% growth in the third—is surely attributable to firms sitting on the sidelines. In fact, a recent report by the National Association of Manufacturers estimates that by the end of 2012, the finger pointing and political stalemate on this issue already will have cost us 0.6% of our GDP—before we have actually gone over the cliff. That same report projects that the recession and slow recovery from going over the fiscal cliff would reduce real GDP by more than 12% over the next three years from the level it would have reached without the negative fiscal-cliff event.

In the world of business, nothing is worse than legislative or regulatory action (or more typically, inaction) that makes it challenging to formulate near- and long-term plans. Vacillation and stalemate on the part of policymakers makes business decision-making a crapshoot. As Geoff Colvin, senior editor of Fortune, put it recently, "A hyperpolarized Congress is an uncertainty-generating machine."

Tough Times for Manufacturers

U.S. manufacturers have seen their share of improbable events since the turn of the millennium. They've experienced the two most significant industrial downturns since the Great Depression—manufacturing production contracting 7% in the 2001 recession compared with 0.3% for the overall economy, and manufacturing production falling 21% in the Great Recession compared with 5% GDP decline for the overall economy. Manufacturers have lost fully a third of their workforce since 2000. They've even watched other countries lower their corporate tax rates (Japan being the most recent) while the U.S. maintained the highest statutory rate in the developed world.

But no manufacturers ever would have predicted their own politicians would throw them under the bus in order to make a political statement. Still, that's what leaders of both parties have been overheard discussing. Sen. Patty Murray, D-Wash., has been quoted as saying that if Democrats couldn't get what she considered a "good deal," then they would "absolutely continue this debate into 2013." Sen. Jim DeMint, R-S.C., has said, "I'm not willing to make bad deals in a lame duck."

Here's hoping leaders of both parties "chicken out" and come to terms before they hurt someone—like the American business community.

For more on the fiscal cliff and its impact on manufacturing, click here.