As we enter this last week of September, America faces another looming government shutdown. The continuing resolution that currently funds the Federal government’s activities expires at 11:59 pm the evening of September 30 – the end of the last day of the government’s fiscal year. Republicans and Democrats have once again dug in to their partisan positions; creating an uncertainty regarding the operation of our government institutions, the funding of programs, and the paying of social security, veteran benefits and military salaries.
StrategyDriven has long maintained that politicians are primarily responsible for the great uncertainty hindering economic expansion and prosperity – and we believe history supports our assertion. The following video is that of a lecture made by Nobel Laureate and Economist Milton Friedman. In his discussion, Dr. Friedman reveals how the government, and in particular the Federal Reserve, was largely responsible for the Great Depression. He goes on to illustrate how Federal Reserve actions also caused the hyper inflation experienced in the late 1970s.
The purpose of this editorial is not to suggest a specific course of action. Instead it’s purpose is to suggest a need to closely monitor the government’s fiscal policies and to draw from historical perspectives how those policies may impact our economy and your business’s future.
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A Republican controlled House of Representatives, a Democrat controlled Senate and White House – a divided government. And if to make matters more complicated, the Republican Party itself is dominated by two very different groups; the first and larger being the Traditional Republicans and the second being the fiscally conservative Tea Party Republicans. Could ‘getting to yes’ be any more difficult?
The recent debt ceiling debate illustrated the vastly different philosophies of these three dominant groups within our government and revealed to us a fundamental negotiation rule – one that we often forget, one that we should be much more diligent in recognizing when negotiating ourselves. This rule: identify the other party’s best alternative to a negotiated agreement.
Let’s consider the recent debt ceiling debate…
Common among all three parties was the desire to prevent the United States government from defaulting on its debt obligations. This particular desire was clearly a moot point. The Federal Government takes in approximately $200 billion per month, an amount far greater than that needed to service its debt. The only reason a default might have occurred would have been that the President and Treasury Secretary would have chose to pay out on the government’s other monthly expenditures ahead of the debt service. This was believed to be highly unlikely. Thus, none of the three parties needed to be truly concerned about a debt default.
The second objective of all three parties was the avoidance of a credit rating downgrade. This particular outcome was a real possibility and in hindsight actually occurred. At the time (prior to the actual downgrade), the threat of a credit downgrade forced all three parties to the negotiating table. However, how to deal with the threat of a downgrade was represented a vastly different position taken by all three groups. More to come on this point in a moment…
The third common outcome desired by all the parties was for the United States Government to meet its financial obligations to military service members, veterans, and the elderly by way of making compensation, benefits, and social security payments. Once again, the United States Government receives enough monthly tax revenues to meet these and its debt service obligations making this another moot point.
The fourth belief shared by the three parties is that an expanding economy is the ultimate solution for increasing government tax revenues and more closely balancing the government’s income with its expenditures. How to achieve this economic growth is the key difference between the parties and forms the basis of the debt ceiling negotiations.
Let’s now examine those differences…
The Democrats: The Democrat Party, in general, believes that government intervention is required to grow the economy, to create jobs. Their focus is on job creation through the building of new and refurbishment of existing infrastructures. Furthermore, Democrats believe that by providing funds to the less fortunate, that these individuals will more greatly participate in the marketplace which in-turn will foster greater economic activity and growth. Democrats feel that given the depressed economy, those millionaires and billionaires – defined as individuals earning wages more than $200,000 or married couples earning more than $250,000 per year – should pay more in taxes to enable their prescribed government spending. This increase in tax revenue derived from this group would be achieved through the elimination of existing tax deductions and an increase in these individuals’ tax rate. Lastly, Democrats wish to heighten marketplace regulation to ‘protect’ their defined middle and low income wage earners.
The Republicans: The Republican Party, likewise, want to grow the economy. However, they believe that taxation and marketplace regulation should be reduced in order to lower the burdens and risks presented to business owners that will, in theory, spark increased economic activity and growth. Furthermore, Republicans believe in lower individual taxes as a mechanism for enabling citizens to retain more of their income which would then be spent within the marketplace and bolster economic activity. They believe that this reduction in government tax revenues should be offset by some modest reductions in Federally funded programs and the restructuring of others. Republicans are not calling for an immediate balancing of the Federal Government’s budget but rather believe their deficit spending will eventually be offset by the increased revenues received from a growing economy some number of years in the future.
The Tea Party: The Tea Party, in principle, shares economic philosophy of the Republicans. The difference, however, is that Tea Party members believe that the government should live within its means now, not many years into the future. Subsequently, the Tea Party wants to cut government spending, primarily through institutional downsizing, to a far greater extent than Traditional Republicans. They believe economic growth is best achieved through a balanced government budget in the immediate-term, not with the promise of a balanced budget some years out.
Considering the desired results of the three parties negotiating over the debt ceiling increase, we can see that there is, in fact, a lot these groups have in common. The negotiations, therefore, center on the approach to achieving these goals.
Now, let’s examine the best alternative to a negotiated settlement. If the parties did not come together on a compromise position that would garner enough votes to pass in both the House and the Senate as well as receiving the President’s signature, the Federal Government would hit its debt ceiling and have its spending limited to that equal to its monthly tax revenues. This would force the government to prioritize its spending and essentially achieve a balanced budget. Additionally, we find that the government could cover all of the commonly desired program funding, namely the service of debt, payment of military salaries, provision of veterans’ benefits, and issuing of Social Security checks. Therefore, all of the commonly desired could be met leaving only the approach to be negotiated.
Considering the desired approach of the three negotiating parties, we find that the Tea Party’s demands in this area would have also been satisfied with Traditional Republicans being partially satisfied and Democrats receiving none of what they desired. Thus, the best alternative to a negotiated solution met the Tea Party members’ demands enabling them to firmly resist any solution not in line with their wishes. This made the Tea Party the most powerful, if not the smallest in number, negotiator at the table. Likewise, Traditional Republicans, the second smallest group, was in a more powerful position than the Democrats who held the greatest control over the Federal Government.
StrategyDriven Recommended Practices
This best alternative to a negotiated solution example highlights the power held by each party and helps explain why the negotiations ended as they did… with no tax increases and an equal value in budget cuts to the amount of debt ceiling increase. It also illustrates several practices StrategyDriven leaders should take when negotiating with other parties:
Define your best alternative to a negotiated solution and its acceptance to your organization.
Identify the best alternative to a negotiated solution of those you are negotiating with including the acceptance of that solution to their organization.
Outside of the negotiations, work to improve your best alternative to a negotiated solution.
Outside of the negotiations, identify those factors that may worsen your counterpart’s best alternative to a negotiated solution and consider taking ethical action to worsen their position.
Reasonably and aggressively negotiate with your counterparts while leveraging this best alternative to a negotiated solution information.
Additional Information
For additional information on determining the best alternative to a negotiated solution and other negotiation best practices, StrategyDriven Contributors recommend Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, William L. Ury, and Bruce Patton.
Final Request…
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Why is it that the American economic recovery is moving so slowly and new job creation is low? PBS NewsHour Economics Correspondent Paul Solman takes a critical look at whether America is experiencing an innovation lull, as George Mason University economist Tyler Cowen claims in his new book, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better. Solman spoke with Cowen and to those who say he couldn’t be more wrong – that the nation is brimming with new innovations that will advance our quality of life.
Cowen claims we’ve picked all the ‘low-hanging fruit’ and that current innovations do not produce the same kind of new jobs, advancements and efficiencies in our everyday lives as, say, the washing machine or stove. “This is our central economic problem today,” he said.
Not so, counters MIT’s Andrew McAfee, Erik Brynjolfsson and others, who insist that the advancements in innovation and technology are making big contributions to markets, businesses, and job functions. “If anything, the rate of change is not slowing down,” Brynjolfsson told Solman. “It’s increasing.”
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The extension of Bush-era tax breaks, healthcare reform and an increase in the rate of hiring in November suggests that the economy is gaining momentum. Unfortunately, few expect a change in the 9.6 percent unemployment rate. Yet despite this constant, many economists are optimistic about the Nation’s hiring forecast.
Two pillars of the economy – jobs and consumer spending – appear to be on the upswing. Factories are producing, auto sales are rising and new businesses pop up daily. Also, applications for initial unemployment benefits hit a two year low in November and 151,000 new jobs were created.
Job creation does not necessarily correlate with lowering the unemployment rate. According to analysts, the economy would need to consistently add 200,000-300,000 jobs a month to make a noticeable dent in the unemployment rate. Despite the job creation shortfall, the economy is moving in the right direction. Economists predict that the United States economy will grow at a three percent pace in the October-December quarter, up from a two and a half percent growth rate in the July-September quarter.
Will the steady increase in the economy translate into a positive hiring forecast? The results are mixed. The increase in private sector jobs suggests that retail and factory jobs will continue to climb. The same cannot be said for small businesses, mainly due to uncertain tax future many businesses face.
The issue at the heart of this uncertainty involves limited access to capital at a time when banks are reluctant to lend. Taxes further hinder these businesses’ ability to produce. If a business owner has to pay higher taxes on net earnings, the business is much less available to do other things needed to contribute to the economy such as hire employees, buy equipment and expand. Many small business owners seek long term tax strategies rather than year-by-year decisions that make planning for the future of their business impossible.
Recent healthcare reform is also adding to economic uncertainty for small businesses. Many of the provisions of the sweeping health-care bill passed by the House of Representatives in March won’t kick in until 2014, however these provisions spell big changes for small businesses.
By no later than 2014, states will have to set up Small Business Health Options Programs, or “SHOP Exchanges,” where small businesses will be able to pool together to buy insurance. Businesses with more than 50 employees will be required to either offer healthcare coverage or pay a penalty of $750 a year per full-time worker. Part-time employees would be counted toward the 50-employee minimum on pro-rated basis based on hours worked, bringing more small businesses into the group required to provide coverage.
This clearly effects hiring as many small businesses have been able to exclude part time employees from healthcare benefits and from its total number of employees. However, the proposed reforms could help spur entrepreneurial activity by increasing the incentives for talented Americans to launch their own companies, and could increase the pool of workers willing to work at small firms. Further, successful reform would reduce the phenomenon of ‘job lock,’ in which workers are reluctant to leave a job with employer-sponsored health insurance out of fear that they will not be able to find affordable coverage.
As both the future of business tax as well as healthcare reform are uncertain, the countries hiring forecast is foggy. However, both private sector jobs and consumer spending have risen creating an optimistic attitude among economic analysts for our country’s economic future. New healthcare laws also suggest a possible increase in entrepreneurial activity, thus creating more jobs, hopefully creating a positive hiring trend.
About the Author
As CEO of MyCorporation Business Services, Inc. (www.MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for all consumers. With experience in the field of corporate and intellectual property law, Deborah provides insightful commentary on the benefits, barriers and who should consider incorporation and trademark registration.
Deborah joined MyCorporation in 2003 after serving as outside general counsel for 5 years. She received her Juris Doctor and Masters in Business Administration degrees from Pepperdine University and is a member of the American Bar Association.
Deborah served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the area of corporate and intellectual property law. Because of her extensive knowledge, Deborah has long served as a speaker and panelist on legal issues affecting new to the world and growing businesses.
With the elections over and unemployment reaching 9.8 percent, we once again see politics shifting into high gear as the posturing and power grabs in Washington D.C. continue to prevent the creation of marketplace certainty needed before business leaders begin to create new jobs. In our closing commentary for 2010, Perspectives reflects on the several pending and enacted pieces of legislation that continue to plague the job market and have the potential to do so for the foreseeable future.
Expiration of the Bush Tax Cuts – regardless of your position on whether the Bush tax cuts should be allowed to expire or extended in part or in whole, two things are certain – our leaders are in a deadlock split over what action to take and without action the tax rate for all individuals will rise on January 1, 2011. This uncertainty is clearly unnecessary and should have been avoided. Democrats bent of pushing through healthcare, financial, and carbon reforms should have moved on this issue as a priority as it is the only one of these issues with a deadline; though all are bad for the U.S. economy. According to Deloitte Tax LLP, the following impacts will be realized if the Bush Tax Cuts are allowed to expire:
A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011
The same family making $100,000 a year would see its taxes rise by $4,500
Wealthier families of four making $500,000 a year would pay $10,800 more in taxes
A family making $1 million a year would get a tax increase of $53,2001
Net Result: higher taxes reduce disposable income; resulting in less spending and slower economic growth
Healthcare Reform – with several hundred new regulations and standards not yet defined, the cost of Obamacare remains unknown. However, as Perspectives addressed in You Don’t Get Something for Nothing, the added benefit requirements mandated by the Obamacare legislation have to be paid for by someone; whether those payers are businesses, individuals, or some combination of the two. In fact, the Wall Street Journal reported that healthcare insurers Aetna, some BlueCross Blue Shield plans and other smaller carriers are seeking premium increase between 1 – 9 percent to cover the extra benefits mandated by healthcare reform.2
A report by Senators Coburn M.D. (R-OK) and Barrasso M.D. (R-WY) finds Obamacare as having the following impacts:
New penalties and costs discourages the hiring of American employees
The law will eliminate about 800,000 jobs; possibly more
Real income will be depressed for millions of Americans
Employers are struggling with rising health care costs that are increasing more quickly because of the new law3
Net Result: labor costs increase and/or disposable incomes decrease; resulting in fewer jobs as employers hire less and outsource more and reduced consumer spending – both driving slower, if not negative, economic growth
No Federal Budget – by law, the Congress of the United States is to develop and pass a budget for the coming fiscal year by April 15. Not unlike most years since the law was enacted, Congress has failed to meet this obligation; thereby failing to signal market participants as to how and when the economy’s single largest consumer will spend its money.
Net Result: uncertainty as to the government’s coming year spending heightens employer risk to maintaining and expanding business operations; depressing workforce retention and expansion as well as research and development and other growth projects.
Carbon Legislation – passed by the U.S. House of Representatives and stalled in the Senate, carbon legislation that would assign fees to carbon producing business activities, namely energy generation, looms as an uncertain and daunting risk of increased energy cost. If passed, this legislation would increase energy costs for all consumers; raising personal and business energy consumption expenditures.
A study by the Heritage Foundation of carbon legislation proposed by Representatives Waxman (D-CA) and Markey (D-MA) revealed the following potential economic impacts of this legislation as being:
Elimination of 1,145,000 jobs on average, with peak year unemployment increases of over 2,479,000 jobs
Increased electric rates of 90 percent after adjusting for inflation
Heightened, inflation-adjusted gasoline prices by 58 percent
Raised residential natural gas prices by 55 percent
Increased energy bills for the average American family of $1,241 per year4
Net Result: increased energy costs will add to the costs of every product and services produced within the United States and increase residential heating, cooling, general living, and transportation costs; reducing consumer’s disposable income and subsequently their spending which will slow economic growth if not shrinking the overall economy.
StrategyDriven Recommended Practices
Individually any one of these items damages the U.S. economy; taken together, Perspectives believes they crush any hope for a near-term economic recovery and may even bring about the return of the economist defined recessionary conditions. The combination of these four unnecessary uncertainties results in:
prolonged high unemployment rates
sustained lower consumer spending
perpetuated hording of cash by individuals and businesses
continued slow economic growth with the possibility of reentering recessionary conditions
To protect ones company from these unnecessary risks, StrategyDriven recommends business leaders consider the following options:
Eliminating, streamlining, and outsourcing all processes and activities. The goal is to reduce headcount in order to avoid the potential costs associated with the new healthcare legislation and reduce the energy needed to produce the company’s goods and services to avoid the impacts of the proposed carbon tax. Additionally, more efficient processes increase the organization’s supply flexibility in response to market demand allowing for a reduction in inventory levels. In the case of outsourcing, those functions not absolutely required to be performed within the United States should be transferred to overseas providers.
Increasing employment of temporary staff. The goal is to minimize the company’s commitment to a higher number of full-time staff members that necessarily brings with it the elevated entitlement costs associated with Obamacare. A clearly defined return on investment should be identified prior to hiring any additional full-time staff.
Relocating operations to another country not as heavily burdened with taxes and other mandates. The goal is to reduce non-value adding payments required by the government. Consideration must be given to other added costs such as transportation and importation taxes when evaluating whether or not to relocate.
Limiting production and inventory levels. The goal is to reduce labor and energy consumption to avoid costs while at the same time preparing for the probable decline in the demand for goods that would result in slower inventory turns and subsequently higher inventories and warehousing costs should current production rates be maintained.
Expanding the organization’s cash reserves. The goal is to prepare the company for the heightened expenses that will be incurred as a result of Obamacare and the potential carbon tax as well as the reduction in revenues that will likely result from the expiration of the Bush Tax Cuts.
Final Thought…
Perspectives acknowledges that our recommendations include provisions that would result in fewer American jobs. We believe these recommendations are sound.
Perspectives believes the Obama Administration and Democrat controlled Congress passage of Obamacare, desire to rescind portions of the Bush Tax Cuts, proposed carbon tax legislation, and failure to pass a Federal budget is devastatingly harmful to the American economy. We believe business leaders have a responsibility to their company’s shareholders to maximize their return on investment and that the legislative initiatives discussed drive leaders to transfer operations overseas. Therefore, it is our opinion that the Obama Administration and Democrat Congressional Leaders are culpable for the ongoing unnecessary uncertainty preventing real economic recovery.
As always, we’ve provided our perspective and hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.
Final Request…
The strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.
Thank you again for listening to the StrategyDriven Editorial Perspective podcast!
Sources
“Expiring tax cuts hit taxpayers at every level,” Stephen Ohlemacher, Associated Press, September 16, 2010
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As we enter this last week of September, America faces another looming government shutdown. The continuing resolution that currently funds the Federal government’s activities expires at 11:59 pm the evening of September 30 – the end of the last day of the government’s fiscal year. Republicans and Democrats have once again dug in to their partisan positions; creating an uncertainty regarding the operation of our government institutions, the funding of programs, and the paying of social security, veteran benefits and military salaries.
by Roger Fisher, William L. Ury, and Bruce Patton.
. Solman spoke with Cowen and to those who say he couldn’t be more wrong – that the nation is brimming with new innovations that will advance our quality of life.
As CEO of MyCorporation Business Services, Inc. (
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