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Withdrawal Symptoms: How Further Gov’t Assistance Could Hurt, Not Help Companies

I've been keeping a close eye on EBN's latest poll (see left side of this page) and find the result fascinating. As the number of respondents climbed from the low teens to more than one hundred in the last week, the verdict has remained largely the same: Only about 50 percent of respondents, it seems, still want further assistance from the Federal Reserve Bank.

Some business leaders have been blunt about it. “Our view is just kind of get out our way and let us do what we do,” Clay Jones, CEO of Rockwell Collins Inc. told {complink 7522|Thomson Reuters} as cited in a report titled “As they look to 2011, CEOs see more of the same.” “Companies are awash in cash so there's plenty of liquidity,” added Southwest Airlines' Gary Kelly. “We don't need more money.”

At EBN we were already aware the high-tech industry is sloshing around with more cash than companies can currently spend. (See: Cash Hoarders & the Confidence Crisis and Richest Tech Firms & the Challenge of Managing Huge Cash Hoards.) What's more surprising is that, despite continued signs of persistent economic weakness, many corporate executives now simply want to move ahead with the business of managing their operations rather than focus on, or depend on, additional stimulants government could inject into the economy to keep it growing.

There's a simple explanation for this. The involvement of government in commercial activities, outside of the traditional role of setting ground rules and enforcing them, has a tendency to disrupt and distort business conditions, making it difficult for companies and industries to plan future investment activities. Each time governments open the faucets to help the economy grow, businesses know they will enjoy the stimulating “high” and later suffer the pains of “withdrawal.” That's why, as commendable as it might be for government to want to stretch out its supportive hand to businesses, the best way for officials to help, at times, is to step out of the way.

Let's go back briefly in time for some evidence of the distortion government can introduce into normal corporate activities. Following the terrorist incidents of Sept. 9, 2001, the US government poured money into various segments of the economy, including the aviation industry, which was hit hard by a three-day grounding of commercial flights nationwide. The industry was already reeling from problems of its own making, and a round of consolidation was underway, to mop up excess capacity in the market.

The government's hefty $5 billion handout to the industry following the 9/11 disasters halted the consolidation temporarily but could only postpone its inevitability in a bloated market. One year or so later, it became obvious the industry had still not resolved its internal problems and that the consolidation must resume. That process is only now being wrapped up years later, with the merger of Continental Airlines and United Airlines. (For more on this subject see The Economic Effects of 9/11: A Retrospective Assessment and Another Airline Bailout? Just Say No!)

Sure, it can be argued that the assistance the US, EU, China, and Japan poured into the global economy following the financial and real estate market declines of the last years helped forestall a deeper and more distressing downturn, but officials also have to know when to let regular business activities resume and take away the training wheels. In the case of the high-tech sector, no amount of economic stimulus will help if buyers, whether corporate or consumers, have doubts about the future. The house-cleaning that has started at the personal and corporate levels must go on unimpeded and only then will real growth resume.

At the moment, what we have is a so-called helping hand that might be drowning us all in assistance. We can't know exactly what to plan for or how, as long as Big Brother keeps masking the big view of actual, fundamental demand.

8 comments on “Withdrawal Symptoms: How Further Gov’t Assistance Could Hurt, Not Help Companies

  1. AnalyzeThis
    October 29, 2010

    That's why, as commendable as it might be for government to want to stretch out its supportive hand to businesses, the best way for officials to help, at times, is to step out of the way.

    I agree. Like you say, at some point officials need to know when to take the training wheels off.

    There are also political issues at play here. I believe there is much less support for economic stimulus programs these days. In addition, if you're trying to increase confidence regarding the economy in general — especially in regards to consumer spending — I don't see how enacting new stimulus programs will help.

    I think the “our view is just kind of get out our way and let us do what we do” quote is an opinion shared by many business leaders, and I agree with that philosophy as well.

    Let's just deal with the current economic reality and move forward. Taking those training wheels off may be scary for some, but in time we'll wonder why we even needed them in the first place.

  2. bolaji ojo
    October 29, 2010

    Dennis, So how do we explain the 50% plus of people who still want some form of stimulus? I know 37% say “we've had enough” and another 12% are saying “don't know” but a majority still wants some form of government assistance for the economy. I am trying to understand the thinking of the group that is still supporting a form of bail out. At this moment, most business executives don't seem interested in government bailout-fueled recovery because of the issues I discussed in the blog. It would be interesting, on the other hand, to identify the demography of those who still want further stimulus.

  3. AnalyzeThis
    October 29, 2010

    Dennis, So how do we explain the 50% plus of people who still want some form of stimulus?

    I'm not sure! Perhaps it would be helpful to hear from some people who voted “yes,” to the poll?

    I was curious too and after doing a bit of googling I found some recent opinions from people who think there should be a second stimulus plan.

    One article said that the reason we need another stimulus to force banks to be more liberal about loaning money out, I suppose in order to fund growth for small business.

    Another said that economists think there should be another stimulus focusing on infrastructure upgrades, because there are “two trillion or so dollars of unaddressed infrastructure needs.”

    While I agree that there are many worthwhile infrastructure projects out there, I'm not sure exactly how throwing tons of money at that now is a fix-all, exactly. One example, while it'd be great to have high-speed rail… it's really questionable how the execution of that would work out in reality: how long would it take to complete? How much would it cost? Would it ever be profitable?

    And perhaps my opinion of infrastructure projects is a bit skewed because I live in NYC, and the major subway expansion project here is still years away from completion and vastly over budget. And it will almost certainly never be completed as originally planned; they'll be lucky to have half of it up and running ten years from now. So even if some of these infrastructure projects did get funding, it's not as if that's a guarantee they will actually be completed.

    Again, I'm a little mystified as well. Hope to hear from some people with different opinions on this!

  4. Backorder
    October 31, 2010

    I think the reason why some people believe that another stimulus or continuation of govt. intervention in business would be a good idea, is because of what happened over the last one and a half years. The American Recovery and Reinvestment Act with about $800 B seemed to act only marginally and the unemployment in the US rised above 10%. In came demands for other stimuli, tax breaks for companies hiring and the Jobs Bill etc. and more dollars were spent by the govt. This gives an impression that things can be sorted out with stimulus every time, which appeals to people who know little about the economy and debt as a whole. I think, if the economic and fiscal and monetary policies are solid, no stimulus or little of it was required to lift out of the recession. Some of the developing countries, like India, are perfect examples.

  5. Ashu001
    November 1, 2010

    Bolaji,

     

    I agree entirely with what you are saying here in this post.

    “Sure, it can be argued that the assistance the US, EU, China, and Japan poured into the global economy following the financial and real estate market declines of the last years helped forestall a deeper and more distressing downturn, but officials also have to know when to let regular business activities resume and take away the training wheels. In the case of the high-tech sector, no amount of economic stimulus will help if buyers, whether corporate or consumers, have doubts about the future. The house-cleaning that has started at the personal and corporate levels must go on unimpeded and only then will real growth resume.

    At the moment, what we have is a so-called helping hand that might be drowning us all in assistance. We can't know exactly what to plan for or how, as long as Big Brother keeps masking the big view of actual, fundamental demand.

     

    My question is do you have a direct line to the White House who seem to be influenced almost exclusively by Mr Paul Krugman(and is begging and screaming for more and more and more stimulus)??

    Keep stimulating the economy until the US Dollar dies.That seems to be their theme,regardless of how badly Middle-Class Americans are really doing today,where Real world Inflation(stuff they eat everyday as well as Gasoline) are showing Double Digit price rises over the last one year alone.

    http://www.caseyresearch.com/editorial/3791?ppref=CRX175ED1010A

    This is very much against the fantasy world which the Federal Reserve economists and Paul Krugman are living in.Is it any wonder middle-class Americans are so angry and the anti-incumbency vote in tommorow's mid-terms is going to be so strong???

    Regards

    Ashish.

     

  6. Ariella
    November 1, 2010

    Hello, Ashish, nice to see you on this board.  If you are not the Ashish from IE, then you sound just like him. I wonder to what extend people are influenced by party politics when selecting their answer to the poll.  Generally, Democrats are more in favor of government spending and involvement, while Republicans take the opposing point of view.  That is something to bear in mind with Election Day tomorrow.

    Bolaji, I found your post very clear and convincing.  

  7. Ashu001
    November 1, 2010

    Hi Ariella,

    It is the same me…

    I hate putting myself in the bracket of either Republican or Democrat given that they are both EQUALLY responsible for the mess that we are in today in America.

    I kind of look at myself as a fan of Small Government and I am a big fan of Ron Paul and his thoughts.It hardly matters that he belongs to the Republican Party.     I am also a big fan of Chris Christie.

    But I also know there are enough clowns (who want more and more stimulus) in both parties…

    Hopefully the anti-incumbency vote in the mid-terms tommorow will be so strong so as to make the politicians in DC sit up and LISTEN to voters and their real world concerns rather than pander to clowns like Paul Krugman and Larry Summers.

    Regards

    Ashish.

  8. bolaji ojo
    November 1, 2010

    Ashish, Even Paul Krugman complains the Obama administration does not heed him. Krugman wants a larger intervention because he believes this is what the economy requires while it appears the government is just happy it got something through the U.S. Congress. I think business executives do not necessarily see this as a political issue, though. If I know someone is going to bail me out no matter what stupid stuff I get into, I am likely to be even more daring than I would be if I knew I was on my own. That's a fact of life. Businesses know, however, that real growth comes from the innovation they can come up with in products and business processes. The government is hardly the place to look for this. I am not against injecting some form of stimulus into the economy. I am just at this point beginning to wonder if it is the best way to energize companies.

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