A question was posed last week asking why business wasn't investing more to create jobs.
The short answer is the lack of investments is on hold for the same reason that you can't find any good returns for your savings. It's all because of economic uncertainty.
On the investment side, business needs to fund pension plans. Recently I wrote that pensions were becoming underfunded because of artificially low interest rates authorized by the Federal Reserve Board. This reduced the long-term bond rates upon which is based the discount rate affecting pensions. So we have a federally set rate affecting the rules of the federal Pension Guarantee Board impacting how funding of pensions is determined. The PGB says that pension funding has become inadequate to meet future payouts. The only way out is to pony up more cash to keep the pensions solvent according to federal guidelines.
The result is business is investing billions more than normal in pension plans which were deemed solvent as recently as 3 1/2 years ago.
What the heck? Your IRAs and 401(k)s are not earning anywhere near what they were then either due to the artificially low interest rates established by the feds. Earning a historically reasonable rate of return on assets is very difficult is these circumstances and business is just as hesitant to invest as are you.
Investors of all stripes want to have a stable environment in which to place their money. Uncertainty constrains investment because it adds to the overall risk of any long term purchase of property, plant, and equipment. In any investment there is a chance that you might lose your money. Really high-risk situations with very high but improbable returns are called gambling.
Business and investors like low risk investments. At the board of directors level, high risk options are called "Bet the Company strategies." Generally, you will see these strategies put in place in the corporate world when investment bankers hold large stakes in corporations. This type of investing is the exception, not the rule in boardrooms worldwide.
The government promulgates rules at a stupendous rate adding to the risk in decision-making. In the current administration alone there have been 60,000 new or revised rules made with the force of law. Just one of this stunning number of changes killed the proposed power plant in Presque Isle County and cost rate payers in northern Michigan tens of millions of dollars in the expense of the planning of the facility that now cannot be built and cannot be recovered except through electric rates. That's some risk.
On the state level, the legislature has passed a personal property exemption for all businesses in Michigan except electric utilities but the bill languishes on the governor's desk and is yet unsigned into law. There is little incentive to invest until you know what the tax treatment of the assets purchased will be. This adds to the uncertainty.
For farms and other family owned businesses the estate tax is a big deal. There has been no action on a comprehensive tax bill leading to vast uncertainty about what might be proposed, let alone enacted. It's the same with income tax reform; until you know the rules, it's hard to play the game. The U.S. Senate hasn't passed a budget in years.
We are entering recession again, yet legislators are not there but rather on the campaign trail. The fiscal cliff is looming and yet we are dithering about who is addressing the deficit. Actually, there is no one presently holding elected office who is addressing the deficit, so we just ignore the fact that our national debt levels are approaching those of the near bankrupt countries of Europe.
Locally, things aren't much more certain. ATI and Besser still are at employment levels far less that four years ago and many once familiar names of local businesses are gone. The recall election adds to the uncertainty surrounding the city and shuttered motel operations make one wonder about the viability of tourism as an industry for this area.
The question about business investment and the subsequent job creation is valid, but the job killing uncertainty created by governments of all levels is a pervasive exterminator of long term investment.
Next Week: Where do we go from here?