Felix Salmon did an admirable takedown of a “CEOs [sic] Deficit Manifesto” in the Wall Street Journal. It’s yet another entry in the long-running, dishonest campaign funded by billionaire Pete Peterson to pretend that all right thinking people (and of course CEOs believe they have the right to think for everybody else) should be all in favor of trashing the middle class and the economy through misguided deficit cutting. Salmon could have gone further in his critique, but the letter was so lame he didn’t need to, and the issues he raised would be plenty persuasive to most Americans.
Felix correctly styled the letter as “self serving” and described the idea of deficit cutting now as “ridiculous”. Debt to GDP is falling and the economy would tank if we were to reduce the Federal deficit while the economy is deleveraging. But these corporate leaders tried overegging the pudding by depicting the current federal debt levels as a security threat. One aspect of this debate that doesn’t get the attention that it deserves is that the deficit hawks keep claiming that the US is about to hit a 90% federal debt to GDP ratio, which Carmen Reinhart and Ken Rogoff claim is correlated with lower economic growth. Aside from the fact that this study is questionable (it mixes gold standard countries with fiat currency countries, plus correlation is not causation; in many cases, a major financial crisis produced both the low growth and an increase in debt levels, meaning its spurious to treat debt as a driver of lower growth), the US is actually not at any imminent risk of breaching this level. The CBO, astonishingly, has kept publishing reports that project gross debt levels, not net debt. This 2010 analysis by Rob Johnson and Tom Ferguson shows what a large adjustment netting out the government’s financial assets makes (click to enlarge):
Our Table 1 displays the magnitude of the diðerence. The first two columns compare the CBO baseline budget projection, as slightly revised in August 2010, with the revised figures taking account of the U.S. government’s financial assets.69 The third column displays the diðerences between the first two, which are substantial. The fourth column shows the CBO’s March estimates of the impact of the President’s program; these figures also should be adjusted by the amount of the government’s financial assets that the CBO at last recognizes. This can be approximated by simply marking down each entry in the estimates of the President’s budget by the corresponding figure in column 3. Enacting the President’s fiscal program would not in fact push the US across the mythical 90% threshold. In 2020 the U.S. would be operating within the range of debt ratios at which other large countries function successfully right now.
The authors contacted the CBO about their analysis. The CBO has acknowledged it is correct but refuses to change its reporting. So much for the vaunted independence of the CBO.
Salmon also makes a point near and dear to our heart:
Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.
Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is — rightly — easing that pain right now. And this is the gratitude it gets in return!
The situation is even worse than he suggests. It isn’t just that corporations aren’t investing now; they weren’t investing in the last expansion. The corporate sector in aggregate was disinvesting and we first took note of this in 2005!.
And big companies have been the biggest sinners. Notice how Obama and Romney both fawned over small businesses? They’ve been the drivers of job growth for the last decade, while the biggest companies have shed workers. In fact, since the 1980s, mediums sized and smaller companies have gained in share of assets, employment, and revenues relative to the biggest companies (and that’s before you factor in the role that acquisitions, as opposed to organic growth, have played for them). So these big companies, on the whole, are losers relative to the rest of the corporate sectors, yet they have the temerity to preach to the rest of us as if they speak from genuine accomplishment, as opposed to having been lucky or politically savvy enough to assume the leadership of companies with well established franchises. And of course, the other factor working to their advantage is that political influence can be bought for remarkably little.
If you look at the 80 CEOs that signed this list, you don’t see a single Silicon Valley or tech darling (well, there is Microsoft, but they are too long in the tooth to be darlings, and one small cap tech company, Investment Technology Group, but it’s on Motley Fool’s current list of 10 Worst Small Cap CEOs, so it proves our point). There’s a complete absence of the sort of companies that America likes to hold up as its winners.
Instead, the list is heavy with finance, including private equity firms, and mature industries. A sampling:
Bank of America
Clayton & Dubilier (major LBO firm)
Deloitte Federal Government Services
Dow Chemical Company
General Atlantic, LLC (major LBO firm)
General Electric Company
Goldman, Sachs & Co.
HarbourVest Partners, LLC
JPMorgan Chase & Co.
Knight Capital Group, Inc.
Pershing Square Capital Management, L.P.
Promontory Financial Group
Silver Lake Partners (a major LBO firm)
Time Warner Cable Inc.
Verizon Communications Inc.
Now having said that, some of the members of the list are solid, well run companies, such as Deere, Caterpillar, M&T Bank, Marriott. But this is not a list of big company outperformers. Plus you have the hypocrisy of tax-dodge General Electric and the beneficiary-of-NIH-basic-research Merck happy to impose the costs of the bennies they’ve gotten on ordinary Americans. And you’ve also got some CEOs from much smaller service/not for profits players who are clearly there to curry favor, such as the head of PR firm Weber Shandwick Worldwide, leadership consultant Interaction Associates, and our favorite banking industry brown-nose, Kathryn Wylde of the New York City Partnership.
The good news is that the letter appears to have landed like a lead balloon with the audience most likely to be receptive, namely WSJ readers themselves. It got a mere 5 comments. But the bad news is that this letter is the least important aspect of this CEO effort to get Medicare and Social Security “reforms” meaning cuts, through (yes, they make noises about other “responsible” actions they’d like to see happen, but this one is the one they are most keen to get done).
Ordinary Americans have complacent as this plan to gore their ox has moved relentlessly forward. But they’ve been sold on the false idea that deficit cuts are necessary and salutary. Central bankers are perversely imposing costs on savers through ZIRP as a poor second best for greater spending. As Felix concludes:
In any case, both the global economy and the US economy are very fragile right now, and every central banker in the world is begging for help from fiscal policymakers. Which is to say, higher deficits, not lower ones. The problem is that Pete Peterson seems to be much more effective at corralling CEOs than Ben Bernanke is. More’s the pity.