It's more than just a fairy tale.
The Business Roundtable on Wednesday said chief executives expect to spend and hire less over the next six months than they previously planned. The group’s economic outlook index fell to 89.1 in the second quarter from 96.9 in the first quarter — the first decline in nine months.
Top executives are increasingly worried about potentially big changes in U.S. tax and spending policies in 2013— the so-called fiscal cliff — as well as the spillover effects of the financial crisis in Europe.
The Roundtable’s chairman, Boeing (US:BA) CEO Jim McNerney, said all the uncertainty is causing “paralysis” among businesses as the end of the year approaches. Some are even cutting jobs until they have a clearer idea of how the fiscal cliff and European crisis will be resolved.
“”We are being forced to trim employment in some places. A number of companies are doing that,” said McNerney, who is also a member of President Obama’s council on jobs...
McNerney say it’s harder for companies to make plans for hiring and capital spending unless they know what the tax rates will be. On the spending side, defense firms could be at risk since the cuts would largely take place in the military’s budget.
Paul Krugman has steadfastly maintained that talk of austerity during a recession is the real problem, and business confidence is a non-issue in today's economic climate.
What to make of this news report, then? Top CEOs of American companies are warning that their spending and hiring decisions are affected by future changes to tax and fiscal policies. If this isn't the confidence fairy working its evil magic, what else is it?
Of course, maybe the CEOs of Walmart, GE, AT&T, and ExxonMobil don't possess the economic wisdom of Paul Krugman. Maybe their statements are just a crass smokescreen over the corporate policies they'd choose anyway, and all this talk of "fiscal cliffs" is just a convenient excuse. Maybe.
The federal government spent $3.2 trillion in 2009, $3.55 trillion in 2010, and $3.83 trillion in 2011 (compared to a miserly $2.7 trillion in 2006). In other news, today the Fed predicts unemployment will remain above 8% for the rest of the year. But maybe we just need to stimulate aggregate demand a little bit more.
Government spending rose 7% between 2010 and 2011 but the economy grew at about a third of that rate. Either the multiplier is a myth, or businesses/individuals are offsetting their spending now to account for higher tax rates implied by current spending (the Ricardian Equivalence argument)... or both.
So who are you going to trust: the Keynesians, or your own lying eyes?