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Sunday, November 18, 2012

CEOs Warn U.S.: Avoid the “Fiscal Cliff”

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

The difference is that a downturn from exaggerated rhetoric on the public airwaves would not inevitable, even were sequestration to occur. Even the sequestration alone was not in itself inevitable as 2012 was coming to an end, as Congress and the president had ample opportunity go beyond posturing to avert the $500 million hit by reaching a deal on budget-cuts and revenue increases. Making matters perhaps worse, the corporate executives who were discussing their plans publically in November 2012 may have been depicting their intentionsoverly pessimistically in order to manipulate the contours of an eventual deal between Congress and the White House, or just to press the federal officials to get to a deal—anything. In other words, as laudable as it is to pressure elected representatives to work together for the good of the entire economy, advertising exaggerated corporate plans to do it could play into the self-fulfilling prophesy.

Bank of America CEO Brian Moynihan said at an investor conference in New York in November that uncertainty about U.S. tax and spending policies had already prevented many clients from investing in 2012. At a meeting of CEOs hosted by the Wall Street Journal, Mark Bertonini of the health insurance company, Aetna, said, “The American people are going to suffer, because we’ll lay them off.” Besides the fact that stoking fears as a means to manipulate public opinion and federal lawmakers is ethically problematic, the CEO’s claim might be exaggerated, or at least overly simplistic even as it is in line with the financial interest of an insurance company that would be negatively affected by the budget cuts to hospitals.

The Journal itself provides a reality-check in making the following observation: “To be sure, there is a difference between CEOs issuing warnings to influence a policy debate and actually making cuts. Companies juggle a range of factors when deciding whether to hire, fire or invest, and many say privately they are more influenced by broader shifts in technology and demand than the fiscal cliff.” Merely in using the term cliff, however, the Journal is unwittingly complicit in the game. About a week later, the Journal would blatantly state that for investors, the stakes   were high.

Bertonini’s claim of eventual layoffs could have very little to do with Aetna’s actual contingency plans—the claim being primarily to manipulate rather than inform. Even defense contractors and hospitals, which would be directly impacted by the sequestration (but also by a Congressional agreement, albeit less so), had probably already factored the possibility into their operations in 2012 so any further downturns in 2013 from the sequestration would probably be more muted than the cliff rhetoric would suggest.

Already in 2012, the eurozone’s quarterly GDP numbers, including the third-quarter “slump” of -0.2 percent, was “weighing on” executives at American companies in terms of their cautiousness in investing and hiring at a time when consumer demand in the U.S. was running at its highest level since mid-2007. That is to say, world events prior to the anticipated “fiscal cliff”were also playing a role in the business outlook in America.

Warren Buffett, the founder of Berkshire Hathaway, said the U.S. has a "very resilient economy" and so going over the so-called cliff would not be permanently crippling. To be sure, the senior statesman of business could have been trying to manipulate Democratic leaders to push for higher tax revenue from the rich. However, Seifi Ghasemi, CEO of Rockwood Holdings, a specialty chemical manufacturer, said in late 2012 that preventing another war in the Middle East and bolstering Europe’s economy were bigger concerns” at the time than avoiding the sequestration of across-the-board budget cuts. With the exception of Newt Gingrich saying on ABC This Week that the U.S. economy was big enough to handle a $500 million hit, Buffett and Ghasemi were lone wolves in the wilderness in downplaying the "cliff" theatrics that the sky would fall should the budget ax fall early in 2013. At the conference of CEO’s hosted by the Wall Street Journal in November 2012, 73 percent of the executives said they were more concerned about sequestration than even the E.U.’s debt crisis—this in spite of the fact that the Economist had just come out with a major piece on the uncompetitiveness of France representing a new danger to the euro.

The involvement of CEOs in the chorus of “the sky is falling” rhetoric in order to manipulate public policy for financial gain should strike us as nothing new. It is crucial to note, however, that the topic here was systemic in nature, meaning that the U.S. economy as a whole and the fiscal viability of the U.S. Government itself were presumably at issue. The stakes are perhaps too large where the risk is systemic for CEO’s to “hyper-drive” the public discussion into hysteria just so profit won’t be as negatively affected by government cuts.

Whereas corporate public affairs offices are typically oriented to getting favorable regulations (i.e., strategic use of regulation) or deregulation oriented to a particular industry, the “fiscal cliff” would impact the entire economy—the question being how much. Using the sequestration “debate” to eke out more financial gain or avoid a loss for one’s company can be dangerous for the system as a whole if the manipulation distorts the problem. In my view, fiscal cliff is inherently distortive, and thus any public manipulation based on it is also problematic. To “join in”for financial gain is not exactly being socially responsible.

Whether in public or “behind closed doors,” corporate involvement in the public policy process has more legitimacy ethically speaking when the effort is to “save the ship” where the “ship” is the system as a whole, and thus far from narrower benefits, such as to the companies themselves. To be sure, companies have a financial interest in the general condition of the macro economy, but the more systemic the suggestion, the less immediate the financial benefit to a particular firm. The more immediate the benefit is to a company, the less credible are its managers’ efforts to manipulate public opinion and officials.

Rather than “fear mongering,” the CEOs at the meeting hosted by the Wall Street Journal in November 2012 could have suggested possible ways that sequestration could be obviated by an agreement by Republicans and Democrats leaders in the U.S. Government. Specifically, the executives could have oriented their comments to suggesting new ways that Congress could raise revenue and cut the federal budget in ways that are wiser than simply across the board. Optimally, the suggestions would be oriented to the problem at the systemic level and thus reflect such a perspective.

Implying that a corporation’s particular financial interest is never completely overcome by a societal perspective, the Wall Street Journal reported in November 2012, “Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. . . . (S)ome say fears of the fiscal cliff are overblown.” The split by sector suggests that the prescriptions even at the macro, or societal level at the very least take into account an industry’s own financial interest. It is as if what is good for the part is presumed to be good for the whole. To be so inclined does not make a CEO or company look good in the public discourse.

A suggestion with even an indirect financial benefit to one’s firm can easily be discounted by public officials and even the general public as lacking sufficient credibility to be trusted. An executive’s venture into the public square can easily be for naught under such circumstances. It would be better to remain quiet than suffer the loss in reputational capital. The alternative to either one is for the CEO or public affairs director to limit the company’s particular benefit from a systemic-oriented suggestion to public relations, which is itself a valuable long-term intangible asset. That is to say, time and energy spent coming up with the most respectable (i.e., clever) suggestion can do much more for one’s own company than trying to profit more directly from manipulating public discourse in a self-interested way. The numbers will take care of themselves. Ever notice that when people recognize a clever suggestion made by someone, they don’t accuse the person of trying to manipulate things, but, rather, praise him or her for the insight? CEO’s wanting a share of the leadership podium at the societal level might keep this observation in mind.

Given the expertise and societal position, at least potentially, of CEO’s, contributing toward solving system-wide problems in the political economy can even be regarded as a part of corporate social responsibility, as long as the financial benefit implied by a given suggestion is not too direct or exclusive to the executive or his/her company. Financial self-interest exculpates the ethical merit that is inherent in the very notions of responsibility and duty that are salient in ethics. In public discourse, it is better to be oriented to mapping the general course of the ship (i.e., the political system and/or financial system as a whole) around icebergs rather than trying to reserve a deck chair with a better view. We expect people to wrangle for position, whereas we take notice when individuals take a stand in spite of themselves for the greater good of the system.

                                       J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com

Consider, for example, J.P. Morgan’s decision in 1907 to take the weight of the banking crisis on his own shoulders by leading banks to save Wall Street by infusing the needed capital into the system. Contrast this vaulting of business leadership to the societal level with the vaunted self-protective orientation of Wall Street bank CEOs in September 2008. Business leadership raised to the societal level is rare indeed, and thus particularly valuable—and yet countless CEO’s settle for strategic leadership of significantly less value.

It is not as though opportunities are rare. In November 2012, President Obama presented CEOs with just such a platform at the White House just as he was entering into negotiations with Congressional leaders on a possible deal that would avert the “sky from falling.”To have optimal credibility with the president, the CEOs would have had to treat the meeting as falling under “corporate social responsibility” in that they would have had to take the perspective of the U.S. as a whole, and thus be on the same page as the president, to be credible. Put another way, the president would hardly have been expecting this, so a CEO achieving such a height would have stood out above the crowd and thus have had the president’s ear.

As an example of a perspective oriented to the political system and at the same time justifying business leadership on the societal level, David Crane, CEO of NRG Energy, said in referring to members of Congress and the president,“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other. CEO’s, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.” This statement is more oriented to a systemic flaw—that of gridlock in the federal government—than to getting something for NRG. Furthermore, the pragmatism, and one could add experience, of CEO’s could come into play should executives feel like doing some “pro-bono” work for the American people.

In conclusion, distorting public discourse in order to gain financially can contribute toward the general sense that a cliff is just ahead. Such participation is not constructive. In contrast, being oriented to coming up with a clever suggestion geared to a societal problem even (and especially!) though one’s company would only rise or fall along with all the other boats (i.e., the benefit of which being systemic in nature), can raise a CEO from strategic leadership to societal leadership. Only at this level can duty be reconciled with benefit in terms of credibility and the related reputational capital. CEOs following JP Morgan’s example in 1907 in willing the leap to societal leadership wherein the focus is on saving the system could make all the difference on whether the U.S. survives its own accumulated icebergs. Regarding the question of survival and the related implicit call to CEOs to “step up to the plate” for the good of the “team” (or ballpark), the U.S. Government’s gigantic accumulated-debt of over $16 trillion and deficits of over $1 trillion stood out even in 2012 as huge red flags much more dire than any $500 million so-called “fiscal cliff.”

Kate Linebaugh and Stobhan Hughes, “Companies Warn About Cutbacks,” The Wall Street Journal, November 14, 2012.

Damian Paletta and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” The Wall Street Journal, November 14, 2012.

Brian Blankstone and William Horobin, “Euro-Zone Economy Shrinks Again,” The Wall Street Journal, November 16, 2012.

Maureen Farrell, "Buffett Not Worried About Fiscal Cliff," CNNMoney, November 16, 2012.

Jonathan Cheng, “Investors Show Optimism That Cliff Will Be Avoided,” The Wall Street Journal, November 20, 2012.