Why a Republican Congress Won't Ignite a Hiring Explosion

Why a Republican Congress Won't Ignite a Hiring Explosion
Why a Republican Congress Won't Ignite a Hiring Explosion

CNBC's Larry Kudlow blogged Tuesday that House Minority Leader John Boehner (R- Ohio) told him that Congress would pass a law during the recess that would extend the Bush tax cuts. This would certainly boost the deficit by about $630 billion, the amount of the American people's subsidy of high-income taxpayers -- many of whom pay lower tax rates than their secretaries. Meanwhile, Kudlow opined that outcome of the November elections would create an explosion of job creation.

Not bloody likely.

This was my conclusion during an appearance Tuesday on The Kudlow Report. To be fair, I think the raw material for a business led recovery is out there: the $1.84 trillion in cash on corporate balance sheets and re-liquified bank capital accounts.

What's needed is something to drop the match on that pile of financial gunpowder. Two things could do that: an acquisition wave as companies take advantage of cheap capital to buy growth, and/or a rising stock market that would boost the consumer wealth effect, opening up consumer spending, which accounts for 70% of GDP growth.

Will a Republican House Repeal Uncertainty?

As Kudlow blogged, he thinks that there's something called a Washington Wall, and that it's going to fall. I am not sure what the Washington Wall is, but I assume it is code for the Democratic party, and that its fall will come when more Republicans are in power. This won't affect business decision-making, but it will make Republicans happy. Most people already expect the House to change hands in November, so when it happens, it won't be a surprise.

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One of the most popular statements among those seeking power in Washington is the notion that businesses are holding off on making new investments due to uncertainty. Based on my work teaching business strategy at Babson College, I'm well aware that uncertainty is always a consideration in business decision-making, regardless of which party is in power. But I don't believe that uncertainty will be repealed should Republicans retake the House.

Businesses will invest to create jobs if they decide that it's in the shareholders' best interests to do so. Stock prices rise when companies beat quarterly earnings expectations and raise revenue guidance. Since companies have cut staff as much as they can, growth might come from acquisitions of companies that can quickly boost their sales. As long as valuations remain low and cash is cheap, businesses will see this as a good way to grow.

Could This Create A Jobs Explosion?

As companies start to see themselves falling further behind competitors who are making acquisitions, the urge to buy their way to growth should increase, and that acquisition mania could boost stock prices. Now, if stock prices rise, it will become more expensive to do deals, and they'll eventually slow down. But in the interim, the rising stock prices will create a wealth effect, which will unleash consumer spending.

This won't cause an immediate explosion in job growth. Businesses will hire domestically only if they conclude that they can't satisfy growing demand unless they hire U.S. employees. First, businesses will try to hire people outside the U.S. who get paid less for the same work. That's what big, mature businesses do -- try to push as much work as possible to lower labor rate countries. And with the U.S. experiencing a 22.1% increase in temporary hiring -- compared to a mere 0.2% rise in full-time job growth -- an explosion of permanent job growth seems miles away.

The best hope for local job growth comes from creating lots of small firms that do most of the growing and hiring. As I wrote this week in an article on DailyFinance, of the 17 startup CEOs I recently interviewed, only one said that small business tax incentives would play any role in their decision to hire people. Fortunately, these companies are all planning to hire more people anyway -- some plan to double their employee count in 2011.

But they're hiring because they use technology to create superior value for customers -- something I spoke about with Drucker Apps in connection with the bankruptcy of Blockbuster, a company that failed to do that. The basic idea is that growth and new jobs come from companies that solve customers' problems better than the competition. And there aren't enough startups out there that can do that well to create enough new jobs to spark a jobs explosion -- no matter what happens in the voting booths in November.

Let's not confuse what Republicans say in their effort to gain power with those basic business realities.