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posted: 7/31/2011 6:00 AM

Frustrated execs says debt showdown hinders hiring

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The Washington Post

Business leaders are becoming exasperated with Washington. And the dysfunction they see in the political system is holding them back from hiring and investing.

Executives lack confidence that political leaders can execute the basic nuts and bolts of governing, as exemplified by the current brinkmanship over raising the debt ceiling, based on interviews with more than a dozen corporate leaders in the Chicago area last week. Indeed, the frustration over the political climate and Washington's seeming inability to solve problems seems to weigh more heavily in their minds than any specific government policy.

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The executives are hostile to President Barack Obama and his agenda and say higher taxes would damage their business prospects and make them less inclined to invest and hire. But in contrast to claims by congressional Republicans that any tax increases whatsoever would stop job creation in its tracks, many executives say they could tolerate somewhat higher taxes if it were part of a broader plan that offered clarity on the nation's future policies, particularly one heavy on spending cuts.

"What are the rules of the game going to be in the long term?" said Lyle Heidemann, chief executive of the 5,000-store hardware chain True Value. "What our retailers would like to have is consistency and predictability. We can handle decisions we don't agree with, but that's easier than not knowing what the decision is going to be."

For example, he said, several True Value franchisees have sold their stores in the past year, even though they would have preferred to hold on to them for a few more years, because they feared that the current 15 percent capital gains tax will rise when it is scheduled to expire at the end of next year.

The loss of confidence in Washington seems to be a driver of a more fundamental lowering of expectations in America's executive suites. The Conference Board, a business research group, found in its most recent survey of CEOs that 43 percent expected economic improvement in the next six months, down from 66 percent at the beginning of the year.

The sentiments of the Chicago area executives reflect a simmering angst in executive suites and factory floors across the country, a new sort of risk to the business outlook that has emerged not from economic forces per se but from an inability of elected officials to agree on how to deal with them.

The groups that represent businesses in Washington, including the U.S. Chamber of Commerce and the Business Roundtable, have been urging Congress to raise the debt ceiling to avoid the risk of a default or downgrade of the U.S. credit rating, even as many newly elected Republican members of the House -- who received support from business interests when running -- are reluctant to vote for such a measure. A group of major business groups sent a letter to the president and every member of Congress two weeks ago imploring them to raise the debt ceiling.

The tenor of the debates in Washington has damaged the executives' sense -- long taken for granted -- that the taxes and regulatory policies they face will be predictable and reasonably constant. The executives are horrified that the nation might be on the verge of losing its AAA credit rating, and their hunger for a grand bargain -- a master plan to determine the nation's fiscal future over the coming decade -- is deep.

At present, there is no telling what the tax code will look like next year or who will ultimately bear the burden of reducing the nation's budget deficits. That makes it an ominous time to even consider buying a new piece of equipment or hiring another worker, businesspeople said.

"Clarity is everything, even if it's negative clarity," said Rick Bastian, chief executive of Blackhawk Bank, with eight branches in northern Illinois and southern Wisconsin. The mid-size manufacturers to whom the bank lends money have made it through the worst of the recession, Bastian said. But now they are resistant to upgrading equipment or expanding their production capacity because they don't know what the tax burden will be on their revenue.

"Let's say you make an investment that will return $100,000," said Bastian. "I don't know if I'll be paying $10,000 more in taxes, or $15,000 more. That could be the difference between whether you can afford to service a loan to pay for it or not. I'm not going to make a long-term investment that requires me to commit cash flow for years if I don't know what taxes are going to be."

There has been plenty of political bickering in the nation's history -- and the current budget brinkmanship bears some resemblance to the standoffs between President Bill Clinton and the Republican Congress that shut down the government twice in 1995 and 1996.

But executives describe a very different environment this time around. The economy was in generally strong shape in the mid-1990s, and business confidence, then high, was little-phased by the showdown in Washington. Now, with 9 percent unemployment and an exceptionally weak two-year-old recovery, confidence is far more fragile.

"We're still coming out of a deep crisis and recession," said Kevin Kelly, chief executive of Heidrick & Struggles, one of the leading executive search firms, who said his conversations with executives in recent weeks have frequently featured fretting over the debt ceiling talks. "There have been fits and starts toward stronger growth, and now the outlook hinges on what happens in Washington."

At Quality Float Works, a Schaumburg, Ill., company that makes metal float balls for industrial use, the debt mess has general manager Jason Speer nervous that it could lead interest rates to spike and as a result make the line of credit the firm uses to finance its inventory more expensive to manage.

As a result, even with business up 30 percent this year and more long-term orders coming in from customers, "we're kind of holding back on hiring and major purchases," Speer said. "We're waiting and seeing what effect all this will have on our credit and on our ability to do business overseas."

Many executives describe the uncertainty around taxes and spending as only one in a series of confidence-sapping challenges coming from Washington.

For example, Brightstar Care provides staffing services for home health care workers through 225 franchisees worldwide with a combined 6,000 employees. Founder and chief executive Shelly Sun said that as she works with potential franchisees, many are held back by uncertainty over whether they will have to pay for their workers' health care costs once last year's health reform legislation is fully enacted, and if so what it will cost.

"This is a very price-competitive business," Sun said. "Consumers are already having difficulty scraping together funds to pay for services, and if the franchisees have to bear an extra dollar, $1.25, or $1.50 per hour for health care costs, what could be a viable business may not be."

And at Discover Financial Services, the large credit card and transaction processing firm with 11,000 employees, President Roger Hochschild has had to grapple with great uncertainty about how the financial system will evolve under changing regulations.

"It's really challenging to enter the mortgage business with no clear understanding of what Fannie Mae and Freddie Mac will look like down the road," Hochschild said.

But for many executives, the uncertainty about how the United States will lower its budget deficit over time and who will pay for it looms most heavily over their decisions.

"Among the other presidents and CEOs I interact with, the only consensus of opinion is none of us has any idea where things are going," said Scott Morey, chief executive of Morey Corp., a 700-employee maker of electronic equipment in Woodridge, Ill. "And in my observation, the uncertainty we are experiencing is caused almost entirely out of Washington and other governments around the world."

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