Why Firms Aren't Hiring

It's pretty easy to understand why firms aren't hiring -- you just need to ask them. In fact, plenty of surveys do. Here's one that asks small businesses (.pdf). Here's another focused on middle market companies.



Firms consistently provide the same set of answers for why hiring is so subdued. The most important is that the economy still stinks so sales are very low. Since they're unimpressed with the recovery, they don't feel much urgency to bring on additional staff until things improve.

Uncertainty is a problem -- but it's an issue as it relates to regulation, like health care costs and new financial rules. No survey I have ever seen has indicated that firms are choosing not to hire people now because they're worried about future spending cuts or tax hikes.

Similarly, it is not particularly likely that these fears have consumers spending less either. Like firms, their sentiment is based mostly on the weak economy. With unemployment struggling to make its way below 9%, strong economic confidence remains elusive. They're also trying to get their fiscal houses in order after expanding credit way too much over the past decade or two, so they're saving.

Would Certainty on Deficits Help?

The behavior of consumers and businesses would be virtually unchanged if, tomorrow, Congress provided a clear, complete explanation of how the U.S. would remain fiscally sound over the next 50 years. This isn't an obstacle holding back a recovery. You might see a slight uptick in confidence if such a plan were released and agreed upon, but it's just as likely that confidence could decline: the reality might be worse than the uncertainty.

There are surely some, if not many, Americans who fail to understand the serious fiscal challenges that lie ahead for the U.S. over the next couple of decades. If the government tells people that they're going to get less from Medicare, that some Social Security benefits will be cut, and that taxes will rise across-the-board, in what way would that new encourage people to spend? If anything, this greater certainty would make people realize that they must save more now, because the future looks pretty grim.

Of course, at some point the government needs to deal with its deficit problem. But now is not the time for a huge, sweeping plan to fix the problem. Frankly, we don't even know what a stable U.S. economy looks like anymore, so we can't really create realistic estimates about future tax revenues and spending anyway. Smaller deficit reduction plans will bridge the gap for now. Then, once the U.S. economy is back on its feet, the federal government can get to business on a comprehensive plan and deliver Americans the bad news when they're better able to stomach it.

Image Credit: REUTERS/Jason Reed

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