Why a Republican Congress Won't Ignite a Hiring ExplosionCNBC'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.

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 But I don't believe that uncertainty will be repealed should Republicans retake the House.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.


Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

Add a Comment

*0 / 3000 Character Maximum

8 Comments

Filter by:
Sonny

It is foolish to think that our next expansion will be consumer driven........what will the consumers be using for money, the dollar won't be worth anything after the Fed gets through printing. Only cheaper labor that enables us to compete in the world economy will work............but with unions (both private and government workers) empowered by the govt., chances are slim to none.

October 06 2010 at 5:51 PM Report abuse rate up rate down Reply
MSmailbox

The only way to create a hiring "explosion," is by creating shallow jobs, which will evaporate just as quickly as they exploded. It seems like most politicians have a power-myopia, which can only look to the next couple of elections. Just as businessmen, for the most part, can only see one or two quarters ahead. I can't hope to dig myself out of 53 years of mistakes, but I can learn from them, making small changes which, over time, will benefit myself and equally important, those who will folllow me. What seems expedient, often results in many years of suffering. We must accept a certain amount of personal tradgedy, for the benefit of future generations. Every man must give it up in the end, so to the extent that we are able, we must defer self-gratification (not completely) and gracefully become human beings, again.

October 06 2010 at 12:18 PM Report abuse +1 rate up rate down Reply
djr200

I think Mr Cohan has missed the boat. Why has temporary hiring jumped 22%? Because companies don't want to make a permanent commitment in hiring. Why would that be? Could it be the uncertainty of what is coming including taxes and what comes next like cap & trade, etc.? The new startups will hire perms because they have to hire quality and try to get employees they can count on to get their companies to succeed. However, long standing companies can make temps work easier than the startups and won't hire perms as long as uncertainty overhangs the economy. Mr C missed what is going on. The tea party is taking over the Republican party and therefore offers a new hope that sanity will return. The newbies will take a while to gel because most of them are not career politicians and thus will have to learn how to work together to get things done while at the same recreating how the process works (remove corruption from the process). Therefore, we can expect some learning lag before anything gets done. I believe this hope is propelling the market at this time.

October 06 2010 at 11:05 AM Report abuse +1 rate up rate down Reply
orbit7777

Peter Cohen is not reading this situation at all. I get so tired of hearing these characters talking about how LOOOOOOONG it will take for the economy, stock market, hiring to take place. DON'T THEY E_V_E_R learn!!!??? I guess not. Those corporations are not going to let that nearly 2 trillion sit idle a minute longer than they have to. And the American people have been saving like crazy. That money will be burning a hole in their pockets very soon. AND EVERYONE IS WORRIED ABOUT INFLATION.

October 06 2010 at 10:48 AM Report abuse rate up rate down Reply
bhawkes328

I DONT KNOW ABOUT ANYONE ELSE, BUT I DONT HIRE BECAUSE THE PEOPLE WHO USE MY PRODUCT HAVE STOPPED BUYING...THE WORKING CLASS IS SO FAR IN DEBT THEY CANT AFFORD TO SPEND. THANKS TO THE BANKS AND POLITATIONS....

October 06 2010 at 10:39 AM Report abuse +3 rate up rate down Reply
1 reply to bhawkes328's comment
jkennedy806

Richard Reich said the same thing a few months back, When people have good living wage jobs, security in the work place, and confidence the people start buying first the things they truly need, the little extras are put off, but as the families budget improves so does the buying power. IT'S JOBS JOBS JOBS BOY IS WASHINGTON STUPID

October 06 2010 at 11:17 AM Report abuse +1 rate up rate down Reply
velociwrangler

Peter, Peter. Dude you are ignoring the dynamics of consumer / business confidence. Remember when the Democrats took control of Congress in 2006, and in early 2007 it became obvious we were going to have either a full-blown Socialist or Socialist-Lite as President? Consumer / business confidence took a nosedive. The reverse dynamics may very well come into play. When consumers and businesses realize after the November election, that the country is moving away from Communism towards Capitalism again, the economy will recover nicely. So, in this Kudlow is onto something and you are not.

October 06 2010 at 10:39 AM Report abuse rate up rate down Reply
1 reply to velociwrangler's comment
Floyd N. Maddox

velociwrangler, you don't know what you're talking about. Corporations are waiting and looking to go back to their free wheeling, back-room dealings with wall street. It's all about holding on to the 2 trillion dollars in cash so they can get more tax cuts, more deregulation and more loose deals under the republicans. You think it's rough now, just wait until the sh*t hit the fan.

October 06 2010 at 9:34 PM Report abuse -1 rate up rate down Reply