Policymakers Must Act So That Recession Fears Don't Become Self-Fulfilling Prophecy
Business executives around the world are worried. And when business decision-makers worry, they hold back on investment commitments that would raise living standards and create jobs.
What should worry everyone, business executives and employees alike, is that these worries come from self-inflicted wounds imposed by political leaders. Business executives know all about taking risks. They make commitments all the time based on their own firms’ capabilities in intensely competitive markets. What business executives cannot assess, however, is the uncertainty that arises because of outside forces beyond their control and knowledge. And right now, uncontrollable — and even unknowable — political forces are creating the kind of uncertainty that can derail economies around the world.
The Conference Board has polled CEOs each year since 1999, asking them about their concerns for their businesses. The questions are divided between those about internal problems — how can the CEOs do their jobs better — and external problems — how might the business environment worsen the bottom line.
In the new January 2020 poll, the internal issues seem like “high-class problems”: How to attract top talent in a tight labor market (which is great for workers). Innovating in products and business culture (which gives customers better goods and services, and workers better jobs). Cultivating new leadership (which gives younger business leaders a path upward). All of this is forward looking and optimistic.
But the external issues cited by CEOs were much darker in tone.
CEOs worldwide cite a possible recession as their greatest worry. One year ago, U.S. CEOs ranked recession as their third-greatest worry (while foreign CEOs rated it first then and now). The Conference Board’s Global Economic Outlook forecasts that the global economy will skirt recession this year and begin a mild upswing. Everyone hopes that is true, but business executives must react to the prospect of a downswing with caution — and that very fear can become a self-fulfilling prophecy, as investment and expansion plans are postponed for fear of overextending in a down consumer market.
The second-greatest global CEO fear is a breakdown in global trade. For U.S. CEOs trade ranks fourth, but the related concern of global economic instability is ranked equal to it, and the second-ranked problem is business competition, again related to global trade.
So let’s put two and two together. When the Federal Reserve began its most recent round of interest rate cuts in July of 2019, it sought to forestall the risk of recession that it assigned to trade disputes and global economic weakness. In the extreme, those factors could cause recession in the US or around the world. These concerns — the ones cited by the CEOs participating in The Conference Board’s poll – are closely linked. With international trade running near the highest levels in history, economic weakness anywhere threatens economic growth everywhere.
Therefore, much of the concern about the business environment in the U.S. and around the world — the kind of concern that can freeze business investment and expansion, in a self-fulfilling prophecy – boils down to public policymaking. If business decision-makers in the U.S. and elsewhere are to move aggressively to expand production and employment, to the benefit of all people in every country, those decision leaders need a sound economic environment. And the common denominator of sound policy in every nation is trade.
The U.S. is perhaps one of the least globalized among all advanced countries. Our productive capacity — the product of the size of our economy and the productivity of our workers — is second to none, making us extraordinarily economically independent. But everything is relative. Our nation does depend upon other countries for a wide range of low-cost goods, food products, and raw materials that we simply do not have within our borders. Despite our technology for manufacturing, many other countries have specialized in niche products that we do not build ourselves. And many sectors of our economy — notably agriculture, manufacturing and services — count on sales to other countries to earn profit and provide employment.
We need good trade relations with other nations to obtain needed goods and services, and to export to grow our own economy. As the world’s largest economy, the U.S. is the flywheel that keeps the global economy stable. The world’s CEOs know that, and they worry precisely because they see that needed source of stability beginning to shake the global economy.
The business leaders in The Conference Board’s poll are sending a message. Political leaders of all countries need to cooperate, even as they compete. In mutual destruction, everybody loses. It is time to drop zero-sum trade policy, and to engage in positive-sum negotiation that will make every nation better off — and obviate CEO fears of global recession and trade war.
Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development of The Conference Board. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Senator Bill Bradley of New Jersey on efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity and Smart Regulation: Changing Speed Bumps into Guardrails.