The Economy

The Election Will Not Remove Uncertainty

Uncertainty has been used to explain just about everything that’s wrong with the economy. But it’s not an explanation. It’s an excuse.
David RosenbaumNovember 6, 2012

Sometime Tuesday night or Wednesday morning, all the uncertainty will go away, won’t it? CFOs, businesses, and individuals won’t have to worry about whether they’ll be paying more or less in taxes. Obamacare will be settled, one way or the other. A new Administration (or an old one with a new lease on life) will be able to stop us before we fall off the fiscal cliff.

Business will begin investing and hiring. Demand will rise. Unemployment will decline. Everything will be hunky-dory.

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Fat chance.

For the past several years, uncertainty  about future taxes, impending regulations, health care, interest rates, demand, the euro, Greece, Italy, Spain, the Middle East, and now China  has been used as an explanation for the slow-motion recovery of the past four years. Businesses have refrained from using their ever-mounting caches of cash (which are reportedly approaching $1 trillion in the United States), all in the name of prudence in face of uncertainty. As long as the macroeconomy is uncertain, the common wisdom says, business won’t invest. And as long as business refrains from investing, “the economy contracts, generating a recession,” according to a June article by Scott Baker and Nicholas Boom of the Stanford Center for Economic Performance, and Steven Davis of Chicago Business School.

“Policy-related economic uncertainty has become the subject of contentious debate since the recession of 20072009 and the most recent presidential and congressional elections,” the paper notes.

High uncertainty, the paper’s authors say, “gives firms an incentive to delay investment and employment decisions.”

At the same time, one continually reads and hears that businesses are collecting data, in sets large and small, to move the locus of decision-making from the gut to the brain (or algorithm). This is the much-ballyhooed knowledge-based, data-driven economy. But knowledge and data both tell us that certainty is a chimera. Worse, certainty is madness.

Back in the late ’90s, everyone was certain that having a .com after your company’s name was a guarantor of riches. More recently, everyone was certain that housing prices would never fall.

I’m reminded of Tommy Lee Jones in Men in Black recruiting Will Smith to work for the eponymous agency monitoring extraterrestrials: “Fifteen hundred years ago, everybody knew the Earth was the center of the universe. Five hundred years ago, everybody knew the Earth was flat, and 15 minutes ago you knew that humans were alone on this planet. Imagine what you’ll know tomorrow.”

There’s no doubt that uncertainty is unsettling. Uncertainty conveys risk, and finance people are notoriously risk-averse. But there are exceptions.

At the recent CFO Playbook for Private Companies conference in Miami, Chobani yogurt CFO James McConeghy described a breathtaking growth curve. In 2010 the company had 150 full-time employees. It will end 2012 with 2,000.

“We grow as fast as we can add production capacity,” McConeghy said, and this year Chobani is opening a new, 900,000 square-foot yogurt factory, the biggest in America. This year it has spent $400 million on new facilities.

Is this wise? Is this prudent? What about all the uncertainty? Is it possible that Chobani is overinvesting in human and physical capital? Is it possible that demand for its yogurt will not grow as fast as it has for the past four years? What if the economy falters after the election? What if tax rates rise, federal regulations become more onerous, cash becomes more expensive, and another massive storm plays havoc with Chobani’s supply chain, causing pallets of product to spoil on loading docks? Is Chobani moving too fast, hurtling into a future everyone agrees is . . . uncertain?

Well, last year, said McConeghy, Chobani “disappointed” customers. “Despite Herculean efforts, there were stock-outs. Consumers went to the store to get their Chobani fix and it wasn’t there. We lost a lot of revenue.”

That, he vowed, would not happen again. Chobani invested and continues to invest. For McConeghy, the risks embodied in all those uncertainties are just that: risks to be mitigated, risks to be balanced against potential gain.

“With speed comes breakage,” allowed McConeghy. “You have to wrap your hands around what’s an acceptable level of breakage.

“We’re taking some degree of risk. Possibly, we’ve overbuilt on the short term. But we don’t ever want to be behind the 8-ball on capacity. We’ve stepped up to the plate to solve any possible capacity issue.”

It’s probably safe to say that no finance executive in the crowd of almost 200 at last week’s Miami conference is experiencing Chobani-level growth but, just like in poker, you can’t win a hand you don’t play.

“The idea that this election will end uncertainty is laughable,” says Rob Frohwein, chief executive officer and co-founder of Kabbage, an online site that offers credit lines to qualifying small businesses. “There’s always an election around the corner.”

And our political system guarantees that the winner of any election does not take all. Inefficiency is built into the Constitution via the separation of powers, which, by the way, has historically been considered a good thing. Our economy is not centralized. We have no economic czar with the power to proclaim a new tax code or end regulations with a wave of his or her hand.

This election will not eliminate, or even reduce, uncertainty. Change, and the uncertainty it generates, is a permanent feature of our lives. That understanding created modernism itself, and differentiates our world from the stasis of the Dark and Middle Ages.

No great business was ever created without assuming a measure of risk. Uncertainty is not an explanation for a business to sit out while the cards are being dealt and the game played. It’s an excuse. And a poor one at that.