What the New Congress Means to Business?

Knight Kiplinger, editor in chief of Kiplinger’s Personal Finance magazine and the Kiplinger Letter, one of America’s leading business-forecasting publications, addressed an AMA Current Issues Forum on “What the New Congress Means to Business?” on February 27, 2003 at the New York Executive Conference Center. His talk also offered insights on the geopolitical, economic and tax situations that business will face this year.

On the issue of Iraq, Kiplinger told the group that it was unlikely that even a last-minute compromise would prevent the United States from going to war with Iraq within the month. “Even if there is a coup in Iraq,” he said, “we would go there to ensure political stability.” The dollar cost of the Iraq war, including aid to Turkey and support of a transitional government, might be around $100 billion, or around 1 percent of GNP. But “the real cost of the war,” he said, “will be a heightened risk of terrorism in the United States and a fracturing of our ally relationships that will linger for a long time.”

Once the geopolitical situation is settled, Kiplinger forecast, business spending will pick up. During the past few years organizations have operated under tight budgetary constraints, practicing “deferred planning,” foregoing upgrades for machinery and systems to achieve competitive advantage. But many investments cannot continue to be deferred and he believes business is eager to spend and will do so in the second half of the year.

Discussing other business indicators, Kiplinger said that while the current unemployment rate of 6 percent is higher than in recent years it is actually low given the sluggish economy we have had. Consumer spending is likely to increase but at a lower rate of increase than last year, which was around 3 percent. He thinks we’re going to see declines in home sales and housing starts but 2003 will be one of the best years for automobile sales.

Whereas business spending has been restrained, the federal government has been “spending like a drunken sailor.” And, said Kiplinger, we can expect federal spending to grow 10 percent this year.

But states will be retrenching. All the U.S. states except Vermont must balance their budgets. So, in addition to some states borrowing, we are likely to see rises in taxes and cuts in spending. Among the cuts in services on a state level, we can expect a cut in the number of states with trade promotion offices. Their maintenance is likely to be seen as “discretionary spending.”

The decline in consumer spending and increase in state taxes are likely to offset any economic stimulus from cuts in federal taxes. At best, we can expect 3 to 3.5 percent growth in business profits.

A “chilling new trend for businesses,” said Kiplinger, is the taxation of services, but not across the board. He thinks smaller firms like dry cleaning establishments and repair shops with weak trade organizations will more likely be taxed than larger firms with more lobbying clout like legal, healthcare and financial planning.

If American business has a problem, said Kiplinger, it is overcapacity. Kiplinger wasn’t just talking about activity on shop floors. “We have too many stores, too many financial advisors, too many auto makers, too many steel makers.” Kiplinger believes that we will see a major decline in the number of businesses in each category due to mergers, consolidations and failures from this past period of economic downturn.

As to new legislation in Washington, it won’t matter which party controls Congress, according to Kiplinger. Legislation will be controlled by the moderate middle. “We can see lots of horse trading with the moderate middle,” said Kiplinger.

When it comes to Bush’s tax package, Kiplinger believes, “The President will have to settle for modest changes.” Congress won’t accelerate rate cuts on high income taxes but it will accelerate cuts in low and middle class taxes. Congressional action will virtually wipe out taxes for families with incomes at around $45,000. “The final tax bill will be a little bit of this and a little bit of that.”