October 12, 2015

Changing Government Priorities

In the September 23 issue of the Financial Times, reporters Chris Bryant, Fiona Harvey, and Tony Barber, in an article entitled “Climate Change Fears After German Opt-Out”, reported that the German government had backed a decision to exempt virtually all of German industry from new EU rules that would force companies to pay for carbon dioxide emissions.  Not surprisingly, the Merkel government justified the decision on the basis that it would cost too many jobs.

Over the last decade, the United States has been soundly criticized by governments, as well as environmentalists, for refusing to endorse the Kyoto Protocol to reduce carbon dioxide emissions.  Global warming has been seen as such an imminent crisis of such horrible consequence that governments have implicitly assumed that addressing it had priority over all other public policy concerns.  Obviously, short-term job losses now trump global warming as a higher public policy priority in Germany.  The reporters state that opponents of the German government decision believe that it will trigger off similar decisions by other governments.

The triggering effect of this decision is uncertain. However, decisions like these undermine business innovations that are justified on environmental grounds, as well as innovations in other areas. While it is uncomfortable for governments to stick with certain courses of action in the face of adverse economic environments, the failure to do so compromises government credibility across a variety of markets.  At Pitney Bowes, we have repeatedly experienced situations in which we have spent millions of dollars, and have asked our customers to make investments in modernizing mailing technology in anticipation of postal regulatory or operational changes that have then been postponed repeatedly.  The pharmaceutical industry has seen a pattern of more unpredictable decision-making by the Food and Drug Administration, which has resulted in fewer and more delayed approvals than in the past.

Governments that change decision processes and criteria, often without warning or compelling long-term logic, create higher risks for investments, which then raises the investment return threshold that must be applied to a decision to invest in new products, technologies, and business processes.  The impact of these decisions is often not felt immediately, and, therefore, is not as visible to the public, but, over time, governments erode investment in innovation, depress economic growth, and, ironically, undermine the process by which innovation creates new jobs.  Governments increase short-term job preservation, but probably sacrifice far more jobs over the long term by discouraging innovation.

We need better ways to communicate to elected officials the financial impact of their decisions in terms of the risk they introduce to investment decisions.  For example, if businesses could say with some confidence that erratic and unpredictable government decision making raises the required return threshold from 10% to 15% and that a particular dollar volume of investments no longer reached the upwardly revised threshold, it might be easier to preclude government from making these abrupt changes in policy, or, at least, it would get them to modify such decisions to reduce the perceived risk element in the decisions.