Why we're freezing near the fiscal cliff

August 23, 2012: 11:58 AM ET

The culture of stagnation in Congress is creeping into the business world. What will it take to get unstuck as America moves towards the fiscal cliff?

FORTUNE -- Most good decision-making practices grind to a halt during an election year.

President Barack Obama and former Massachusetts Governor Mitt Romney are both taking to the podium, talking up job creation and business recovery. Yet in the short term, government leaders are keeping employees waiting -- and scared -- in the wings. President Obama, for example, told Congress Tuesday that he planned to extend the existing pay freeze for federal workers through this coming March.

The great irony is that while the candidates campaign on moving the country forward, said country is essentially frozen. Congress doesn't make bold political moves during election time, and is particularly stagnant this year in terms of doing anything bipartisan. It was a huge red flag when the Congressional "super committee" failed to pass a bipartisan debt deal in 2011 -- the deal was supposed to outline how to reduce the budget by at least $1.2 trillion over ten years. Since then, the debate in Congress over how to cut spending has become increasingly important and increasingly polarized. Businesses, to protect themselves from the potential effects of the cliff, are freezing up too.

The "fiscal cliff" refers to a handful of sweeping government spending cuts that will happen in January should the government fail to agree on a less drastic, more bipartisan policy. As of now, roughly $7 trillion worth of tax increases and spending cuts will go into effect this coming January. The cuts include measures such as a $55 billion cut in defense spending, an additional $55 billion cut to non-defense spending, a shrinking of unemployment benefits and an increase income tax, among others. The U.S. does need to cut spending, but it would probably be better to cut it with a policy that looks more like a scalpel than a rusty machete.

Unfortunately Congress has been dragging, and that stagnation has been creeping into business. Small businesses, scared of the potential effects of the fiscal cliff, are freezing hiring and holding off on long-term investments. American politicians and business leaders are finding themselves caught in a world that will require decisive action to survive, and caught in a flat-footed leadership culture where people are too scared to move.

"I don't see so much formal planning as deer-in-the-headlights kind of behavior," says Alan Beckenstein, Professor of Business Administration at University of Virginia's Darden School.

MORE: Forget Washington: Here's how we'd fix the economy

Frozen businesses may frustrate job seekers, but it's important to view this stagnation in context, Beckenstein says. Over the past four years, businesses have struggled to survive on short-term financial fixes. "They've done a damn good job of doing things which keep their earnings up or prevent them from falling." Since the crisis, he says, businesses have effectively mortgaged the long term to generate cash flow fast. They've generally held off on R&D, and invested less in branding. In some senses, it has paid off. The S&P 500, for example, hit 14,000 on the morning of August 21 -- its highest point since May 2008.

Hence the hesitancy for corporate leaders to make bold moves. Companies have been told they're doing well, and stocks have recovered, in many cases because of cautious corporate spending in a difficult economy. Similarly, CEOs are often rewarded for short-term fixes. CEO pay, "is not necessarily aligned with the economic environment at any point at time," says Sydney Finkelstein, a professor of management at Dartmouth's Tuck Executive Education program. CEOs paid in stock can sometimes cash it out more quickly than it would take long-term measures for the health of the company to kick in.

That's at the heart of the Congressional gridlock too -- the policy that helps the economy over time takes longer than a term in office. The culture has grown particularly toxic now. In fact, it has been off-putting enough to spur some people to leave politics, meaning the partisan atmosphere could get even worse next year. Last week, California Congressman Dennis Cardoza resigned from his position, citing the inability for Congress to actually do anything as part of the reason for quitting. At the beginning of August, Republican Representative Steve LaTourette of Ohio said he was planning to leave his post this coming January, mentioning that in Congress, "compromise" had become a dirty word.

MORE: Wall Street still ignoring the fiscal cliff

The solution for businesses might be to move forward as much as possible without waiting on Washington. True, some government contractors have to hold tight and react to the fallout from the coming cuts. But plenty of smart business leaders can diversify and prepare to get ahead during a crisis, says Finkelstein. Crises always create opportunities for really innovative businesses. He says, "You end up in a position to take advantage of some of the turmoil some of the other companies might be in, because they haven't been as prudent in managing their resources." Businesses, he says, should focus on taking market share away from struggling competitors.

Scary as it is, it might be best for businesses to go ahead and bank on the long run, says Darden's Beckenstein: "Personally, I'm rooting for a move of thinking towards the intermediate- to long-term and say to hell with the short-term and create the future, because the short-term is just doomed to be crummy. We're stuck in a valley, and it's hard, and where's the leadership going to come from?"

Certainly not from Washington any time soon.

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About This Author
Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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