How political polarization creates business uncertainty

A study from Florida State University reveals how America's deepening political polarization impacts business operations and creates uncertainty. Investigated by Herbert Wertheim College of Business professor Michael Holmes and Saint Louis University dean Jackson Nickerson, the research published in Strategic Management Review explores how the challenges companies face due to political polarization could exacerbate the divide.

Political adjustment costs, the difficulties in shifting from stable policy sets, are a central focus. Deep partisan divisions make government policy shifts harder, with reliance on executive orders raising the risk of abrupt policy reversals. The instability stems from weakening trust in the American dream, with political parties blaming each other for a decline in financial security and upward mobility.

This blame and differing policy positions often involve increasing the deficit through lower taxes and higher spending. Structural incentives then reinforce polarization, as fundraising advantages for national political organizations give parties significant influence over candidates, and emotionally charged issues like abortion, the environment, and immigration reward partisan conflict over compromise.

Businesses and executives, who are often major political donors, face a dilemma: they may feel pressured to donate for government contracts but risk alienating the opposite party when it gains power. This Catch-22 can lead to long-term economic instability, as government's inability to address major issues filters down to businesses and their workers.

Holmes emphasizes that political polarization is not just a public policy issue but a source of operational risk for companies, affecting regulations, costs, and long-term strategic plans.