Key Points
- New research by Florida State University Herbert Wertheim Distinguished Professor of Business Administration Michael Holmes examines the challenges companies face when they engage in America’s polarized political system and whether that involvement further deepens the divide.
- Central to the research are “political adjustment costs,” the challenges that keep government from shifting from one stable set of policies to another, and the declining feeling of reaching the American Dream.
New research by a Florida State University professor in the Herbert Wertheim College of Business finds that America’s increasingly polarized political system reaches far beyond the ballot box, creating greater uncertainty and higher costs for companies.
As the Nov. 3 midterm elections approach, this research published in Strategic Management Review examines the challenges companies face when they engage in America’s polarized political system and whether that involvement further deepens the divide.
“Understanding polarization, its sources and its consequences can help us keep things in perspective as we approach Tuesday’s elections,” said Michael Holmes, the Herbert Wertheim Distinguished Professor of Business Administration who co-authored the study along with Saint Louis University Dean of the Chaifetz School of Business Leadership Jackson Nickerson.
Central to the research are “political adjustment costs,” the challenges that keep government from shifting from one stable set of policies to another. Deep partisan divisions can make legislation harder to pass, while greater reliance on actions such as executive orders raises the prospect of abrupt policy reversals between administrations.
The theory traces that instability to a deeper problem: weakening faith in the American Dream. For many people, the traditional promise that hard work, education and employment will lead to financial security and upward mobility no longer feels attainable. Competing political parties offer sharply different explanations for that decline, they argue, making common solutions even harder to reach.
“Each political party places the blame in different places and, thus, champions different solutions,” Holmes said. “The source of the blame and the policy positions are irreconcilable. The solutions nearly always involve increasing the deficit through lower taxes and higher spending.”
Structural incentives can then reinforce the polarization. Holmes said the fundraising advantages of national political organizations give parties tremendous influence over their candidates, while campaigns built around emotionally charged issues reward partisan conflict rather than compromise.
“Fundraising research suggests that arousing emotions and identifying common enemies increase fundraising,” Holmes said. “Both parties paint the other as the villain and refuse to cooperate with the other. They also tend to emphasize political issues which tug on emotions such as abortion, the environment, gun control and immigration.”
That dynamic puts businesses and executives, often powerful political donors, in a difficult position. They may feel pressure to participate in fundraising campaigns, but doing so can expose them to risk when political control changes hands.
“Businesses are in a Catch-22,” Holmes said. “For example, they may feel the pressure to donate to obtain or maintain a government contract, but they are not guaranteed to get what they want and they risk alienating the other party, who could be in power within two to four years.”
“Businesses are in a Catch-22. They may feel the pressure to donate to obtain or maintain a government contract, but they are not guaranteed to get what they want and they risk alienating the other party, who could be in power within two to four years.”
– Michael Holmes, FSU Herbert Wertheim Distinguished Professor of Business Administration
For companies, that dilemma can contribute to long-term institutional and economic instability. Holmes said the consequences extend beyond election cycles because deep political divisions make it increasingly difficult for government to address major problems.
The effects ultimately filter down to companies and their workers.
“Because government cannot solve problems like it once did, the American system is increasingly ineffective and unstable, which is problematic for everyone” Holmes said. “For example, our healthcare system is inefficient, and Congress has been unable to fix it. As a result, healthcare costs continue to outstrip inflation by a wide margin.”
For business leaders, Holmes said, political polarization is more than a public policy issue; it is a source of operational risk. Understanding how partisan conflict drives policy uncertainty can help companies prepare for shifting regulations, rising costs and instability affecting their employees and long-term strategic plans.