Say what you will about social equality issues, corporate governance and all that. Forget the golden parachutes, the corner offices and the outrageous salaries and bonuses.

The fact is, this dismal economy still has deep problems. Factory output is dropping for the first time since the recession ended -- and the unemployment rate is rising.

To fix the economy, we must stop demonizing the CEOs and big business. Instead, we need to coddle them and soothe their troubled minds. Above all, we need to get them to spend and invest again.

No, I haven't had a sip of the hard right's Kool-Aid. It's a Faustian deal: growth now and reform later.

Even if doesn't sit well in the our collective conscience, our political leaders need to address the crisis of confidence in the corporate sector: worries over the "fiscal cliff" of tax hikes and spending cuts worth 5% of the economy due to hit in 2013; worries over tighter regulatory burdens; and worries over the eurozone crisis, energy policy and the potential for new stimulus from global central banks.

Our leaders have little choice, because the corporate sector is sitting on a pile of cash and is unencumbered by debt. And it's the only segment of the economy in that position. CEOs have underinvested and accumulated idle cash over the past 10 years. You can see this in the way the country's productive capacity has flat-lined while inventories dwindle to three-year lows and hiring slows.

Image: Anthony Mirhaydari

Anthony Mirhaydari

To put it another way, since the pre-recession peak, America's industrial base has started to rust away, because CEOs haven't felt comfortable paying for even basic maintenance on capital equipment. That's a serious sign something's wrong.

As a result, the economy's speed limit -- its potential growth rate -- has slowed to as low as 1.5% according to Deutsche Bank estimates. That's not enough to push down the unemployment rate or generate the wealth needed to pay down household and government debt loads. It also limits gains in labor productivity, which keeps our standard of living stagnant.

It's like this: Whatever you think of top executives or their fears, we need happy, confident CEOs or there will be no real recovery.

The uncertainty problem

The crux of the problem is that the CEOs are scared. Uncertainty, as measured by a group of economists from Stanford and the University of Chicago, has remained unusually high and volatile since the banking panic and the start of the Great Recession in 2007. Historically, according to their research, stock market returns, business investment and inventory accumulation are all affected by high levels of uncertainty.

What goes into their measure of uncertainty? Things like news flow, the number of tax code provisions due to expire and disagreement among economic forecasters.

The curious thing is that consumers and the government have done most of what they can to support the economy over the past few years, given constrained finances and the falling popularity of debt-financed stimulus. And it has worked, at least up to a point. The economy is growing, albeit slowly; jobs (though too few of them) are being created every month.

Just look at this week's retail sales report, which surprised to the upside, thanks to a surge in auto sales. And that has fueled a marginal rebound in production to satisfy this short-term need.

But businesses, worried about uncertainty, haven't embarked on the kind of long-term projects that would kick this economy into high gear and create a wave of hiring, as occured when corporate investment surged in the 1980s and 1990s. You can see this in the chart below, which shows how America's industrial capacity -- machinery, assembly lines, generators and the like -- hasn't really grown since the Clinton administration.

Image: Industrial capacity indices © MSN Money

Morgan Stanley estimates that political uncertainty alone will shave half a percentage point off of growth in the gross domestic product later this year -- at a time when growth is running at a pitiful 1.5% annual rate. And over the last few weeks, executives from Honeywell International (HON), United Parcel Service (UPS), Caterpillar (CAT) and JPMorgan Chase (JPM) have all cited political uncertainty as a threat to earnings, investment and hiring.

The Conference Board's measure of CEO confidence plunged in the second quarter, down to 47 from 63 in the first quarter. A reading lower than 50 indicates more negative than positive responses. Only 17% of respondents said conditions had improved in the past six months, a huge drop from 67% in the first quarter. Looking ahead, only 20% expect conditions to improve over the next six months, down from 59% in the first quarter.

But perhaps the night is darkest just before dawn.

Credit Suisse economists note that the ratio of industrial production to demand has fallen to its lowest level in nearly three years -- a level that in the past has come just before some big cyclical recoveries in output and risk appetite. Turnaround points include 1983, 1987, 1994, 1999 and 2003.

Is a repeat performance coming?