My Case Western colleague, Scott Shane, has a brief item linking the lack of hiring by small businesses to the collapse in home prices. Specifically, he identifies five reasons the “residential real-estate mess” is holding back small business job creation:
- Declining house prices have softened demand for small businesses’ products and services.
- Small businesses are overrepresented in the real estate-related industries that have been decimated by the residential housing market collapse.
- Small business owners use their homes to obtain business credit.
- Banks have tightened lending standards in response to a rising share of non-performing real estate loans.
- Small business owners were major customers of residential real estate loans during the boom, making them among the consumers hardest hit from the collapse in home prices.
He concludes:
Waiting for small business owners to begin hiring in this economic recovery has become like waiting for Godot. Rather than continuing to wait (while chanting the mantra that “small businesses are the major job creators in economic recoveries”), we should acknowledge why small businesses aren’t leading job creation this time around and come up with solutions to the residential real estate problems that are holding them back.
Doing this is imperative. Slightly more than half (50.2 percent) the private sector works in small companies. If the residential real estate mess keeps the small business sector from hiring, it will be awfully difficult to reduce our unemployment rate to a reasonable level.
Dennis N says:
There’s another reason why small businesses aren’t hiring. It’s uncertainty about whether they can sustain the employment. Managers and business owners hate to lay people off. They’re people. In a small business, they’re “even more people,” as you know them more personally.
August 25, 2010, 2:20 pmMarcus says:
Actually, he’s wrong on all counts. Small businesses are not hiring because they don’t know whether people making over $2,000,000/year will be able to keep their tax cuts. I heard Boehner, or McConnell, or one of those other economic genii (Yay, Shakespeare!) say so.
On a slightly less snotty note, why is there no pressure brought to bear on the banks? They got their bonuses then closed their wallets. Is it because the poor banks were so brutally victimized by poor people that they are gun-shy, now? I mean, it’s time to let go, BigBanks. The people with no money and no power can’t hurt you anymore. At least until your next shady business practice blows up in your faces, that is.
And why are the Republicans, despite all of their best non-efforts to keep our economy in the tank until (and likely after) election day, reasonably expecting to be rewarded for their treacheries? Is it because, “Shut up, Obama’s a socialist, that’s why?”
August 25, 2010, 2:25 pmSteve says:
It’s true that many small business owners use their homes as a source of capital, but it’s not as though the banks have kept the exact same lending standards and the borrowers simply have less collateral due to the state of the housing market. There’s been a sharp tightening of credit at the source in the last two years and it’s a big problem.
August 25, 2010, 2:30 pmI say NONSENSE says:
Uncertainty about government policy is indeed a real impediment to hiring at small business (and large).
Rather than rely on this or that expert, get it from a serious small businessman facing the issue at Coyote Blog (one of the best libertarian blogs out there).
Here is one of his postings on the subject.
Another anecdote… a relative was applying to oil companies for a research job (unrelated to deep sea drilling) for which there were many openings. After the arbitrary regulatory actions of the government following the BP oil spill, all of those job openings simply vanished – the companies are waiting for the government to decide whether and how they can operate, and if they’ll have enough money to invest in research.
August 25, 2010, 2:39 pmSteve says:
What complete glibertarian bullshit. You could not be less credible if you claimed Big Government carved a backwards “B” on your face.
August 25, 2010, 2:43 pmDavid Welker says:
*sarcasm* Actually, the real reason that small businesses aren’t hiring is uncertainty about how Dodd-Frank will be implemented. After all, most small business owners do nothing else than follow politics with baited breath. *end sarcasm*
Actually, the point about real estate being a major factor sounds right to me. I have thought for a while that not allowing mortgage cram downs in bankruptcy (making mortgage holders take their losses for bad loans) was a serious mistake. Basically, the banks are dragging things out as long as possible. Home owners that want loan modifications are made to wait for months for decisions and banks often delay foreclosure in order to avoid flooding the market with homes.
What this all means, is that we are dragging out this crisis forever. The smart thing to do would be to require people who made bad bets to take their medicine and move on. Instead, we are dragging things out.
I predict a double-dip recession.
August 25, 2010, 2:45 pmmicdeniro says:
It might be useful to remember that a better translation of the title of Beckett’s masterpiece is “While Waiting for Godot.”
Maybe we’re not waiting, just as Vladimir and Estragon weren’t; maybe this is the (seeming) beginning of the while part.
August 25, 2010, 2:48 pmName (required) says:
Something’s fishy, that’s for certain.
August 25, 2010, 2:58 pmrilkefan says:
Isn’t it simply that the economy is still horribly weak and is expected to stay that way, thus consumers aren’t spending and won’t any time soon, so small business aren’t expanding?
“in this economic recovery” is just silly, unless we’re talking about small businesses that cater to the very wealthy.
Really it’s the fault of those who kept the stimulus much too small.
August 25, 2010, 3:06 pmruuffles says:
Well that’s insane. If they’re willing to use their homes as collateral to get credit, why not take the risk of hiring more employees? In for a penny …
August 25, 2010, 3:07 pmI say NONSENSE says:
John Stossel also shows how government produced uncertainty is a big factor.
August 25, 2010, 3:12 pmMark Field says:
How to lose credibility on the internet in one easy lesson.
August 25, 2010, 3:24 pmHouston Lawyer says:
Come on. Last year the banks were the culprits for having too lax lending standards. This year they are bad because they are being more prudent with their lending.
I don’t think that the lack of new jobs can be laid entirely on the real estate bust. For instance, the SEC today issed a 451 page release of its final rules regarding shareholder director nominations, effectively federalizing what had always been a state law issue. Now this development is good for us corporate lawyer types, because our clients need some one to explain the rules and their implementation to them. On the other hand, clients who are spending their time and money learning new compliance rules are going to be distracted from operational issues.
August 25, 2010, 3:32 pmProfit and Earnings Ratios for the win says:
How to lose credibility on the internet in one easy lesson.
And from an expert on the topic no less.
I see the “progressives” at the VC have identified another factor that is in no way negatively influencing the economy. Why, at this rate, the economy will be humming along in no time.
Keep it up team, you’re doing a heckuva job.
August 25, 2010, 3:46 pmDavid Welker says:
Really Houston Lawyer. Haven’t you read Goldilocks. They need to learn to lend the “just right” amount.
I think it is pretty obvious that banks can be to lax in their lending standards. And I think it is obvious that if they are too stingy with their lending, that can keep businesses from expanding and hiring people. Is there something about the Goldilocks view that you don’t like?
If I said that living on the surface of the sun was too hot, would you complain if I later said that living in Antarctica with no clothes or shelter was too cold? At least I don’t see the contradiction.
That said, I have a tendency to think that the more core problem is that both businesses and banks are skeptical about the wisdom of expanding while the economy is in its current condition. And part of the reason that the economy is in its current condition is because we are dragging out this disaster in our real estate sector out much longer than we should be. People (banks and borrowers) just need to take some losses for their bad bets and move on. But, of course, what is good for society as whole isn’t always good for individuals. It is better for banks, for example, to drag things out rather than risking insolvency.
August 25, 2010, 4:06 pmM. Gross says:
Really it’s the fault of those who kept the stimulus much too small.
So it would appear that the housing market is frustrating job creation efforts, something that really isn’t the Obama administration’s fault. You’d think his supporters would be elated that he’s off the hook, but instead, the take-away is that we should throw more money into the hole and hope the laws of economics change over the next couple months.
Fannie, Freddie, and the FHA are already running with the throttle wide open. What more do you seriously want?
August 25, 2010, 4:12 pmSteve says:
The point is that if you’re a small business owner whose business needs more capital, a common place to get it is by tapping your home equity line of credit. If your home is worth less, or your bank is scaling back home equity loans as many are, suddenly you have much less credit available and thus less capital to put into your business.
August 25, 2010, 4:20 pmSmall Business Guy says:
I’m a small business owner … I’m not hiring because My business is small about 12 people. Anyone who comes to work here becomes “Family” I hate laying people off. I have no issues laying someone off for cause, but laying someone off for business reasons is terribly hard. I can’t predict the regulatory environment in the next year or so, will my taxes go up?, Will we be forced to double or triple our heath insurance premiums? Will we be forced to create and submit 10,000 new 1099 forms (as the current health bill requires)
At the end of 2008 we saw a very sharp business drop off, we ended up with a lot of unsold inventory on Jan 1, about 500K worth, so on paper that is 500K of profit, I had to pay large state and federal taxes on the supposed “profit”. So on paper we make 500K in reality we had ZERO $$ we could spend. We got through 2009 by cutting the owners salary to near zero (just enough to pay the tax bills) and everyone else by 20% we did not lay anyone off.
This environment has become so uncertain that its destroyed all the enjoyment in running a business. If we did not have a bunch of people and families dependent on our continued existence I’d be tempted to close the doors and retire to some place rural.
August 25, 2010, 4:23 pmHarry Schell says:
As a small business owner who does not need either bank lending or to use my house as a piggy bank, I am not hiring because of market and regulatory uncertainties. Most importantly, demand is way down and I have no intel as to which way things will go. So, we are hoarding cash and doing some new product development, but no hiring.
Based on a really good first half, we will have our best sales year since 2002. Quarterly sales, however, starting with Q2, have declined from the prior quarters by 37% and 30%, with another 15% decline expected in Q4.
Expand hiring on a sales trend like that, or go borrow money? How stupid do you think I am?
Obama and other government managers are doing it, but I have to live with my decisions. I have to look people in the eye when I let them go. Junior and cadre don’t.
I have never met a successful small business person whose first concern wasn’t sales, current and potential. It has to be, for everything, and I mean everything, flows from that. Sure, some are facing a rising sales trend and may have trouble finding capital to support expansion, which might be easier if they could tap house equity or get a bank line…but without that rising sales trend, only idiots do such things and hire more people. Idiots usually end up broke.
WSJ has a counter point to Shane’s argument on today’s op-ed page, which I recommend for an additional point of view.
In sum, Shane could be partly right in some cases…I bet he is. The meme that a strong residential market is the key to a strong economy is so simplistic it cannot be true. Almost every national economy has too many moving pieces for such simple recipes. If it were that easy, centrally planned economies would run perfectly. Central planning has and always will fail, however much conceit the “smarties” at the core think they are. They just aren’t good enough.
And that includes Cass Sunstein, even. He and Obama share a trait, they have never done anything but talk all their lives. Even had they different qualifications, neither of them, if there were thousands, could make optimal decisions for hundreds of millions of people. The fatal conceit that they should try comes easier when they have done less in life. They are so ignorant they can’t comprehend their own failibility.
August 25, 2010, 4:31 pmrilkefan says:
Well, they did really screw homeowners via HAMP, but I don’t in fact blame Obama for the endless tracts of houses built in the last bubble.
It’s pretty clear to me that freshwater economics (and even more so freshwater economists) has been shown to be deeply flawed, and I want (0) Obama to have at least tried for a stimulus package of the size and composition calculated by the folks proven to have been right about the economy; and since that’s scotch under the bridge I wish (1) he’d try taking advantage of the fact that money is dirt cheap right now to hire folks to paint roofs white, to fix broken water mains, to shore up old bridges. It would take a lot more than a few months, but of course Bush spent the better part of eight years digging this hole.
August 25, 2010, 4:34 pmSteve says:
Obama is responsible for your company’s weak sales? How does that work exactly?
August 25, 2010, 4:36 pmLN says:
Harry:
So in other words, you are not hiring because sales are declining. That makes perfect sense to me. I guess I don’t understand the connection to “market and regulatory uncertainty” or to the fact that President Obama is an arrogant politician.
August 25, 2010, 4:47 pmDavid Welker says:
This argument that the problem is “regulatory uncertainty” is simply off. You had 500k in unsold inventory. Why would you hire anyone in any regulatory environment if the economy isn’t doing well?
Let us say there were lots of opportunity to sell whatever product you do sell and the economy was moving along quite nicely. If you are an idiosyncratic business owner who refuses to expand to take advantage of that business, I am sure your competitors would be glad to take advantage of your slacker-like qualities. Basically, business owners are constrained by economic reality too. Of course, you can decide to behave irrationally in response to “regulatory uncertainty” and leave a lot of money on the table if you want. I am sure your competitors will be glad to eat your lunch.
This point about “uncertainty” is nothing more than another right-wing talking point. Or, to be more precise, the issue is not that “uncertainty” (also known as risk) is not a cost, but that there is an awful lot of selectivity about when those with right-wing inclinations decide that “uncertainty” is THE problem of the day. For more, see this excellent post on this topic by Brad DeLong here.
Right-wingers are kind of like used car salesmen. They will say anything to make the sale.
Anyone else amused about how right-wingers are so selective in invoking certain ideas? Anyone else amused how the right-wingers always invent a new talking point of the day (now it is uncertainty) that somehow always leads to the same preordained conclusions? Buy this lemon!
August 25, 2010, 4:51 pmAnon Y. Mous says:
Oh my yes. Please oh please, can’t we have more efforts of the federal government to manipulate the housing market? Even though each attempt has been a more spectacular failure than the last, I’m sure that this time they can turn it around.
August 25, 2010, 4:57 pmAP says:
WSJ opinion directly on point: It ain’t the real estate market; real estate prices are merely an effect of the real cause: gain in productivity. Wanna drive economic growth/recovery? Encourage productivity gains
August 25, 2010, 5:08 pmDavid Welker says:
Well, at least you admit that the fact that demand is way down is more important than “regulatory uncertainties.”
I especially like this quote:
As Harry Schell acknowledges, the really big problem is aggregate demand. It isn’t the only problem, but without the prospect of sales, you would be pretty crazy to expand.
The government, instead of taking decisive action by doing a stimulus that was actually enough to increase aggregate demand (a.k.a. “sales” in accountant speak) has been rather useless. Frankly speaking, any accomplishments on health care or financial regulatory reform (Dodd-Frank) don’t really matter compared to getting the economy back on track. That should have been priority number one all along.
I personally am going to be glad when Democrats suffer in the midterms. They deserve it. They obviously don’t want to lead. They didn’t lead when they had the chance. Instead, the ever so lame Rahm Emanuel argued that a stimulus that was over 1 trillion was “too big of a number” in a 14 trillion economy. In other words, the guy was more worried about a bad news cycle when what he really should be worried about is the economy. Because I guarantee you that (1) taking care of the economy is the right thing to do anyway and (2) when unemployment is high, incumbents lose, so it is politically stupid to base the size of the stimulus on anything other than what is best for the economy. In other words, the stimulus was all along ruined by politics and the administration and Congressional Democrats never fought to do the right thing. This is true both regard to its size and its structure.
I mean, at least fight to do the right thing! If you lose because of Republicans, at least you tried. But Democrats did not even try. So, they deserve to lose. Oh, and also they deserve to lose for not getting rid of the filibuster. When you allow the other party obstruct when you don’t really have to, that is your fault. If I was a Republican who disagreed with you on policy, I would obstruct you too if you let me. I don’t blame Republicans for obstructing when they disagree on the substantive policy. That is exactly what they should do when they disagree! What do you expect them to do, help you enact policies that they don’t think are a good idea? That is an unreasonable expectation. I don’t blame Republicans as much for obstructing. (I do blame them some, because much of that obstruction was blatantly political and not based on policy.) But more I blame Democrats for letting Republicans obstruct.
I am inclined to not vote in the midterms (except for state-level races). Democrats need to pay. If Democrats are not going to fight for the economy and all they ever attempt are half measures, why exactly should I care whether they are re-elected or not?
August 25, 2010, 5:21 pmPaul says:
what amuses me is how sure people who have never run a business are about why small business isn’t hiring. The reasons are many and yes every one of them doesn’t encompass every business. But when a small business owner says something – it is probably true for them (and probably some others like them)
what saddens me when I read on this topic is how little real listening goes on.
I run a small business – I am doing all I can to avoid hiring people (and yes I could use the help – we will do more work (sales to use one term) this year than any previous – 18 years in business). In addition to working longer hours (me and everyone else)I have outsourced some more so maybe that has created a job somewhere
Hey – but keep telling us were wrong and that what we say isn’t the real reason we don’t hire (expand)
August 25, 2010, 5:33 pmI say NONSENSE says:
Lots of posters here trying hard to maintain their denial of the obvious fact that the dramatic increase in regulatory, fiscal, monetary and tax uncertainties increase the risk, thus reducing the incentives for small businesses. It started under Bush with TARP, but expanded greatly with the current administration, which has used its Chicago-land tactics to batter big businesses into submission, while capriciously regulating small businesses into a defensive, non-hiring posture.
Yes, there are important other factors, such as aggregate demand. But I have yet to hear from a businessman who cites shortage of credit as a reason for not hiring.
There has not been a time since the disastrous economy of the 70′s where government impact on business has been so hard to forecast. There has not been a time since that period where the net increase in government impact on business has been has high.
You don’t have to be a conservative to understand the impact of government caused uncertainty. You can be a lefty and argue for a CONSISTENT policy of some sort. But that’s not what we have – we have a government that, while greatly increasing its footprint, is arbitrary and capricious about how it does so. Obamacare, whether you are in favor of it or not, is a huge disincentive to hiring right now. The regulatory over-reaction to the BP spill tells businesses that some event not under their control may trigger this very activist and confused government to just shut their whole sector down. New or proposed regulations in all sorts of fields are threatening businesses.
I wonder how many of those denying these impacts has ever actually tried to run a business?
August 25, 2010, 5:40 pmDavid Welker says:
And I am sure that the rising health care costs (and uncertainty about those costs) that we have allowed to spiral out of control under Republicans has NEVER been a problem for business hiring, right. Read this post by Brad DeLong and explain to me why the people preaching about “uncertainty” were silent about uncertainty caused by Republicans? I will tell you why, because it doesn’t fit the narrative.
August 25, 2010, 5:50 pmrilkefan says:
Because at least those half-measures move the country in a fairly sensible direction, most of the time; the other guys can’t acknowledge evolution, won’t admit tax cuts reduce revenues for reasonable tax levels, like to pretend T-bills are worthless IOUs.
August 25, 2010, 5:55 pmDavid Welker says:
What you say does not matter. What matters is supply and demand. If sales keep on increasing, you either have to hire more at some point (assuming all the work cannot be outsourced) or your competitors will simply take the customers you lose. And they will hire. There is a limit to the point where you can require more work from yourself and your existing staff; there are only 24-hours in a day. (Also, if you abuse your employees by overworking them now, they might put up with it now while jobs are scarce. But don’t be surprised when they ditch you at the first chance to actually have BOTH a job and a life.)
Just like everyone else, you are constrained by supply and demand. If you act in an irrational manner (fail to expand when the opportunity exists), then your competitors will eat your lunch.
So, you can tell me your behaving irrationally and not expanding in the face of rising demand. But it doesn’t really matter what YOU do, because you have competitors. If the demand (sales) exist and you don’t expand to meet it, your competitors will.
August 25, 2010, 5:59 pmbailey says:
Well, Paul, they think you are a moron. That’s the general trend you see in the discussions that revolve around the topic here. You, small business owner, are an idiot and anything you say is of no consequence.
August 25, 2010, 5:59 pmPaul says:
David – How many people have you hired? Why or why not?
August 25, 2010, 6:01 pmbailey says:
Of course, you do get the brilliant discussion of how if demand were better, you would be doing better. I doubt you could have ever figured out such a thing. Aren’t you glad you came here.
August 25, 2010, 6:01 pmSmall Business Guy says:
I run a company that designs electronic products that we sell to engineers to use in their products. Yes in 2009 we had an inventory problem, that was cleared up by mid 2009. The hire or don’t hire decision comes down to this: Do I hire engineers to expand my product line and develop new business or not. To do so is a gamble. Sometimes it works and sometimes it doesn’t. One of my current issues is that I can’t evaluate my business cost so I can’t figure how much I have available to bet, or the longer term cost of a “hire bet”. So if it costs me 100K to hire one guy to potentially create (50% chance) 500K in profit, 100K is much less than 500K * 50%. I’d probably go for it. In order to place this bet I have to be certain that the business will still be around in 18 mo when this bet pays off.
My existing business costs currently have a cost and regulatory uncertainty that swamps a 100K bet. If I bet the 100K and all the regulatory uncertainty goes the wrong way I’m out of business. So rather than place the 100K bet(hire) we conserve cash and try to be as lean as possible to survive the uncertainty. Yes Harry is right small business guys are all about sales first and foremost, Our particular response to increased sales is to widen/increase our product offerings.
August 25, 2010, 6:20 pmHarry Schell says:
@ Steve: Obama’s overall destructive actions toward the private sector, particularly energy, have cut domestic demand for some of our products. The Gulf oil drilling moratorium clearly is stupid and costing jobs. Conscious acts.
@LN: The regulatory uncertainty absolutely plays into what plans I make to deal with the future. We have opportunities out there which might keep our sales rising. Intel is too poor now to act on it, but if we do well, I want to stay under 25 people to minimize Obamacare’s impact. The 1099 requirement is another uncertainty…how much more paperwork? Will we have to hire another person for it, fire someone in the shop to keep costs contained and work everybody else overtime if things get going? I don’t know to some extent who to hire or fire. So we sit.
As to the arrogance of Obama and his cadre, they will reduce overall economic performance with their arrogant solutions and contralizastion of power, picking winners and losers they like…and that has to have some impact sometime on my company. The simplicity offered by Mr. Shane is ludicrous and dangerous. Housing in CA was a symptom of free money, speculative fevers and drove a lot of construction jobs. Those construction jobs did nothing to help my company. We don’t participate in that market. So fixing the real estate mess will not fix my business problems.
@David Welker: The stimulus is another cloud on the horizon. Keynes himself backed away from his multiplier late in life after rigorous reveiw of his work for FDR. By contrast, cutting marginal tax rates and government spending has a long empirical history of promoting a strong private sector. A great batting average.
Greece would be a paradise if high regulation, high taxation, high government spending compared to GDP and lots of debt were the keys to economic success. It isn’t and history is against you. That teacher’s jobs were preserved, some will celebrate. Overall, a bad decision, out of Junior’s need for campaign support for Democrats. The tax money goes directly there. Public financing of (Democrat) campaigns has nearly arrived.
Look at what Harry Truman and Congress did with FDR’s plans for a postwar economy. Ireland, Germany and other countries minimizing Keynesian interventions are stronger for it, if still hurting. We are nose down and accelerating, with stimulus interventions delaying needed realignments. That pain is going to happen, and like a lot of things avoided, is better faced today than later.
Finally, I have to say that I am feeling like Small Business Guy when it comes to taking on the risks and effort of running a business in light of the use of the money I earn and what arrogant politicians use it for. I am in CA, which has a state government and most local governments staffed with incompetents. Even if we got tax and regulatory relief at the state level, the buffoonery of how my tax dollars are spent makes me want to cut off the flow, and wonder about the people who live around me and think things are ducky.
The state legislature cannot get a budget done but they are highly animated about CA’s state rock, serpentine. Why? It has traces of asbestos in it. So, such a horrible thing should be shunned by the state, even though in its natural state the asbestos is encapsulated and not remotely harmful. And I have worse tales. I am getting to my limit of paying for such buffoonery.
Thanks to all for a good discusison, mostly.
August 25, 2010, 6:27 pmRandy says:
Paul: ” In addition to working longer hours (me and everyone else)I have outsourced some more so maybe that has created a job somewhere.”
Of course. This isn’t a normal business cycle, whereby we lay off people when sales go down and rehire when sales go up. So many of the job functions of an SME have been outsourced to others. Outsourcing can be done to the accounting firm down the street, or the firm in India, but it’s the same concept.
In other words, a lot of jobs are just gone. Once you laid off your accountant or your janitor and contracted with a firm that does that for you, you certainly are not ever going to hire any of those people for those functions.
When the economy goes through a major restructuring like this, a lot of positions are lost forever, at least in the US. But new ones are created. We must focus on where those new ones are and nurture those.
We went through a major restructuring in the early 80s and that was immensely painful, and many of those jobs were lost, mostly heavy manufacturing like steel, shipbuilding, and the like. The housing market no doubt contributes, but I doubt it is the major reason businesses aren’t hiring, and so far, none of the commentators have said that it is either.
August 25, 2010, 6:34 pmHarry Schell says:
Paul, look at Obama’s cabinet. Virtually no one from the private sector with any experience. People who talk and ideate all day. A bunch of “geniuses” who think they can “nudge” the commoners around so the commoners lives will improve. They think they know it all, and maybe that old saw about academia should be recalled: as academics progress, they study more and more about less and less…in the end know all there is about nothing much at all.
Of course Junior picked a bunch of talkers. He would be very uncomfortable around any other group. No echo chamber for him.
August 25, 2010, 6:38 pmSmall Business Guy says:
One Jobs issue is that we are becoming a world economy. In a world with no business barriers an unskilled worker in China will make the same as an unskilled worker in the U.S. The low skill manufacturing Jobs in the U.S. are all gone. For a while construction (as much mas 6% of GDP) provided work for low skill workers in the U.S. Construction can’t be effectively done offshore. This construction boom was enhanced with the easy mortgage rules. That is all gone. Service Jobs also have to be done locally, but service Jobs don’t really create wealth.
IMHO The creation of Wealth requires the creation of stuff. This can be intellectual property (IP), or tangible things. We in the U.S. have not lost our ability to create IP and good creative people can still make a lot of $.
We have lost a bunch of businesses that create tangible things. I do believe that people have different innate skills and not everyone is cutout to get a PHD in advanced science or technology fields.
So at some level the problem in the U.S. is how do we create Jobs for those that aren’t sufficiently gifted or inclined to create IP? A secondary question is how do we create an environment where the really high net worth people to have their homes, yachts and airplanes built in the U.S.? We don’t do this by creating class warfare that makes them feel unwelcome.
We also want large international corporations to feel welcome here by offering low tax rates. Large international corporations have the ability to move their profits and expenses around so that the profit magically appears in the counties with the lowest tax rates. By having one of the higher corp tax rates we effectively prevent ANY larg international corps from landing their profits here.
August 25, 2010, 6:56 pmMark Field says:
I don’t have to be an expert on a topic to know whether someone else is or not. I’m not a biologist, but I know that creationists are not experts on the subject. I’m not a meterologist, but I know George Will is no expert. I’m not a time traveler, but I know that Glenn Beck is no historian.
And John Stossel isn’t an expert on anything at all.
August 25, 2010, 6:59 pmI say NONSENSE says:
Mark,
Your comment is utterly illogical.
Stossel is not commenting as an expert – he is reporting as a reporter (with a particular slant, as all reporters have).
He may also know a hell of a lot more than you about small business, or not. I know that I do, based on your comments.
August 25, 2010, 7:56 pmPerseus says:
Because government officials and economists have demonstrated their abilities to do that so well.
August 25, 2010, 7:56 pmMossypete says:
Ok- I’ll bite
August 25, 2010, 8:02 pmHow does 500K in unsold inventory mean a 500K profit ? I understand different valuation methods effecting the gross profit margin of sold inventory. Can you explain how unsold inventory is taxed a profit?
Perseus says:
Why should we give much credence to an ideological rant found at a professor’s blog whose byline about being “even-handed” is obviously intended to be ironic?
August 25, 2010, 8:08 pmSmall Business Guy says:
The 500K of inventory is an asset. So 500K of what was $ was turned into inventory to try and sell at an additional profit.
It did not sell, so rather than having it as actual $ you could spend its tied up in inventory.
When you do taxes you take (Inventory end of Year) – (Inventory Start of Year) and that goes right to the bottom line.
If you actually can clear the inventory in the next year you really get the tax stuff reversed because over the year you sell it off then get an income adjustment the other way. as end-start turns negative.
But in the short term you have a huge tax liability with no $ to pay for it.
So saying we will only tax those making >250K also damages small business that are only really making that much on paper due to temp situations. Its an attempt to show a real world example of someone having a huge reported profit that’s not “real”
This also applies to things like large equipment purchases. Say you run a machine shop, you buy a fancy 250K CNC mill. That’s an asset.
August 25, 2010, 8:22 pmso you pay taxes on the change in your asset values even though its not a liquid asset. You then get to depreciate the CNC mill over a number of years as its “value” get used up. As a business grows the $$ tied up in things like equipment and inventory grows. Its all considered profit by the IRS and if you could actually sell the business for what its worth that might be ok, but in many cases small business people can’t get the book value for a business run by a few key people that want out. So its quite likely that a business owner might have a growing business that the IRS says made $1M, yet he has NO cash to pay the IRS with. It basically makes all equipment and inventory 35 to 50% more expensive. (Depends on state rates as well)
Mark Field says:
This is ridiculous. He wasn’t reporting facts, he was commenting on them. Your original comment specifically says “John Stossel also shows…” If he were a reporter, you would have said “the facts show”. Stossel did cite some (very selective) facts, but he also went far beyond them in interpretation.
I’ve never, to the best of my recollection, made a comment here or anywhere about small business. If you know a lot, you should make your own argument rather than citing Stossel.
August 25, 2010, 8:27 pmPaul says:
A few observations – from a small business owners perspective
I run a business that has averaged 20+% growth over the 18 years since I started. We have had 3 down years of revenue in that period. This year I think we will have our highest revenue ever. I have not and will not hire any new long term employees (I am considering a few “short term” – but the long termers are against it) – why won’t I hire?
1) “Investing” by hiring an employee is giving up current income in order to have a higher future income. With tax rates increasing the government has created an incentive to increase current income at the expense of future income. This will be true until we are thru the increase but for now it is a disincentive to hire (then the disincentive is the lower after tax return on the risk). There are VERY few businesses in which an employee can generate profits that exceed their start up costs right off the bat.
2) For my business I figure it costs 25 to 28k to carry an employee’s payroll and the material costs for their work thru the cycle from when I have to pay them and suppliers until I get paid for their work. I can borrow the money for this or It can come from retained earnings. There is a fear factor that has led most small business owners to question why they have leveraged their house, life etc to the hilt (you have to sign away your life to borrow from a bank even if not borrowing against a house). I know my wife has had enough of cosigning on all the papers. Thus as one deleverages I can afford fewer employees. The only way to cover the carry costs is to have AFTER TAX retained earnings in the business. The rising tax rates means that it will take longer to accumulate this. This also delays hiring. (see #6 below for more on this)
3) I am extremely committed to keeping the employees I have carried to this point. They are also committed to going the extra mile. Paying them to work extra hours costs no additional health insurance, unemployment insurance etc (the max payments have already been made). It is cheaper, less risky and better for moral to let everyone work more than it is to hire another employee. I lay the workload out to them on a regular basis and say what do you want to do. May of them have spouses who are out of work – they are thrilled to work extra. I run regular craigslist ads so I have a stable of resumes of people who could be hired.
4) The government has said that we must stay under 50 employees to avoid “regulations” – I am down from 75-80 but still over the 50 – It is quite a quandary but I must figure out how to outsource more rather than grow employment.
5) The uncertainty of future taxes, regulations and mandates is pretty daunting. I can manage the people. I can manage the business. I can manage growth. More government involvement in it all scares the crud out of me
6) I am tired of the pressure – I enjoy the “game” but the future is for the first time pretty darn uncertain. By this I mean government/Tax/Regulatory uncertainty. I’m paying down debt. That has come out of retained earnings. This is a lot of capital out of the system. Future growth will be based on internally generated retained earnings rather than borrowing. I expect the higher future taxes to limit this. Regardless in 2 more years (this and next) we’ll be done with debt. Economics 101 would say this is awful for the overall economy – but it sure feels great. I think other small business owners have similar goals.
7) My business will not be outsourced overseas. I could create jobs – I am arrogant enough to think I am very good at what I do. I have clients who have asked me to expand more than I have (they would take the work away from competitors). I have employees who would do it if I would back them up. Unfortunately – Its just not worth it right now. When people like me see it as being worth it again – the economy will take off.
Will it be worth it to push growth again? I have some opinions thoughts hopes and fears but that is probably for another day. For many of the commentors here I would say this – You may not agree with the reasoning (and there are many different ones) that leads to the conclusion not to hire – but the conclusion “feels right”. Until that changes – we are in a rut. I have seen few comments that would even try to change anyones mind and say “go hire and expand”
August 25, 2010, 8:50 pmMarcus says:
This. Whether the Democrats deserve to be punished due to shortfalls in what they wanted to do or because of perceptions they are soft is way far off the point.
Between Republican obstinence and the cutesy named but ugly Blue Dogs, dem Dems were hogtied from the beginning. And they still managed to nudge our economy forward. Allowing the Republicans, including the Angles and Pauls, to take over our systems again- after such a short banishment- and drive us straight back into the morass these very same lunatics put us in in the first place is not punishing the Democrats, but all of us.
Think for a moment how hard and fast the Republicans have stood in the path of loans for small business, jobs saving bills, and every other bill that may have actually helped us and kept the economy sputtering forward. They should be rewarded for this behavior? And only out of spite for Democrats? I don’t think so.
Trust me. Any satisfaction derived from punishing Democrats in the midterms will be stunningly short-lived. And then we all get to live with it.
August 25, 2010, 8:59 pmLN says:
You are correct that an increasing tax rate creates an incentive to increase current income at the expense of future income. However, this only has an effect on the margin. If an employee costs $100K to hire before a tax increase and $105K to hire after a tax increase, the tax increase only has an effect on the hiring decision if the employee’s projected future impact on revenues is between $100K and $105K. Given that the projected future impact is highly uncertain even in the best of economic environments, the impact of the tax increase on hiring is best described as a second-order effect.
This is true. Of course this was also true when George W. Bush was President, when Bill Clinton was President, when George H.W. Bush was President, when Reagan was President, when James Garfield was President.
Also true… but I wasn’t aware that Obama had invented the idea that larger businesses are regulated more than smaller ones.
And when the economy takes off, people like you will see it as being worth it again.
In short, small business owners are entitled to political opinions just like everyone else, and I guess it’s nice to imagine that you’re America’s backbone or whatever, but that doesn’t mean you have some sort of magical insight into the economy not available to anyone else.
August 25, 2010, 9:25 pmHugh says:
Well, I tried to do my part. My wife and I decided to add a detached garage to our house. We got the yard ready. Then the builder called us to give us the details on getting approval. First, we have to go to the City Board of Zoning Appeals in order to get approval to take our plans to the local neighborhood commission. There is a waiting list and we can’t get on the schedule for the BZA until their mid-November meeting. Then, the BZA will submit our paperwork to the neighborhood commission. We get on the waiting list for that. We have a hearing and present our plan. The commission will approve or disapprove; doesn’t matter because it is not conclusive. Then, once the commission has made its decision, we take it back to the BZA which makes the ultimate decision.
We have to go to 1 in order to have a hearing in front of 2. However, 2 does not have any authority; it is just a procedure we follow to get back to 1. 1 then makes the decision. This will take anywhere from 4 to 7 months.
The builder told me that he once asked the BZA why they didn’t schedule more hearings during the busy months. He was told, “but that would mean more work.” Oy vey! Maybe if these fools did a little more work, the local economy might pick up a little faster.
August 25, 2010, 10:09 pmByomtov says:
SmallBusinessGuy,
I think you are confusing increases in assets with increases in owners’ equity.
Let’s say I open a store in January. I borrow money to buy $100K of inventory. I now have a $100K asset – the inventory, and a $100K liability – the loan. (If I use my own money to buy the inventory then I’ve created $100K of “paid-in-capital” instead of the loan).
I don’t sell anything. At the end of the year I still have my inventory, $100K more than on Jan. 1, when it was zero. I don’t owe any income taxes on it. I had no revenue. I made no profit.
OTOH, if I sold it all at a $50K profit and reinvested in more inventory, so I ended the year with $150K in inventory it’s true I owe on the profit I made – $50K, not $150K. In that case I have a cash problem. I owe taxes but my cash is tied up in my inventory. This is common in growing businesses, where non-cash assets expand rapidly.
August 25, 2010, 10:14 pmJoe Kowalski says:
So in other words, SmallBusinessGuy’s $500K in unsold inventory is less of a tax problem then it is actually a cash flow problem. Curious, was this particular inventory rule in place on January 19th, 2009, or did it come into effect after that?
August 25, 2010, 10:25 pmRandy says:
Perseus: “Because government officials and economists have demonstrated their abilities to do that so well.”
Who said anything of the sort? We have educational institutions that could and should train people for the jobs of the future, can’t we? I don’t know exactly what positions will be in high demand in ten years or twenty, but I do know that there are many growing areas — learning languages and foreign cultures, learning new technologies and developing them, anticipating new business models. There are many ways to nurture these things, and few, if any, require the government’s blessing.
August 25, 2010, 10:28 pmStephen Lathrop says:
This thread is like standing in a breeze and watching the straws blow past. As in “straw in the wind,” not straw men. What these comments attest is the spread of deflationary expectations. If it’s happening, it’s a serious problem, more serious than anything seen recently in the economy.
August 25, 2010, 10:30 pmLN says:
A growing business needs to borrow money or raise capital to finance its growth. It’s Obama’s fault.
August 25, 2010, 10:34 pmChaser says:
Small business owners control a large proportion of the economy. They certainly have a lot of insight into THAT PART of the economy, which is what they are talking about. That insight includes direct knowledge of the impact of governmental decision making (and the uncertainties therein).
It is interesting watching the theoreticians here first pontificate on small business, then, when contradicted by people who actually know something about the subject, assert that this knowledge is not relevant.
August 25, 2010, 10:34 pmChaser says:
Which leads to the obvious question: why the hell are you blathering on in a thread about small business?
August 25, 2010, 10:35 pmPerseus says:
Debatable, and our educational institutions are very much closely intertwined with government.
August 25, 2010, 10:47 pmLN says:
And yet the small business owners commenting here cannot explain how Obama is responsible for their problems. One guy owns a business with declining sales. Another guy can’t unload his inventory. Someone else thinks it’s too risky to borrow money to finance more hiring. In other words, people aren’t hiring because the economy sucks — what a shocker. The rest of it is just people articulating their political biases. Big deal, we all have them. Yes, taxes and regulations make it harder to hire people. Guess what, taxes and regulations weren’t invented on January 21st, 2009.
Nobody here is actually explaining how current Congressional actions are preventing them from hiring. Instead we get “well it makes absolutely no sense to hire in this economic environment, and I think Republicans are more favorable to small business owners on issues of taxes and regulation.” But I could have told you that and I’m merely somebody who works at a large company.
August 25, 2010, 10:51 pmkazinski says:
Actually you are not far off base. You may have misplaced a zero, the Dems are talking about only preserving tax cuts for those who make under 200,000, but no matter the principal is the same: The money that small business uses for expansion, hiring that is, comes out of their profits, taxable income that is.
So higher tax rates on even those making over 200,000 does put a crimp on hiring. And then add to that higher costs for benefits due to health care “reform”, and other possible taxes and entitlement increases and it makes a pretty dramatic effect on hiring.
August 25, 2010, 11:55 pmDuracomm says:
LN said,
Here is an explanation of how the actions of obama and the democrats are causing small business to not hire.
Small business not expanding or hiring is basic economic self preservation in the face of tremendous uncertainty regarding government regulatory and tax policy.
The negative impact of obama and the democrat’s actions ripples through the economy. The guy below is not spending money because of uncertainty which means his vendors will have less money to spend on employees or expansion.
Lather, rinse, repeat.
Why My Business Has Ceased Investing
August 25, 2010, 11:56 pmSmall Business Guy says:
Yes you are 100% right inventory taxation is really a cash flow problem. What I was trying to illustrate is that if a business is growing it needs to reinvest in itself. This reinvestment is currently taxed at the highest rates. Its not like the small business guy that “makes” 500K is snorting coke off a hookers A## in vegas. He is using the 500K to build a business that hires more people. The class warfare theme that says we should tax anyone making more than 250K 99% because no one needs that much $ misses the point that the small business has been the engine of wealth creation and growth in the U.S. That wealth is often wealth that is buried in the business and not liquid in a way that can be used to splurge. The current tax system reduces the rate of that growth by at least 35% and will soon reduce it even more.
As to what has Obama done that harms small business, I think I addressed the uncertainty factor. Whats going to happen to the health insurance mandate the associated costs? What is going to happen with the Tax rates? What is going to happen with the crazy 1099 provision in the health care bill? All of these make for uncertainty and some of what he proposes (cap and trade, card check ) is even worse.
He has as much as said if you make too much money that is unfair and we are going to redistribute that. He vilifies business of all types. The modification of the GM and Crystler bankruptcy made it much mode difficult to raise venture capital from offshore, because they changed the long established bankruptcy rules. The position of secured creditor is no longer applicable as a risk mitigation element of funding.
In Obama’s world he sees all business as evil, so why should I not feel significantly more uncertain about the direction of government regulation and taxation?
August 26, 2010, 12:08 amblue says:
I can’t speak for all small businesses, just my own. Obama is causing small businesses like mine not to hire because I have NO idea what to expect from his policies.
None!
August 26, 2010, 12:13 amLN says:
Duracomm, well at least here we have an example with figures and some attempt at logic. So that’s good.
On the other hand, note the link at the end of the post (“example of current mess”). It is to a post in 2005 that complains about the burdens imposed by tax returns, tax audits, safety inspections, and licensing requirements. It sounds horrible. And yet this company apparently has grown 10% a year since then, adding over 100 positions. What a miracle!
I understand that uncertainty makes life harder for people managing a business. This makes perfect sense. And in a competitive market profit margins are often quite small and very sensitive to changes in the prices of inputs and outputs. Yes yes.
What I don’t see in these testimonies is an honest consideration of the baseline. Life is always uncertain, there is always government regulation, there are always taxes, and profit margins are rarely that large.
I also don’t see much consideration of the fact that if you are affected by new taxes and regulation, it is very likely that your competitors are also affected by them.
Back in 2008 the housing bubble had popped, the financial system was going crazy, the government had been running large deficits for a while, and it was an election year. There was no uncertainty then? And yet this company apparently managed to grow 10% and invest $500,000 in new facilities. I would be interested in how they managed this feat given that any uncertainty apparently cripples businesses and prevents hiring.
And of course health-care legislation and carbon emissions legislation carries both costs and benefits. It always looks like a terrible idea if you just focus on the costs. I appreciate that small business owners have a better idea of the costs than I do, and I appreciate their perspective. But they do not have the final say on the overall impact of such legislation on the country.
August 26, 2010, 12:21 amLN says:
And really? Obama sees all business as evil? People have LITERALLY NO idea what to expect from his policies?
August 26, 2010, 12:28 amChaser says:
What is utterly clear is that you simply don’t see anything clearly – you just don’t get it, just like Obama.
Economics works on the margins, and what you just described are changes on the margin – BIG margins in this case.
In other words, what you so casually brush off are big effects with significant economic impact, as several businessmen have been trying to explain. Your response is sort of like saying “well, 80% of the people are employed, so what’s the big deal?” Get it? The margins? The differentials? That’s where it all matters!
August 26, 2010, 12:30 amRicardo says:
A survey of small business owners confirms most of them do not expect revenue or cash flow to grow over the next 12 months. These numbers are much more pessimistic than they were even three months ago. That suggests weak demand is behind weak hiring, not uncertainty over rules and regulations.
Uncertainty over the current economic climate is a big problem. The fallacy is in attributing all or most of that to regulatory and tax policy, let alone regulatory and tax policy at the national level.
August 26, 2010, 12:48 amLN says:
Chaser, I appreciate the condescension. Obviously I need to write more slowly for you to understand.
1. To measure any marginal change honestly, you need to look at the baseline. That was my point. Next time read what I wrote instead of what you imagined I would write.
August 26, 2010, 12:53 am2. None of the testimonies about uncertainty look at the baseline level of uncertainty.
3. All the testimonies strongly downplay fundamental economic uncertainty (how much can I sell next year?) and emphasize regulatory uncertainty (what will my taxes be next year?)
4. Is #3 because the latter is much more important than the former, or is it because you can easily bitch about someone for regulatory uncertainty (Obama) but not for economic uncertainty? Hmm…
5. I see no reason to think that small business owners are better at understanding the big picture than anyone else. As I wrote above, they are obviously better at understanding what affects them directly, and I appreciate that. (Well, at least most of them — that guy who has NO IDEA of what to expect from Obama’s policies seems pretty clueless.)
Joe Kowalski says:
From what I can tell, in many of these areas there would likely be a high level of uncertainty even with a Republican administration in office. The health care situation seems like swapping one set of uncertainties, insane inflation of premiums with no end in sight, with another set of uncertainties, a massive new regulatory framework with many possible options, including dropping coverage, sending your employees off to the exchange for coverage, and just paying a fixed penalty for doing so ($2000/employee/year I believe).
As for income taxes, without a major restructuring of the taxation system in favor a consumption driven one, or gutting entitlements and reigning in defense spending (and neither party seems seriously interested in doing this), the deficit will reach Greek levels absent tax increases of some kind.
The 1099 provision in the health care bill will be a pain in the behind, but my employer (~350 employee company) is already requiring vendors to print (or hand write) their federal tax ID on any invoice they send us if they want to be paid and our A/P system has had the ability to track that info for a long time. In addition all of our A/R bills we send out now have our tax id number prominently listed on the invoice so our customers can track it. I wouldn’t be surprised if a small industry of paper pushers comes up to generate the forms for small businesses. Send them a list of names, addresses, amounts, and tax id numbers and they take care of the rest. Accounting and paperwork pain in the arse? Yes. Major liability? Doubtful.
Card check is deader than a doornail in a mortuary. Cap & Trade isn’t going anywhere soon, and if the Republicans regain the house, there will be probably enough votes to override a veto of a bill stripping the EPA of its carbon regulation authority.
Is there uncertainty caused by government actions? Yes. Is it the overriding concern preventing investment, I doubt it.
August 26, 2010, 1:02 amRicardo says:
Good point. Surveys have their own problems but at the very least you are more likely to get a good picture of what the average person is thinking rather than those who have been specifically selected and featured by someone with a possible agenda (the spotlight fallacy).
Most small businesses see their revenues and cash flows deteriorating over the next 12 months. That implies weak demand for their products. What is driving this weak demand? Good question, but it is a question of big-picture macroeconomics and not necessarily one that small business owners are in a special position to know.
As Hayek once pointed out, nobody can really be expected to understand all the complex linkages and feedback loops in a modern economy. People can really only understand their own little place within the economy — everyone has good local knowledge but nobody has good global knowledge.
August 26, 2010, 1:04 amChaser says:
Different orders of magnitude. First, it is not just Democrat administration, but a huge Democrat majority in both houses of congress. When did a Republican administration have that (hint: not in many decades).
Second, Obama set out to change everything at once – from energy policy (cap and tax) to labor policy to health care to… well, if it’s there, he had a better idea for it. His Democrat allies likewise have a huge list of things they’ve been waiting decades to do. Republicans have not done that in living memory.
The result of these two factors together, along with the capricious regulatory behavior this administration is showing, creates enormous uncertainty.
Business always has to deal with uncertainty – governmental and otherwise.
But this time, business has huge governmental uncertainty stacked on top of an already greatly uncertain economic situation. In other words, the Democrats have made the uncertainty much worse by deciding to change ground rules all over the place in the middle of a dramatic downturn, to write legislation that is vague and so complex nobody understands it, and to appoint regulators with all sorts of anti-capitalist biases.
Some have argued that this isn’t the sole cause of lack of hiring, or isn’t the most important one. It certainly isn’t the sole cause. It may be the most important in lack of rehiring on the rebound – but we don’t know.
The key point is that it is certainly folly to have a government jumping all over the place right at the time when we need business to have enough confidence to invest and hire. It cannot possibly improve hiring, which means (unless there is a magical balance) that it has to be hurting hiring.
One of my customers is adding staff due to additional work, but it is adding ONLY consultants (no benefits) in what would normally be salaried positions. Guess why that might be!
My other major customer has cut back almost all R&D in order to be able to hang onto the employees it has (their “family”), and hence my income from them has dropped to zero. They have expressed repeated fear of investment exactly because of the unknowns in taxation and its impact on their business.
August 26, 2010, 2:14 amRicardo says:
It’s still employment. The fact that overall employment rather than just employment with benefits is stagnating suggests that benefits costs are not among the causes.
Another thing we observe from employment data is that employment patterns are just about what we would expect in a severe recession when aggregate demand is down. Health care has added jobs (and large parts of health care reform do not take affect for a couple of years so that’s not a likely explanation) and the health care sector is well-known to not be very cyclical. Companies in the consumer goods and manufacturing sectors have slashed their payrolls because those are among the sectors of the economy hardest hit by a recession.
Again, unknown compared to what? A more business-friendly administration can create just as much uncertainty by proposing a cut in corporate income taxes or a favorable treatment of certain kinds of investment. Will it get enacted or not? A business may well want to hold off on new investments until after the plan is enacted to get the more favorable tax treatment. This uncertainty is not unique to Obama or the Democrats. Which makes it a bad explanation for why businesses only now are so reluctant to invest or hire new workers.
Changes in taxes can move costs by a few percentage points — changes in demand contribute to much more volatility. How can you even begin to predict what demand for your goods and services will look like two years out if you don’t even know whether America faces a lost decade scenario or a (seemingly less likely) brisk recovery?
August 26, 2010, 3:18 amLN says:
They have expressed repeated fear of investment exactly because of the unknowns in taxation and its impact on their business.
Really? The unknowns in taxation are a bigger driver than the expectation that the economy is not going to grow? And even just focusing on taxes, it’s the “unknowns” that paralyze investment rather than the expectation that taxes are going up? If they just forecasted pessimistic assumptions about future tax increases, that would eliminate a lot of the negative “uncertainty.” Would that make investment any more feasible? Of course not, but it would make it slightly harder to blame everything on the radicalism of the Democratic Party.
One of my customers is adding staff due to additional work, but it is adding ONLY consultants (no benefits) in what would normally be salaried positions. Guess why that might be!
Could be a million reasons. Could be a simple matter that the labor market is soft and new hires do not have any leverage. Or maybe small business owners would be fulfilling their dream of paying more than is necessary to attract employees, but Obama created uncertainty and now they have to cut back and stop overpaying.
The bottom line is that the economic outlook for the foreseeable future is bleak, and in such an environment it is ridiculous to go on a big hiring spree unless you are one of the few companies that is fortunately growing. Yes, regulation and taxes hinder hiring, and uncertainty about regulation and taxes also hinder hiring, but I still see no reason to think that small business owners would be especially insightful about the overall societal benefit of various regulations and taxes. If your business got a boost because of some favorable government subsidy, that may make you happy and spur you to increase your hiring but that doesn’t mean that the subsidy is a good idea just because a small business owner likes it.
August 26, 2010, 3:46 amGrover Gardner says:
One of my customers is adding staff due to additional work, but it is adding ONLY consultants (no benefits) in what would normally be salaried positions. Guess why that might be!”
Okay, I’ll guess it’s because he can–because jobs are scarce and people will take the work even without the benefits. If times were good he’d have to be more competitive.
August 26, 2010, 3:59 amStephen Lathrop says:
Actually, the problem is not uncertainty at all. The problem is the near certainty that the consumer economy is not going to recover in the foreseeable future. Would the small business people commenting here support the most obvious government interventions to correct that?
August 26, 2010, 4:17 amStephen Lathrop says:
There are at least four unexamined assumptions in that:
1. The people suffering extra taxes would have used the money for hiring.
2. The government won’t use the extra tax money to do more hiring than the taxed individuals had planned to do.
3. The results of more aggressive taxation and spending won’t result in more demand in the consumer economy, enabling more hiring.
4. A healthier federal balance sheet won’t contribute to reducing economic uncertainty and indirectly improve hiring.
Those assumptions could all be correct. Simply assuming they are correct amounts to putting on ideological blinders.
August 26, 2010, 4:30 amPaul says:
The only real source of agreement I see here between the two “ideologies” is the agreement that given current conditions the small businesses are correct not to be hiring. There are disagreements between those who run small businesses and those who don’t about why this is the correct decision – but no disagreement on the decision. If we want “change” there needs to be a reason to make a different decison. What reason will move us forward?
August 26, 2010, 5:29 amSPQR says:
President Obama keeps asking Americans if they want to go back to the days of Bush.
That is too funny.
My answer is an emphatic, hell yes!
Wouldn’t you like to go back to 5% unemployment and to inflation that was only 30% of what it is now.
(Never mind that, any day now, Obama’s screwy judgment is going to get a lot of people killed.)
August 26, 2010, 7:21 amJody says:
To those saying it’s the risk and to those saying it’s the demand – you’re both right.
Higher risk (uncertainty is a form of risk) means that, all else being equal, you have to have a higher expected return on investment to make the investment worthwhile (see stocks versus bonds for a more mundane example). If you don’t think the recently passed batch of legislation, which no one knows what’s in it until after it’s passed (and then some) and affected a broad swath of the economy (from housing to finanicals to health to even stupid paperwork) did not dramatically increase uncertainty, I can’t help you. Eventually we’ll know the impact of all of these pieces of legislation, but right now we just don’t and it will take years to completely digest.
Lower aggregate demand (or perhaps more meaningfully reduced economic activity) means that, all else being equal, the expected return will be lower for any investment. Again, I think it’s pretty clear that economic activity is down.
Now each of these independently will lead to reduced investment (and as noted above, hiring is an investment, frequently a very expensive investment), but when these two factors (lower expected returns AND higher risk) are compounding factors, so you get the current mess.
(FWIW, I also own a small business)
August 26, 2010, 8:00 amBlue says:
Really LN? Then perhaps you can tell me the outcome of the changes to health care.
In 2 years, 5 years and 10 years?
I have had my own business for 20 years and this is the first time I have ever felt this way.
Even Nancy Pelosi said we didn’t know what was in the health care bill.
But you know? You must be doing quite well for yourself.
August 26, 2010, 8:02 amBlue says:
Would the most obvious government intervention be reducing payroll taxes and government entitlements?
Cause, then I might support that.
I think it is a fundamental lack of faith in the system. Until the system is corrected it really can’t be trusted and relied upon. Just an example of what I mean… the way the gov’t has borrowed from SS.
August 26, 2010, 8:33 amBlue Neponset says:
The gov’t has been borrowing from the social security trust fund since it has had a surplus (more than 50 years). If this is what is getting you spooked then I suggest you are looking for things to be spooked about.
August 26, 2010, 9:04 amAdam Berkowicz says:
It’s very interesting to see the phrase “Talking at each other” reach practical application.
This argument has become dogs barking from each side of the fence. Neither side cares in the slightest what the other has to say.
Bloviating in it’s purest form.
August 26, 2010, 11:00 amDuracomm says:
Blue Neponset said,
That borrowing is unsustainable. Not knowing how the politicians are going to deal with it adds another level of uncertainty for business to deal with.
Social Security in Cash Flow Deficit
6 Years Ahead
In 2008, the CBO projected that outlays would exceed revenues for the first time 2019 and in 2009 CBO projected that this threshold would be crossed in 2016.
In fact, this year Social Security will pay out more in benefits than it collects.
While part of the acceleration in the onset of Social Security deficits is due to the impact of the recession on taxation, by all projections, the unsustainable deficits in Social Security will continue into the future.
August 26, 2010, 11:01 amDotar Sojat says:
It’s amazing how all these folks who own and have their lives invested in small businesses can be so wrong about all the things that should and should not affect their businesses.
August 26, 2010, 11:07 amTamerlane says:
Even if all the arguments in the article were completely correct, most of these arguments apply only to the 12% of small businesses in construction and real estate (the 12% figure can be derived from the original article). In terms of employment, small businesses in construction and real estate tend to be smaller than other small business firms (check the SBA statistics). So in terms of their total impact on small business employment these firms constitute probably less than 10% of total small business effect. So really the article fails to draw any significant relation between contractions in the housing economy and failures of small busineses to expand employment. I’d pay a lot more attention to actual small business owners who are complaining about administration policies.
August 26, 2010, 11:20 ampc says:
Since the last time there a “why small businesses aren’t hiring” discussion came up on Volokh my company has hired two new people, we’re currently interviewing to fill two more positions, and our fourth office is still on schedule to open this year. Damn Obama for his reckless policies (we don’t do any government work, btw (the last startup I was at that did do government work is doing extremely well)).
August 26, 2010, 11:23 amJoe Kowalski says:
I don’t think that these business people are making things up. But I do tend to think that there is a very poor assumption being made that the plural of anecdote is data. It’s not. It’s relatively easy to put together a collection of individual stories and paint a picture of them in any number of ways. It’s easy to focus on the problems one’s own business is facing, but translating that individual experience into broader data usable for making big policy decisions is really hard.
August 26, 2010, 11:48 amHarry Schell says:
What passes for liberal “intelligence” is a Ruth Marcus column in Investor’s Business Daily a few days ago.
“‘The myth of small business as the engine of job creation is largely that — a myth,” Ruth Marcus wrote in support of higher taxes on those earning more than $250,000 a year. “Small businesses create new jobs when they start and take off; they also lose jobs when they crash and burn.”
This Obama cheerleader is one reason I wonder why I am doing this and what else will be thought of to snuff small businesses, since they can be snuffed with impunity, in Ms. Marcus’ view.
IDB doesn’t agree much for Ms. Marcus’ thoughts.
“With all due respect to Marcus, who is syndicated through the Washington Post Writers Group, we’re in deeper trouble than we thought if this is what passes for conventional wisdom in our nation’s capital.
“It’s bad enough that President Obama, and even the U.S. Small Business Administration, low-ball the number of new jobs created by small businesses. Both put it at around two-thirds, when the real number, we believe, is around 85%.”
Read the rest here: http://www.investors.com/NewsAndAnalysis/Article/544945/201008251810/Dont-Diss-Small-Biz.htm
The more difficulty the state (fed, state or local) creates for my business, the less incentive I have to risk or invest, even if I have a rising sales curve.
Don’t buy that? Then why are CA-based companies such as HP, Intel, Apple and Electronic Arts spending $500+M on expansion…anywhere but in CA? Why are the unemployment rates in high-tax, high regulation states higher than average? Why are poeple and businesses moving out of such states? CA’s population is stable due to immigration and Hispanic birth rates. The rate of deindustrialization of the state is accelerating.
I suggest also a nice primer on real economics at http://blog.mises.org/13693/nine-principles-of-economics/
All over the world, repeatedly, the impact of lowered marginal tax rates and less government bureaucracy has lead to economic growth in the private sector, which has to happen if the state is to have a tax base.
A “wealthy” public sector will eventually run out of other people’s money without a healthy tax base, and all will end up poorer, except the elites, who will have all the arugula and golf balls they want either way. Robert Mugabe has lobster whenever he wishes. Hugo Chavez isn’t missing many meals, either.
Private sector job growth, not public sector job growth, is a symptom of a growing tax base and a wealthier society. It is also a symptom of freedom, as people seek their own futures more often.
Obama’s “stimulus” is very much aimed at feeding the public sector and socialist dreams like high-speed rail, green jobs and nationalized health care. Oh, and saving Pelosi’s swamp mouse.
Yes, my big problem is the sales curve. How long and hard I try to hang on is very much affected by what government does, particularly when it comes to things where I have to spend money, such as the 1099 change. Those impact how long the cash can hold out and what is available to invest in new products and marketing.
What I suspect the government will do in the future also plays here. If the business environment looks like it will worsen further, I am less inclined to hang on. New regulations that a Cass Susstein figures out to “nudge” me into a “better” life might not be good for business, even if he thinks my life is better, by his definitions. What will the smarties do next?
Having a business makes me a target. I am tired of that.
August 26, 2010, 11:58 amDuracomm says:
Adam Berkowicz said,
What you are seeing is the progressives desperately hand waving to avoid acknowledging what folks who understand (and own) small business are trying to explain to them.
It is a challenging time for small business right now.
The regulatory, fiscal, and tax uncertainty caused by obama and the democrats substantially increases small business risk and uncertainty.
The progressives will not acknowledge that stacking governmental risk and uncertainty on top of the other challenges is harmful to small business growth and hiring.
What you are seeing is willful ignorance on the part of the progressives, not people talking past each other.
August 26, 2010, 12:10 pmHarry Schell says:
More Obama handiwork:
Low-cost insurance policy companies:
http://michellemalkin.com/2010/08/26/obama-jobs-death-toll-watch-more-health-care-layoffs/
Professional and recreational fishermen:
http://michellemalkin.com/2010/08/26/the-fishermens-flotilla-showdown-at-marthas-vineyard/
What’s next? I have some ideas, but none of the are positive.
August 26, 2010, 12:47 pmHarry Schell says:
New Jersey made an application for school aid in the (heh) “Race to the Top” and made a clerical error on one page, comaparing data from the wrong years. The score was reduced 4.8 points and NJ lost out on $400M of largesse.
Now, I think the feds ought not be in education at all, but could no one have called NJ and asked for the data from the right year?
This is the government that is going to help “nudge” me to a better life and help me run my business? Really? You want me to hire people and invest because these guys are so smart?
I try not to bet on stupid, incompetent people. That is how businesses “crash and burn”, as Ms. Marcus puts it. So you cannot tell me Obama and other solons are irrelevant to investment decisions.
August 26, 2010, 12:59 pmLN says:
The progressives will not acknowledge that stacking governmental risk and uncertainty on top of the other challenges is harmful to small business growth and hiring.
On the contrary, people who disagree with you in this thread are questioning the emphasis placed on governmental risk over fundamental economic risk. I even offered a fairly charitable explanation of why people would do this.
This “uncertainty” argument has some validity but is being employed so liberally here as to be almost meaningless. Let’s pretend I’m a small business owner in 2007. How much uncertainty am I facing? Why next year is an election year and I don’t know who will be elected! It’s possible that Obama will be elected, which would obviously raise uncertainty to record levels, but it’s also possible that Clinton would be elected, or that McCain would be elected, or that John Edwards would be elected, or that Rudy Giuliani would be elected, or that Mike Huckabee would be elected… oh my God at this point there is so much uncertainty that surely even Obama’s election would be a great help! In a climate of this much political uncertainty, it would take incredibly strong economic fundamentals for small business owners to hire anyone at all. Since small businesses did in fact hire people back in 2007, this means that they were *extremely* confident about the future back then. And look how right they were!
August 26, 2010, 1:06 pmHarry Schell says:
Please do tell what I should be focused on.
August 26, 2010, 1:21 pmSmall Business Guy says:
Note the steep drop in employment started when it was clear that Obama was going to win.
It got even steeper after the election when that became a fact.
Many people say its not Obama’s fault, the rise in unemployment all started before Obama was sworn in, that’s true,
but it completly discounts that anyone who was paying attention knew (or strongly suspected) Obama
was going to be the next POTUS. The unemployment rate started rising when he crushed Hillary in the primaries.
Business has to look 5 to 10 years ahead and seeing Obama’s stated anti business agenda become
reality caused a lot of caution. See http://www.tradingeconomics.com/Economics/Unemployment-Rate.aspx?Symbol=USD
You can even see a significant change in slope in the graph on the very week that Obama had his
August 26, 2010, 1:29 pmredistribute the wealth encounter with Joe the Plumber.
LN says:
Housing bubble popping, Bear Stearns and Lehman collapsing, AIG going under, credit markets freezing up — these were all just rational market responses to the horrifying prospect of President Obama letting the Bush tax cuts expire and completely removing the rock-solid stability and certainty that was the backbone of our health-care system.
August 26, 2010, 1:34 pmI say NONSENSE says:
Progressives – try to understand one thing: adding uncertainty adds risk/cost to doing business. Adding cost reduces employment. This is true if the economy is booming, and is more true if the economy is sinking (because the risk is more likely to lead to total failure, not just reduced profits).
Hence, the argument that “the problem is that the economy is bad” simply ignores an important issue.
BTW, some companies are booming: those that make their money as a result of increased federal regulation.
As for companies hiring consultants rather than employees – one reason is that the uncertainty of the cost of benefits, as a result of Obamacare among other changes, has greatly increased. Hence one is making a bigger gamble with an employee than a consultant.
Of course, if companies only hire consultants, progressives will get what they want: a government run health payments system – because those consultants without benefits will create increased political demand for something that lets THEM get benefits – especially those with pre-existing conditions.
August 26, 2010, 1:49 pmI say NONSENSE says:
Also… when small businessmen tell you that uncertainty is affecting their decisions, but their examples show other factors, don’t take that to mean that uncertainty is not affecting their decisions. There’s too much lawyerish parsing for the evidence and not enough understanding of how decisions are actually made. If its weighing on their minds, it’s affecting their decisions, because businessmen, including small businessmen, have to make their decisions at least partly based on intuition (feelings). That’s how it works in the real world.
This discussion has demonstrated one important fact: progressives should never be allowed close to the controls of any economic policy that affects small business, because they have clearly demonstrated their lack of understanding of small business decision making.
August 26, 2010, 2:03 pmHarry Schell says:
Progressives are regressives in that they love ideas that have failed in the past. In conceit or some other mindset, they think they can do it better than the last crew.
Never failes to amaze me.
The interview with Obama during the campaign about why he wanted to raise the capital gains tax rate was instructive. The reporter reminded Obama three times that the impact of the Bush reduction increased revenues and the share of income taxes paid by the “rich”. Obama never flinched, winced, nothing. “It’s more ‘fair’”.
Clearly, Obama sees taxation as a means to punish certain groups and aid others, if it isn’t revenue or who pays that interests him. Or he is a blind ideologue, incurious of reality.
Say whatever you want of his policies, but can we agree no business person can just ignore that kind of mindset in a POTUS?
August 26, 2010, 2:18 pmSmall Business Guy says:
Housing bubble popping, Bear Stearns and Lehman collapsing, AIG going under, credit markets freezing up
Not a single one of these destroyed any real means of production.
All had zero direct influence on my business.
All of my customers build real stuff and don’t make their $$$ trading paper.
The reaction to these by the government where they showed that they would change the rules mid flight to
whatever they wanted did have an impact.
The uncertainty of real costs has a direct impact.
August 26, 2010, 2:18 pmLN says:
As someone taking various commenters to task in this thread, I’ve never said that uncertainty is not affecting their decisions.
And as someone who doesn’t run a small business but who frequently talks to various executives at a large business, I know that people are often not perfectly reliable narrators of the causal factors driving their decisions. For one thing, people are drawn to agency-based explanations for why they are not succeeding. It is generally more psychologically satisfying to think that one has an active nemesis than to think that there are abstract structural forces tying one’s hands.
August 26, 2010, 2:28 pmDavid Welker says:
Nice. Notice that when Bush cuts taxes and deficits go through the roof, this also creates uncertainty about how the resulting debt will be paid back in the future, what affect this will have on interest rates, whether government borrowing will crowd out private borrowing, effects on inflation.
But, you didn’t hear these small business owners complaining about “uncertainty” then. I wonder why?
This selectivity regarding when “uncertainty” caused by “taxes and regulation” (as opposed to uncertainty about economic fundamentals) becomes THE problem is intellectually bankrupt.
No one is saying that imposing requirements on business is a free lunch. When companies have to withhold income and payroll taxes for employees, this is certainly an accounting burden and something that increases the cost of hiring. And when something is more expensive, one demands less of it.
But, when the government fails to act, that also can be quite costly. For example, the costs of health care have been going through the roof. There is “uncertainty” about how much health insurance premiums will go up next year. Health care reform should help curtail this uncertainty to some degree by controlling costs.
Do you hear any of these supposed small business owners talk about that? Nope. Why not? Because it doesn’t fit into the narrative. Basically, these guys who are posing as small business owners (who knows what they really are) are conservatives. Any uncertainty caused by conservative policy (doing little or nothing to control escalating health care costs OR cutting taxes without cutting spending — causing deficits to skyrocket) went unmentioned. I guess it is only uncertainty caused by non-conservatives that matters and deserves mentioning, right?
BTW, please explain the housing bubble. People knew about the bubble. They were uncertain about when it would pop, but if you were paying attention, you knew it would eventually. Despite this massively important uncertainty, people continually invested more in housing, making the bubble worse. And ultimately to their own peril.
Narratives that focus excessively on certainty are off. Life is not without risk. For any of us. Sometime that risk seems to matter to us (now) and sometimes it doesn’t (housing bubble). Risk comes in different forms. There is a risk of a 1% increase in marginal tax rates on our profits. And there is a risk that when we invest in producing something, we will not find a seller willing to pay a price that makes that production profitable.
I think it is pretty obvious that the risk that is more severe is the risk of not being able to sell your product. That will drive you out of business really quickly. Tax rates are only paid on profits. If you don’t have any profits, your risk of having to pay taxes is zero. A small increase in the marginal tax rate lessens the incentive for entrepreneurship, but will not as easily drive you out of business as lack of sales.
It is pretty clear that these small business owners who are focusing on relatively less serious risks arising from taxes and regulation so much more than the relatively more serious risk of not being able to sell your product profitably in the first place are being awfully selective.
If it costs me $100 to produce a widget and I can only sell it for $80, I either need to reduce the production costs of the widgets I make or go out of business. This simply is not sustainable. In contrast, if marginal tax rates go up by say, 5 percentage points, but I can sell my widgets for $120 and make $20 in profit, then that 5 percent increase in taxes on the widget is annoying, in that it lowers my profit by $1. I have less capital to invest in expanding widget production or in other economic enterprises. Taxes are not free. They distort economic activity. But, quite clearly, the more devastating risk is when the price of widgets I sell falls to $80 from $120. The decrease in profit per widget in that case is $40 instead of $1. Indeed, increases in marginal tax rates only hit when one makes a profit.
So, yeah, it is quite clear when people are bitching about the uncertainty regarding changes in marginal tax rates (which will rarely force you out of business entirely) but are silent about the bigger and much more likely to be fatal risk of not being able to sell their widgets profitably at all, that there is a sort of selectivity motivated by political ideology going on.
My point is not that taxes and regulation do not impose costs on business. Indeed, taxes and regulations are sometimes the straw that breaks the camels back. (Although, if your competitors face the same taxes and regulations that you do, blaming the taxes and regulations instead of your own business mistakes is problematic. After all, your competitors did not go out of business and they faced those same costs.) I believe that government at all levels should strive to minimize the costs of businesses complying with regulation while maximizing the benefits of compliance whenever feasible to do so. Taxes should be progressive, but not excessively punishing on success. It is important to get taxes and regulation right, in both good economic times and bad.
But for conservative business owners to talk incessantly about taxes and regulation when the real monster is clearly not being able to sell your widgets at a profitable price… well, that is just blatantly political.
Emphasizing uncertainty regarding taxes and regulation specifically while downplaying uncertainty regarding sales (aggregate demand) has become the new right wing talking point of the moment. That doesn’t mean that uncertainty regarding taxes and regulation imposes no costs whatsoever. But, it is quite clear that certain people are being quite selective in their rhetoric, probably for political reasons.
You can always hear these right wing talking points as they swoosh around in a mindless yet predictable fashion. It is always one right wing meme after another. Remember the ridiculous talking points about how the real culprit in the housing bubble was the Community Reinvestment Act?
Remember how Cheney said that we learned from Reagan that deficits don’t matter while the Bush administration and a Republican Congress proceeded to run up huge deficits? Now the talking point of the moment is that we must now be deficits hawks, or we will end up like Greece.
Oh, and by the way, uncertainty apparently doesn’t matter when it is caused by Republicans. You never heard all this talk about uncertainty before, did you? I wonder why.
There is no intellectual consistency, because conservatives just grab whatever meme seems convenient at the moment and then preen. They have the audacity to demand that unemployment benefits be offset by spending cuts elsewhere, but then hypocritically insist that extensions of the Bush tax cuts do not need to be offset by spending cuts. Oh, I guess that Republican proposals that increase the national debt, unlike Democratic proposals, do not need to be paid for by future generations! Is that how it works??? I for one am tired of the lies that conservatives constantly make about what they actually stand for. Today the problem is uncertainty. Tomorrow, not a word will be mentioned as Republican proposals proceed that would, for example, repeal the new health care laws and create massive uncertainty. Today, Republicans are preening deficit hawks. A few days later, deficits don’t matter when it comes to extending tax cuts. Fucking liars.
To conservatives, I have one question: Who the hell are you and what do you actually stand for?
The only people I can’t stand more than feckless and weak Democrats without the spine to end the filibuster and take action on the economy are inconsistent lying Republicans who fail to show an ounce of integrity on anything.
I am no fan of politicians right now.
August 26, 2010, 2:32 pmLN says:
The reaction to these by the government where they showed that they would change the rules mid flight to whatever they wanted did have an impact.
So when Bush bailed out the investment banks, rational small business owners realized that Obama was bad news and stopped hiring? If only Clinton had won the primaries.
You make no sense.
August 26, 2010, 2:32 pmLN says:
Oh, and Small Business Guy, the popping of the housing bubble almost certainly had an impact on your business. Bad debt has massive reverberations throughout the entire economy.
August 26, 2010, 2:41 pmI say NONSENSE says:
Horsefeathers. The supposed negative effects of this are far out in the future, beyond the time-line of a small businessman. The benefits were immediate Also, the deficits went DOWN after that.
Furthermore, Bush’s changes were simple – they didn’t involve thousand page pieces of legislation that nobody had read, that would invoke dozens of new regulatory bodies, which would ultimately interpret those pages in uncertain ways.
August 26, 2010, 3:13 pmAJ says:
Dave, you need a fact checker to look over your material before you post because some of your observations crowd out some of your more reasonable points.
#1: Bush ran up huge deficits. Look at the trajectory of budget deficits through much of his two terms. They are mostly on the order of 4% of GDP. This at a time of great uncertainty imposed by 9/11, two wars, and an economy fighting to recover from the internet bubble. To say that the economy is in the shape that it is in now because of Bush tax cuts is silliness. Can you say monstrous housing bubble?
#2: Current health care legislation will cut the growth of health insurance premiums. I almost could not type that it is so assinine. You may praise it for providing benefits to people with pre-existing conditions and grad students still on their parents policies but no one serious predicts that it will bend the cost curve in the desired direction. Talk about kool aid!
#3: The housing bubble is no related to the community reinvestment act. Too many people getting into mortgages they could not afford is one critical piece of understanding the housing bubble. Discounting the fact that Fannie/Freddie were being encouraged to make these risky loans is being an ostrich.
#4: Republicans are inconsistent on deficits. Obviously there is some truth on this in regards to 2000-2006, but few of the spending initiatives other than the wars were opposed by Democrats. From no-child-left-behind, to the senior drug benefit, to highway bills, Democrats wanted bigger and bigger spending. True conservatives have and will always be against government spending.
#5: Blaming taxes and regulations on your own business mistakes is problematic. It was nice of you to throw a bone that taxes and regulations matter, if only we can breathlessly wait for you to further expound on that tradeoff. If you want to drive business out of this country and out of business, continue raising taxes and regulations. No one sane denies this.
Much of the rest of your rant sounds like a sophmore hopped up on some bad speed…start a company and come back after 10 years and then lecture the rest of us.
August 26, 2010, 3:17 pmMnZ says:
350 employees is a pretty large small business. One person can be tasked with the 1099 compliance without too much trouble. 10 employees? Not so much.
The problem with the 1099 requirement is that it shows a general cluelessness on the part of the government about the effects of their action. So, I would venture that the issue isn’t so much fear of “uncertainty” but fear of “cluelessness.”
August 26, 2010, 3:23 pmLN says:
But apparently conservative business owners will only be “spooked” by government spending when the Democrats are in charge.
August 26, 2010, 4:17 pmI say NONSENSE says:
Perhaps you should consider the relative magnitudes of the spending before making such an assertion. Perhaps you should also consider why so many small business owners *are* conservative.
August 26, 2010, 4:35 pmPaul says:
While I have heard a lot about why the reasons for not hiring “don’t make sense”, are ideology driven, etc I still haven’t heard anyone explain why small businesses should be hiring. Please enlighten me
August 26, 2010, 4:47 pmDavid Welker says:
AJ,
How ever much the Bush tax cuts cost, they cost WAY more than the $30 billion to extend unemployment benefits that Republicans filibustered out of “principle” because it was necessary for them to be offset by other spending cuts. Also, spending on wars in Afghanistan and Iraq and Medicare Part D were never offset by spending cuts or tax increases.
Oh, fine you say. But now the Republicans have religion. They have learned from their mistakes. They now believe in balancing the budget.
Have they really?
So, one month, Republicans filibuster a $30 billion extension of unemployment benefits as they preen as reformed deficit hawks.
The next month, they insist extending the Bush tax cuts for 10 years at a cost to the deficit of $680 billion does not need to be offset.
Seriously.
Do the math. 680/30 = 22.666.
So, it not okay to increase the deficit by $30 billion for unemployment benefits, but it is okay to increase it by over 22 times that amount for tax cuts? What!? Really? Are you serious!
Guess what. Future generations still have to pay the debt whether it is incurred to pay for unemployment benefits or for tax cuts. If you don’t want future generations to have to pay for the tax cuts, you are going to have to propose spending cuts just like you said had to be done for unemployment benefits. Suddenly, there is an astounding silence regarding the principle that proposals that increase the deficit be offset. Some principle that is!
What does this make Republicans who said that they opposed extending unemployment benefits due to concerns over the deficit as a matter of “principle.” It makes them liars, that is what. You cannot deny it. It is simply the truth.
Republicans are inconsistent and they are also lying about the concerns that truly motivate them. The filibustering of unemployment benefits had absolutely nothing to do with a “conversion” where they realized that the irresponsible deficits of the Bush era were a mistake. If there really was such a “conversion,” they would insist on finding a way to pay for extending tax cuts, not remain indifferent as their proposals push debt onto future generations.
This is all part of a pattern of extraordinary selectivity on the part of Republicans. To be principled, which Republicans claim to be, you cannot ditch your commitments based on mere whim and convenience. When Republicans claim to be principled about deficits when they use them as a reason to oppose extending unemployment benefits, they are lying.
They are lying… And you are falling for it… Again…
August 26, 2010, 5:00 pmDavid Welker says:
You really shouldn’t be. Not unless you see a prospect of sales to support the new employees you take on.
August 26, 2010, 5:04 pmDavid Welker says:
Why not just outsource your payroll responsibilities to a company like ADP and have the company that handles that help you with any new 1099 or other compliance issues? That is perfectly available to a small business with 10 employees.
Division of labor. It works.
August 26, 2010, 5:07 pmI say NONSENSE says:
“Division of labor. It works.”
Yeah, and they charge extra for it. The marginal cost of that employee goes up, thanks to a stupid law.
August 26, 2010, 5:23 pmDavid Welker says:
The purpose of the 1099 requirement is to lessen tax evasion. That money could be used to lower the deficit or cut taxes. It could also prevent dishonest businesses that evade taxes from gaining an edge over honest businesses that honestly report all of their transactions.
I am not saying the 1099 provision is worth it. But I think it is pretty obvious that you have to look at both the costs and the benefits. You have only looked at one side of the ledger, and even then, not very thoroughly. (How much would this change REALLY cost?)
I am no fan of paperwork myself. If the 1099 provision costs business more to comply with than the benefits, I say get rid of it. But you actually have to do the analysis.
August 26, 2010, 5:42 pmI say NONSENSE says:
The 1099 requirement is an example of unexpected increased burden, buried in the Obamacare law, of all places. Discoveries of this sort of hidden treasure, along with the certainty of many new regulations yet to come (as the various agencies created in the law kick in) adds to business uncertainty.
The Obama congress had a period of legislating like mad, producing huge volumes of law, much of it requiring future interpretation by courts or new agencies. When businesses see this happening, and then open one of the fortune cookies to find an unrelated added cost (1099), it rapidly erodes their confidence in the business environment.
For a real example of the costs to a real business, check out Coyote Blog’s post on this subject.
BTW… “If the 1099 provision costs business more to comply with than the benefits, I say get rid of it. But you actually have to do the analysis.” is one reason for the Tea Parties. They recognize that if you have to keep doing the analysis, you have a government that is out of control. You don’t have to do the analysis if you don’t legislate like mad to begin with.
August 26, 2010, 6:04 pmAJ says:
David, you are making up with quantity what you are lacking in quality! Your first flawed assumption is using static analysis to determine “the cost” of the tax cuts. I will not say that tax cuts pay for themselves but an economy growing at 3.5% versus 1.5% means a whole heck of a lot more federal revenues plus fewer unemployment payouts plus states doing much better. Look tax cuts worked in the 1920′s, the 1960′s, in the 1980′s, and in the 2000′s. Keynesian pump priming were not effective in the 1930′s nor in Japan in the 1990′s. If you are after economic growth, we know which philosophy has delivered more often.
The unemployment benefit filibuster was a political point. Don’t pass a “pay as you go” rule then break it the first instant that you get.
Please go to Paul Ryan’s web site to see spending cut ideas. He does actually have the courage to discuss changes to social security and medicare that must happen to make those systems viable. These plus federal pensions and the military are the big ticket items in the budget. When will we see the DEM plan to prune back these areas? More huff and puff then fizzle.
President Obama’s biggest mistakes are linked to his inability to separate from Pelosi/Reid. He needed a “stimulus” that contained 1/3 Republican ideas for cover. He needed a health care bill that incorporated free-market ideas in a real way. He needed to sign a financial reform bill that addressed the heart of the problem as preached by Dylan Ratigan. Unfortunately he appears to be too politically weak to win the center. Too bad.
August 26, 2010, 6:13 pmDavid Welker says:
You also don’t get the benefits of the legislation.
As far as uncertainty, Congress could pass a law tomorrow doing who knows what… Who knows. If you cannot stomach that risk, may I suggest that entrepreneur is not your ideal line of work anyway.
Look, I am pretty sure we are not going to see eye-to-eye here on this or anything. You have what I see as an unreasonable antipathy to government. I don’t love government for its own sake, but I see it as a tool that should be used to improve the happiness and welfare of the people. I also think we should be wary of abuses by government. I think my views are just a whole level above your simplistic anti-government thinking, and I don’t really see any possibility of compromise between us. You apparently have already made up your mind about the 1099 regulation without any consideration of its costs and benefits. The outcome of that analysis just does not matter to you. That strikes me as arrogant and absurd. This indicates that you and I are basically from another planet and there is no possibility of compromise on anything.
August 26, 2010, 6:21 pmLN says:
The stimulus was one-third tax cuts in case anyone is interested — it’s weird how a set of people so sensitive to the government’s actions do not seem to be aware of that.
As far as the Republican position on Medicare the talk about “death panels” and “get the government’s hands off my Medicare” during the health-care debate outweighs whatever position papers Rep. Ryan has on his website, at least in my mind.
August 26, 2010, 6:27 pmI say NONSENSE says:
That I didn’t explain my analysis of that law, which goes beyond what you presume, is because it is irrelevant to the capricious nature of the current government.
As to “simplistic anti-government thinking” – I was afraid that mentioning the Tea Party movement would trigger that intellectual knee jerk.
Government is dangerous. Government is necessary. We both, I suspect, agree on that. But don’t go calling my reasoning simplistic when you don’t know what it is. I have done lots of reading on this and decades of observation.
However, I would be remiss in not pointing out that “simplistic” is often a word used by the intelligensia to attack common sense. Some simple ideas are actually correct, and a whole lot of complex ideas have been shown to be dangerous and wrong (from Marx to Freud).
August 26, 2010, 6:36 pmDavid Welker says:
This is a bunch of BS. Interest rates were not at a zero lower bound when those tax cuts were made. We did not need economic stimulus at that time. Increasing the deficit when you have essentially normal employment (or the ability of the Federal Reserve to stimulate the economy easily with conventional monetary policy) simply crowds out private investment and increases the deficit.
The case for fiscal stimulus is generally limited to unusual situations like the present. It certainly was not justified, either via spending or tax cuts, when Bush was elected.
So you admit that Republicans were lying when they said they were concerned about the effects of that spending on the deficit? Great, sounds like we are making some progress here.
Making “political points” that are supposedly based on principle should not be free. If you are going to make such political point, you should stick to the principle that underlies it.
Must happen? If there is only one policy option, why even discuss it? After all, it must happen.
This language of framing your own optional policy preference as a necessity is a very devious sort of rhetoric.
I am not interested in cutting social security. I am not interested in cutting the delivery of medical services. If you want to create efficiencies that save money, that is one thing. I am game. If you want to slash benefits to maintain a lower level of taxation, that is another thing entirely. No deal.
So, the answer to the question of when liberals will come up with a plan to cut Social Security is never. Cutting Social Security and the delivery of medical services through Medicare and Medicaid is something that Republicans want, not something that Democrats want. Why do you even bother asking when a political party with policy preferences different from yours will propose exactly what you want?
It is like me asking when will Republicans will finally propose to expand and strengthen early childhood education or strengthen higher education or improve the safety net. It just isn’t going to happen. Republicans don’t like safety nets and they think we have already over-invested in education. I don’t expect Republicans to ever do anything in these areas, so why are you asking why Democrats aren’t clamoring to slash our social safety net?
Get it straight. Republicans want to slash the safety net. Democrats want to expand it. You want to slash the social safety net. So, you need to vote Republican, not ask why Democrats aren’t more like Republicans.
Oh, you mean like those tax cuts which were included in the stimulus bill but which are never mentioned by conservatives when they criticize the stimulus?
Oh, you mean by passing a proposal with an individual mandate that mirrors a proposal made by the conservative Heritage Foundation during the Clinton health care debate?
The bottom-line is that Obama can be very centrist, and people like you would never give him credit. Hell, if he went way to the right of the most right-wing member of the Republican Party, you would still probably be saying he should move still further right and to the “center.”
Obama’s problem (and the Democratic Party’s problem) is that he is too cautious and too centrist and too weak. For that reason, I am probably not going to vote in the midterms. And if Obama doesn’t shape up, I won’t vote for him in 2012 either.
This bullshit about being more centrist is just that. So-called centrists have been watering down and ruining every single proposal that would actually help jump start the economy. What Obama needs to do is stop playing the centrist role (no one gives him any credit for it anyway) and man up. No one really knows what Obama believes. He needs to use his communication abilities, like Reagan did. Instead, when Obama is not wasting his time with distractions like commenting on the mosque controversy in New York City or on an altercation between a police officer and a professor in Harvard, he is busy not doing nearly enough for the economy.
The guy needs to learn to push for something and lose. It is better to lose fighting than not advocate for anything at all. I will vote for someone who fights the good fight, but not for someone who gives up before even trying.
Obama’s problem is not that he is not mushy enough as you wish him to be (he already is way too mushy). His problem is the economy and his failure to provide decisive leadership. That failure is already going to cost the Democratic Party plenty in the midterms (as it should). More importantly, his lack of leadership has already cost the American people way too much.
I can’t imagine a worst possible decision for Obama than to take your advice.
August 26, 2010, 7:00 pmDuracomm says:
David Welker said,
Those of us in the reality based community understand the smart thing would have been to do the analysis before passing the law not after. Democrats in congress did not.
An example of the 1099 nightmare
August 26, 2010, 7:37 pmElliot says:
Is there some reason to presume small businesses are trying to get loans and are being rejected? Are there any stats that support that? Do we have any info on small business loan applications vs loans granted or refused? A lack of executed loans could be because 1) banks don’t want to lend, 2) business doesn’t want to borrow, or 3) both.
What reason to we have to think any of these are true?
August 26, 2010, 8:19 pmElliot says:
Anyone notice the president of Intel’s statement the other day that it costs $5 billion to build a plant in the US that would cost $4 billion in other countries? He specifically said it is not due to labor cost differences, but is due to governmant regulations and taxes.
August 26, 2010, 8:27 pmDavid Welker says:
Duracomm,
I don’t agree that we should always religiously perform cost-benefit analysis BEFORE enacting a new law or regulation. However, cost-benefit analysis performed afterwards would always be a good reason to modify an enacted law or regulation. Back in the day, we built the Pentagon in 18 months. Something makes me think that this would be close to impossible nowadays with all of the reviews that would be necessary before acting.
Some things that sounds good in theory (always perform a full cost-benefit analysis before you do anything) are not good in fact.
August 26, 2010, 8:36 pmHary Schell says:
Can’t speak for others but I left the Rep party when it lost its way and Trent Lott became a role model. i really don’t care a bit about who is in charge as long as they cut back on spending and other manipulations to sell votes and influence. As more power accretes to DC, however, that possibility gets smaller and smaller. Another reason I opposed nationalizing healthcare.
Don’t dare paint all conservatives with the same brush. That’s bigotry. I thought “progressives” didn’t do that.
Hmm? The other guys did it so it’s okay if I do? That is a race to the bottom of conduct.
August 26, 2010, 8:41 pmBlue says:
Wrong. I started hoarding cash in late 2006 because it is the system that is screwed up. Obama is just a product of a system badly in need of repair.
August 26, 2010, 9:12 pmLN says:
Harry writes:
And then he writes:
Thanks pop, you’re a real role model.
August 26, 2010, 9:17 pmRicardo says:
AJ, if you are going to demand that other people have a “fact checker” look over their posts, you shouldn’t post stuff like this. Fannie and Freddie do not make loans — they purchase loans from other lenders. An analysis by the Federal Reserve concluded that at most 6% of all high-priced loan originations (generally a good proxy for subprime or alt-A) could reasonably be attributed to the CRA. The rest of the loans were either not extended to poor communities, were extended by non-CRA entities or were extended to individuals living outside of the bank’s CRA-covered area.
(As an aside, I’m not sure what you think you know about ostriches, but you might want to fact-check that as well.)
August 26, 2010, 10:17 pmJohn Skookum says:
Especially when it comes to minorities. Turn down a loan, and you’ll be sued for redlining. Approve a loan, and you’ll be sued for predatory lending.
August 27, 2010, 4:18 amJohn Skookum says:
Faculty lounge Marxists who have never produced a single thing of value in their entire lives. A plague and a burden on society. Boy will I be glad to see them kicked out.
August 27, 2010, 4:19 amJohn Skookum says:
When Barack Obama took over Government Motors by fiat, and in violation of 300 years of settled bankruptcy law, cheated little old ladies out of the GM bonds in their pension funds so he could give their money to lazy overpaid union thugs, it became clear that he is little more than Hugo Chavez in a sharp suit.
What sensible businessman would put his money at risk while such a destructive, corrupt economic imbecile is running amuck?
August 27, 2010, 4:28 amJohn Skookum says:
I don’t consider Marxism complex. It is the ideology of the nursery school and the hope of the wide eyed child on Christmas morning. It takes no intellectual sophistication at all to understand “to each according to his needs, from each according to his abilities.” It takes a great deal more intellectual firepower to understand why this simple creed always leads to death and suffering.
August 27, 2010, 4:34 amRicardo says:
The Congressional Budget Office and Joint Committee on Taxation do not use static analysis. Their estimate for the 10-year cumulative impact on the deficit of making the Bush tax cuts permanent is just over $2.5 trillion. If spending goes according to the assumed baseline scenario, then interest payments on debt will increase the cost by another $600 billion for a total 10-year deficit impact of $3.1 trillion.
Since Bush economic adviser Greg Mankiw defended the tax cuts he helped advocate as “Keynesian pump priming,” that’s a strange claim to make.
The CBO’s Analysis of Paul Ryan’s spending plan had debt as a percentage of GDP increasing to 99% by 2040 with gradual reductions in the second half of the century. It also had the government running deficits until after 2060. In other words, if Paul Ryan’s spending plan (not the tax part, which was never properly analyzed) was followed to the letter, most of the people reading this would be dead before the government ran a budget surplus again.
I’ll hold my applause.
August 27, 2010, 5:36 amPaul says:
Ricardo – I am not familier with Paul Ryan’s plan other than in passing – but I am glad that he has put put a plan out for discussion. When do you think the government will run a surplus? where do you think debt will peak as a % of GDP? Is this what you support for our future?
August 27, 2010, 6:17 amBlue says:
It’s pretty easy to imagine why so many distrust the gov’t.
As if private universities aren’t overselling their product also, but now they get a preferred status in this regard.
This is an example of Obama doing something that directly affects my small business and how ironic and sickening I find out about it while posting on this thread.
August 27, 2010, 8:38 amAJ says:
Ricardo, I appreciate your critique of my critique of David’s missives, but let’s clarify a few points:
1. With regards to Bush tax cuts, Keynesian arguments were used to bring about a non-Keynesian policy. My primary point was that in the 1930’s and in Japan, government policy relied on large infrastructure spending and raising tax rates. In the 1920’s, 1960’s, 1980’s, and 2000, the government policy was to cut tax rates. So you are correct to observe that the “timing” argument was in fact “Keynesian” but the underlying policy is not. In the most recent issue of the American Economic Review, Christina. Romer (former Obama council of economic advisors chair) concludes that “tax increases are highly contractionary….tax cuts have very large and persistent positive output effects.” Her estimates imply the tax increases would depress GDP by roughly half the growth in this so-far-anemic recovery.
2. With regards to CBO forecasting, Jason Furman observes
“over the past quarter century, the revenue projections that CBO has issued each January for the following fiscal year have been either too high or too low by an average of more than $150 billion (measured in 2006 terms).”
The assumptions embedded in the models are still key and are still a source of continued controversy. My hidden point in the post is which is more important right now, economic growth or deficit reduction. For the people out of work, the answer is simple.
3. Your observations about Paul Ryan’s plan are fair but it begs the point. If we do nothing, what is the trajectory of the deficit/debt? What elements of change to social security and Medicare do you support? I don’t see you bringing anything to the table, except that “the rich must pay their fair share!”
4. Your’s and David’s comments that 1/3 of the stimulus package ARE tax cuts leave out an important fact. Tax rebates operate on the economy different than tax rate reductions. GMU economist Wagner states it well: “there is nothing about a tax rebate that encourages people to expand their economic activity” from mason.gmu.edu/~rwagner/rebates.pdf. To imply that 1/3 of stimulus represents conservative economics is mischievous at best
5. I think I know what Fannie and Freddie do, having friends at both institutions. You seem to imply that Fannie and Freddie is some sort of Republican mythology. Let’s go to the PBS Newshour analysis of this. Jeff Brown: “[Fannie and Freddie] victim or villain here?” Edward Pinto: “My view is more villain. It goes back to the early 1990s and a number of federal housing policies that were put in place that pushed very low down payment lending and other loosening and underwriting. Fannie and Freddie were leading that charge starting in the early 1990s. And that eventually, along with the advantage that they had, led to tremendous disruption of the market, which culminated in 2004, with the subprime market really ballooning, and following the lead for low down payments and higher risk.” Do you disagree with this position or do you not? CRA started us down this path. Connect the dots.
6. (David) There is no question that Republicans are maximally leveraging the current economic situation for political benefit. Gosh “dog bites man!” You are not really saying that DEMs would not do the same exact thing. I would concur that we need adults to pull this debate to the center. My only point was that the President has failed to do this. If you want him to execute an even more leftist agenda, then you should have him campaign on these goals not on changing the tone….puuuhleeasse.
August 27, 2010, 10:37 amElliot says:
No. It depends on the amounts involved, not just the fact that it is spent. It also depends on the expected future spending.
August 27, 2010, 1:33 pmElliot says:
So, should this apply to law schools, too? Several recent threads here highlight the 1) huge debt taken on by students, 2) misleading promotion of job prospects and hiring history by law schools, 3) lack of jobs for new law school graduates.
How is this different from the situation at the schools in question?
August 27, 2010, 1:37 pmMoneyrunner says:
It seems to be an iron rule that if theory and practice are not congruent, the academic assumes that practice is faulty. And he will write lengthy explanations showing how his theory is right, but the people who put it into practice are dolts.
It does seem to be true, however, that the Obama administration has done well for the academic community, while those “shovel ready jobs” are mostly signage.
August 27, 2010, 1:53 pmMoneyrunner says:
You know, it would have helped the over-all economy it those “shovel ready” jobs had actually been created. The fundamental problem with this economy is consumer spending, which is a problem when we have somewhere around 18% un-and-underemployment. The consumer in the US represents something like 70% of the economy. You don’t have to be an economist to know that when you’re out of a job or are afraid of losing your job your spending is going down. That means fewer “stuff” sold at retail, fewer things made for sale, fewer things transported, fewer orders for manufacturing equipment, fewer people looking for new houses, home builders going under, ad infinitum.
Building roads and bridges, schools and other construction projects would have helped the private economy. Instead, we got signs and a bailout for state governments that helped them save public sector jobs. Anyone with a minimum of common sense knew that the “shovel ready” mantra was pure unadulterated BS in the absence of regulatory reform. If it takes more than 6 months to get a garage built, guess how long it takes to get a road or bridge built? But that’s all you heard when Stimulus 1 was being sold. I’m still waiting for those who presented this BS to admit they lied and still waiting for those who supported it in op-eds and academic papers to admit they were dupes.
When theory meets practice always expect the theoreticians to explain why their theory was right but the people who were supposed to implement their foolproof plans screwed up.
August 27, 2010, 2:14 pmMac says:
Thanks. You explain the problem here very well. It also explains the Government actors who are unwilling to see the harm their policies are causing and to acknowledge that their policies, no matter how much they revere them, have failed just as they have failed everywhere in the world, now and throughout history. If Government spending were the answer, Japan would not be in it’s second decade of economic stagnation and Venezuela and Cuba and Greece among many others would be economic powerhouses instead of economic basket cases.
When the Government creates a job in Government this adds nothing to the wealth of the nation. It takes money from the producers and gives it to non-producers. It is a net loss in many ways and further exacerbates the problems.
The Democrats could and did do everything they wanted to do. The Republicans could not even have a chance of filibustering until the election of Scott Brown and even then, thanks to Snow and Collins, the filibuster mostly could not be used. It is the ultimate irony that Republicans get blamed for being obstructionists even when they had no power to obstruct and the Blue Dog argument is fictitious as they voted for all of the spending and programs while merely making noises about fiscal responsibility.
The Democrats got exactly what they wanted and it has been a dismal failure and you blame the Republicans for not voting with the Dem’s to expand the failed policies? Give me a break.
August 27, 2010, 5:25 pmMac says:
Ridiculous? Are you serious? Please, pick up a copy of the WSJ for a month and educate yourself. Professors are theoreticians. They do not run a business and, like Obama, have no real world experience in business. If the University elites are so smart, why can’t they figure out how to run their Universities in these times so that they don’t have to lay off teachers and raise tuitions?
August 27, 2010, 5:30 pmMac says:
David, Obama just cut 500 billion out of Medicare. Don’t you even care about facts? Obama has burdened the States, who must balance their budgets, with utterly unsustainable Medicaid spending.
You mean the individual mandates Hilary supported in 2008 and Obama opposed and decried during the primary campaign?
August 27, 2010, 5:52 pmMac says:
Could you please give examples of this? Pelosi and Reid have pretty much ruled with an iron fist. Only recently, as it has become clear to Dem. politicians that they are going to lose their seats, has anyone made any centrist noises.
August 27, 2010, 5:57 pmHarry Schell says:
LN:
Can you show me a “progressive” who doesn’t support more and more central control over the economy and matters such as healthcare?
And where can you show me this idea, which invariably delivers less individual freedom and more corruption of government and civil life, has worked broadly?
August 27, 2010, 6:32 pmMac says:
Certainly not in this case, Biden’s comments to the contrary notwithstanding.
August 27, 2010, 7:18 pmHarry Schell says:
Germany’s unemployment rate is now below pre-crisi levels. What was their “stimulus” program like?
http://www.nytimes.com/2010/08/27/opinion/27brooks.html?_r=1
August 27, 2010, 7:30 pmRicardo says:
It was partly Keynesian and partly not. But will you actually defend the overall performance of the economy during the Bush years? We now know that a substantial part of the recovery that took place was built on housing construction and consumer spending on credit made possible by cheap home equity loans. Which, in turn, were made possible by the housing bubble.
Since I don’t think it makes sense to attribute the housing bubble to tax cuts, I also don’t think it makes sense to credit the tax cuts with much of the illusory recovery that took place. Another piece of evidence here is the fact that the labor force participation rate among working-age men fell during the Bush years. That doesn’t happen when the job market is strong.
I think the tax cuts would have generated a more sustainable recovery had they been more Keynesian. I certainly don’t deny the tax cuts probably helped recovery a bit but they could have done a better job if they had focused more on putting money in the hands of people who are more likely to spend it.
Not at all. Waiting 50 years to balance the budget is a cop-out, pure and simple. It is not a serious plan. What Ryan’s plan unwittingly demonstrates is that if you want to balance the budget in the real world, you need to raise taxes. Even the most aggressive spending cut program imaginable cannot do the job. Who do we raise taxes on? Those least likely to cut spending as a result.
A slight tax increase on people who earn, say, more than $1 million per year is not particularly contractionary. A tax increase on people earning $30,000 per year is. So who do you impose more of the tax burden on?
Good, so then you know they don’t have much to do with the CRA. It’s true they have their own separate mandate to fulfill. But the data and evidence I have seen is that Fannie and Freddie followed rather than led the investment banks into the business of holding subprime CDOs and other securities on their books as an investment and that their total participation in that market was between 20-30%. That’s large but, at the same time, it obviously means that the other 70-80% of participants were private. If the PBS guy wants to quote some better data and evidence to contradict this, let him at it. But I don’t see any references to data in anything he said so I don’t see how this refutes anything I have said about either the CRA or Fannie and Freddie.
Are you going to blame Fannie, Freddie and the CRA for the bubble in condo prices in Miami and Arlington, VA?
August 27, 2010, 11:25 pmRicardo says:
Brooks: “According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.
This divergence created a natural experiment. Who was right?”
A “natural experiment” is where you have two cases that are comparable where each follows a different path in a more or less random manner. Germany is not comparable to the U.S. Germany is an export-oriented economy while the U.S. is not. Germany’s current account balance is estimated to have grown this year from 5% to 6% of GDP while the U.S.’s has shrunk from about -3% to -4% according to the OECD.
This means that international trade will tend to produce a recovery in Germany while it will tend to cause “leakage” from any stimulus money spent by the U.S.
David Brooks is simply wrong.
August 27, 2010, 11:41 pmRicardo says:
The WSJ’s business news reporting is good but skip the op-ed section. The op-ed section was busy publishing Bear Stearns economist David Malpass in 2006 and 2007 saying that all those people saying there was a housing bubble and that the savings rate of the U.S. was too low and unsustainable didn’t know what the hell they were talking about.
After Mr. Malpass’s employer ran itself into the ground by listening to people like, well, Mr. Malpass, he apparently found a new job as president of Encima Global LLC and, sure enough, is still writing for the WSJ. So if you want to read the opinions and predictions of those who are objective failures at investing and predicting, by all means continue to rely on the WSJ.
(Malpass is apparently also running for a Senate seat on the Republican ticket. Ah, Wall Street and government: two institutions that continue to reward failure.)
August 28, 2010, 2:59 amRicardo says:
Here is what Christina Romer actually believes about tax cuts: Extending High-Income Tax Cuts is the Wrong Answer for the Recovery.
August 28, 2010, 5:27 amAleks311 says:
I find it incredible that there are businessmen who have an opportunity to improve business right now but won’t hire to do so because of concerns over what may happen several years hence. Isn’t the old saying “Make hay while the sun shines?”
August 28, 2010, 6:36 amAlso, depending on the type of business the ACA may not matter. For low wage low-skill businesses I understand it matters very much: it will add a new cost. But for high-skill businesses the labor market already mandates health benefits; people will not work in those jobs without health insurance. So the ACA makes no real difference other than in the long-term since it opens up a possibility of moving away from employer-provided health insurance altogether once it’s 100% up and running. Please take the long view: in ten years you may be able to pay the penalty (far cheaper than a year’s healthcare premium) and still be able to hire skilled workesr since they will be able (and willing) to buy their own insurance policies in a functional and subsidized individual market. Which is really how it should be: it’s always been ridiculous that healthcare was tied to work in this country. The ACA was based on conservative proposals in the past, and moving people off of workplace policies is something the sensible right ought approve of.
Elliot says:
Can you list a few for us?
August 28, 2010, 5:44 pmDuracomm says:
Aleks311 said,
Not incredible just simple a simple fiscal survival mechanism in the face of risk and uncertainty created by obama and the democrats.
October 2009
Why My Business Has Ceased Investing
July 2010
All My Business Problems Diagnosed
With a stroke of the pen obama and the democrats destroyed the finances of this guys business less than a year after he explained the risks obama and the democrats posed to it.
This example makes it clear how obama and the democrats have created substantial amounts of uncertainty and this is one of the factors that is absolutely killing small business recovery and expansion.
August 28, 2010, 10:37 pmAleks311 says:
That 2000$ penalty is cheaper by a whole lot than what it costs to insure an employee for a year. Why is this so hard to understand?
August 29, 2010, 9:43 amAnd again: why pass up an opportunity right now because of something that might happen several years from now? Seems to me you’d want to make all the money you can right now if there really is an opportunity to do so, if your costs are going to be higher in five years.
Duracomm says:
Aleks311 said,
If you had followed the link and read the article you would have seen this.
In fact if you had even bothered to pay attention to the posted comment you would have noted that he said the penalty was larger than his net annual income.
If you knew anything about business that would have told you that the legislation passed by obama and the democrats is massively increasing his expenses. This increase in expenses utterly destroys the economic viability of this guys business.
Why is this so hard to understand?
The combination of business ignorance and political arrogance displayed by obama, and the democrats is turning a bad economic situation into one that is intolerable for small business.
August 29, 2010, 11:47 amDuracomm says:
Aleks311 said,
Because investing money in an enterprise whose business model is no longer economically viable will bankrupt the business and the business owner.
It takes time to fire workers and restructure business models and that has to be done before the new regulations kick in.
Since it takes time to implement changes business owners have to adapt to the new economic conditions and economic risk imposed by obama and the democrats right now.
The cheerleaders for obama and the democrats do not understand this.
Those of us in the reality based community do.
August 29, 2010, 12:42 pmSammy Finkelman says:
Something may be statistically true without being true on a simple level. That is maybe tax cuts make a difference (but that should only be when they actually happen or not)]
In a direct way, taxes on people making over $200,000 could cause less small business investment:
1) Relatives or parents of a small business owner might have less free money to loan or invest.
2) If the tax is paid by the business, and the business typically reinvests its profits, there might be less left to compound.
But I would say the real cause is tighter lending standards – would be or current small business owners can borrow less on their homes, or using their credit cards.
August 29, 2010, 1:22 pmSammy Finkelman says:
JA> Small business owners use their homes to obtain business credit.
ruuffles:
Well that’s insane. If they’re willing to use their homes as collateral to get credit, why not take the risk of hiring more employees? In for a penny …
SF> The point is, because the values of houses have dropped, they now can’t, whereas this could be done in 2005 and 2006.
August 29, 2010, 1:29 pmChaser says:
Nonsense. There isn’t a “real cause” – things are way too complicated.
The example given of Warren Meyer’s (Coyote Blog) business shows why central planning is so dangerous – nobody gave a thought to those businesses that don’t pay benefits because the benefits aren’t needed. Furthermore, they obviously didn’t care about businesses which cannot pay benefits and stay in business.
Central planners tend to be like so many commenters on this blog: sure of their ideas, and simply not aware of the real complexity of modern society. This is why expansive government is so dangerous – it is incapable of dealing well with edge conditions, and relies on the ability to understand the impact of its policies.
Conservative economics, while subject to the same prediction problem, try to minimize the impact of government on the economy, which long turn minimizes the prediction problem, and maximizes the natural information processing nature of a complex private sector. Progressive economics assume that well trained, educated and credentialed experts can do a better job than this distributed information system. They are wrong – obviously wrong to anyone who understands information theory.
August 29, 2010, 6:13 pmAJ says:
Ricardo,
1. You seem to be arguing with yourself about the import of tax cuts to the Bush recovery. On one hand you love the cuts for the middle class, but you hate that “the rich” got cuts (apparently because they do not spend as prodigiously). I have to side with Chaser’s arguments on this. Unraveling who should be saving, spending, investing, expanding, etc is the difference between conservatives and liberals. Liberals want the “big-brain” guy to plan it out whereas conservatives say get the money out there as equitably as possible.
2. The argument that Edward Pinto was making regarding the GSE’s is better described in the following WSJ article. It strikes me that low interest rates plus relaxed loan requirements created the inevitable. If we go back in time and insist on 20% down and proof of salary, housing would not have imploded.
http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748703298004574459763052141456.html
3. “Even the most aggressive spending program imaginable cannot do the job.” The key starting points are: enact pro-economic growth policies, place social security and Medicare on different glide paths, cap all government agencies, and start shrinking the federal workforce through attrition. If you want to raise taxes, like Clinton do it during strong economic growth times so the economy can withstand it. In some respect we are now playing small ball, debating 35% versus 40%. It seems agreed that 70% or 90% top rates are now dead letters.
4. I was having fun with my Romer quote….it is so rare when we get to hear a DEM say that tax increases are contractionary…suffice to say she remains a TRUE class warrior!
5. Finally, list me a time when intensive government spending propelled us from a recession into a high-growth low-inflation period. If we are left with our current time being that example, how long do we go before we declare it a mistake? As a pragmatist, I completely recognize that this amount of debt arising from the housing bubble will simply take time to make its way through the economy and that we are somewhat stuck until then. The President’s hand is not a good one but it is hard to argue that his initiatives have been pro-small business.
August 29, 2010, 7:42 pmElliot says:
In the general case, one very simple reason is that the costs expended to expand this year may be scheduled for repayment over the next five years. If one does not expect those profits to be there, then it makes no sense to invest this year. Businesees are trying to make all the profit they can now so they will have the reserves to survive the expected increases in labor and energy costs. There is actually very good incentive now to cut labor, increase productivity, and lower risk.
August 30, 2010, 1:01 amElliot says:
Unfortunately, those big brains don’t exist. They might think they do, but the candidates are not up to the task. Nobody is.
August 30, 2010, 1:03 am