Free Markets, Free People

market


Deciphering Paul Krugman’s latest message

Get your “Captain Krugman” decoder rings out and follow me through this Paul Krugman piece.

Today the line of attack on what he calls the “Obama-McConnell tax cut deal ” is to put forward the argument that the reason we’re in this mess to begin with is because of the debt carried by American families. Yes, that’s right – you did it, now shut up and take the medicine. Oh and the banks – yes, the banks because they “abandoned any notion of sound lending and because everyone assumed housing prices would never fall”.

Yeah, you guessed it  – not a thing about the Community Reinvestment Act, Congressional pressure on banks to lend to very marginal borrowers or Freddie Mac and Fannie Mae.  It was you, dear citizen … and the banks.  The government?  Sparkly clean by omission.

Anyway, because that debt is so high in relation to income and the families are in the middle of trying to deleverage that debt, they’re not spending much – or as much as is needed to kick start the economy, in Krugman’s opinion (they might if they had more but then that means even deeper tax cuts and Krugman ain’t going there).  And of course there’s that problem with high unemployment to factor in as well.

So, backing into this favorite theme of the past two years (Deficit?  Screw the deficit – spend, spend, spend), what or who should be spending to get the economy going?

Why yes Sparky, he means the government.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

It’s true that we’re making progress on deleveraging. Household debt is down to 118 percent of income, and a strong recovery would bring that number down further. But we’re still at least several years from the point at which households will be in good enough shape that the economy no longer needs government support.

But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.

Remember that last phrase because that’s the point of the post.  Now, with all of that background, Krugman says that this “Obama McConnell tax cut deal” will provide some stimulus but not the sustained stimulus Krugman says is needed from government.  And that first stimulus was too small – even though it was much larger than Krugman said was necessary at the time.  Nope  a massive stimulus is still needed no matter what we have to do to pump that money out there (even while the Fed is trying to sponge up the multi-trillion dollar spill of cash they tossed out there before):

The point is that while the deal will cost a lot — adding more to federal debt than the original Obama stimulus — it’s likely to get very little bang for the buck. Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

This is the point where cognitive dissonance smacks right into the Krugman “reasoning”.  A) he wants a new and much bigger stimulus – that’s no secret.  B) he claims this bit of stimulus (tax cut deal) will “cost” more (deficit) than it will deliver (bang for buck).  C) you can’t be trusted (shades of Clinton) to spend your own money the way the government would (perfectly, of course – properly, with no waste, and at exactly the right time and in the right place – having a coughing fit yet?).

For such a supposedly gifted economist it is like he missed Econ 101 in favor of Propaganda 101.  Either that or he really does believe, in the face of much evidence to the contrary, that a government spending money in a recession always returns “more bang for the buck” than does an individual (millions of individuals) in a market being allowed to keep and spend more of his money.  I am forever at a loss to explain that sort of thinking.

Pushing money out into an economy just to be getting it out there isn’t going to solve our economic problems.   In fact, if government has to be the big consumer of loan money to do so, guess what there’s less of for the private side of things?  Can you say “vicious circle”?And what does Krugman think a pure borrowing-based second stimulus plan is going to do to the debt?  Given the “bang for the buck” we received with the last stimulus, what makes Krugman think this one would be a better deal and superior to letting people keep more of their own money?

What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away.

The long and short of it is, this about isn’t economics, it’s about politics.  What Krugman wants is anything he can call economic improvement because he knows that Obama and the Democrats are in awful political shape.  His belief is if the Obama administration will quickly pass a huge stimulus and pump money into the economy, things will look somewhat better than they do now and he can make rosy predictions that should help carry the day for Obama’s re-election in 2012.  If it all collapses after that, who cares?  There will be plenty of time to make stuff up on the fly again and, of course variously blame the Republicans, the American people and, of course, the banks for any problems the economy may suffer.

~McQ


Unemployment rises to 9.8% – yeah, you read that right, rises …

Of course that’s the "official" number – as we’ve been pointing out for some time, the real number is well into double digits. But it again points out that markets are not at all happy with the business environment and consumers simply aren’t consuming at a level to push hiring even if it was settled.

In a significant setback to the recovery and market expectations, the United States economy added just 39,000 jobs in November, and the unemployment rate rose to 9.8 percent, the Department of Labor reported Friday. November’s numbers were far below the consensus forecast of close to 150,000 jobs added and an unemployment rate of 9.6 percent.

The increases tallied are mostly seasonal temporary work, meaning private companies aren’t creating many jobs at all (again, the economy has to generate around 125,000 new jobs a month just to stay even):

Private companies, which have been hiring since the beginning of the year, added 50,000 jobs in November. Most of those increases came from temporary help, where 40,000 jobs were added, and in health care, with an additional 19,000 jobs.

Retail jobs declined by 28,000 in November, while manufacturing, which had showed some strength earlier in the year, lost 13,000 jobs.

Government jobs dropped by 11,000 in the month.

Outlook? Bleak. Meanwhile the tax fight continues in the Congress. If you’re wondering why the business climate remains so unsettled, it is thinking like this which is typical of the majority party there:

Yeah, that’s right – this yahoo is claiming that small businessmen don’t ever make any decisions based on tax considerations. So they won’t mind a tax hike in the least.

How in the world does anyone take someone like that seriously? However, understanding that his thinking is most likely not uncommon there, it isn’t at all hard to imagine why Congress seems clueless as to how to stimulate the economy, is it?

~McQ


Krugman’s latest pearls of wisdom

I noted yesterday that one of the more prolific hacks left off of Alex Pareene list (link in previous post) at Salon was Paul Krugman.

QandO has a long history of examining Krugman’s political thoughts and finding them mostly wanting.  That’s not to say he’s a bust at everything he does – when he just talked economics he had some interesting things to say.  But his venture into political advocacy has, shall we say, not helped his overall reputation in the least.  One of the reasons is he’s prone to saying things like this:

The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty.

Don’t “deserve” wealth or poverty according to whom and by what standard, Mr. Krugman? 

Who gets to decide what is or isn’t “deserved” if earned or obtained legally?  And how does one make the blanket statement that “the poor certainly don’t deserve their poverty?”  That, in many cases, is demonstrably false. 

If we agree we are the sum of our choices in life, and those who’ve made consistently bad choices (drop out of school, take up drug use, commit criminal acts) end up in poverty, how is it they don’t “deserve” what they now suffer?  Certainly I can think of examples of the poor who may be poor through no real fault of their own – the mentally deficient who haven’t the skills to earn high wages, etc.  But for the most part, if everyone is offered essentially the same opportunities as others and they choose not to take advantage of them, how does one relegate their descent into poverty as “undeserved”?  Especially when others in precisely the same circumstances make different decisions that raise them out of poverty?

What, in fact, that statement is meant to reflect is Krugman’s apparent belief that wealth is unequally distributed not because it is earned, but by an immoral and unfair system that needs to be fixed. 

The market, in Krugman’s world, arbitrarily picks winners and losers and rewards them at whim apparently.  Thus most of the rich and none of the poor “deserve” their financial status.

So this should come as not surprise:

Allow me to make a point: Economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished.

The market economy is a system for organizing activity — a pretty good system most of the time, though not always — but not according to any moral significance.

Really?  So nowhere in such an economy is honesty, fairness, good customer service rewarded with business over competitors who exhibit none of those virtues?  Instead, it’s just a “system for organizing” where consumers buy from which ever vendor they first come upon without ever once considering those virtues as a reason for buying?  Does the system punish those who act in what one could consider an “economically immoral” manner – i.e. in violation of the laws of economics” or screwing over customers?  Does it not mostly reward those who act in a manner that most pleases their customers and helps their reputation?

How is that not evidence of a moral code operating within a given market?

Well of course it is – but such a code is inconvenient to the Krugman’s of the world, because admitting that markets, unimpeded by government intrusion, would reward or punish those who transgress its laws would mean the argument for more government intrusion would fall flat.  And certainly, admitting that the rich “deserve” their riches as much as many in poverty “deserve” their poverty would again admit to a morality that precluded government making everything “fair” by it’s attempts to redistribute that “undeserved” wealth.

Those key premises are what Krugman and much of the left base their criticism of capitalism on, never once admitting that a) capitalism as it should exist doesn’t and  b) the reason the markets may not seem to be “working” is because of the amount of distortion they already suffer from government intrusion.

Of course, it is the age old cycle many of us have come to understand – government declares something to be a problem, declares it is the solution, exacerbates the problem and again declares only it can fix it with even more intrusion. 

“Morality” is, at a base level, “good and bad”.  We label what we deem “good” as moral.  The bad stuff is “immoral”.  How one can observe real markets at work, where the basic transaction is a voluntary exchange of goods for money between two people (entities) and not recognize the basic morality of such an act wouldn’t understand morality if it bit them on the leg.   Billions of those transactions will happen on this, Black Friday.  Consumers will go to stores they trust from experience, buy from vendors with good reputations and the best customer service and reward them with their business.  That decision is one based in morality in which the consumer weighs the options and picks the vendor who best exemplifies their moral ideal in the marketplace.  If they’ve been burned in the past by store X, that store most likely will not get their business – a decision based on the moral judgment of the consumer.

How a so-called economist doesn’t understand the basic morality of markets seems a bit beyond me.  Which is why I put Krugman in the hack category.  That morality, which is plainly evident to me, is inconvenient to Krugman’s thesis that government must intervene in the economy.  He can’t really point to any success stories (well he tries by saying, finally, that massive government spending for WWII brought us out of the Depression and that’s suspect), so he’s left trying to explain why it is government’s job to save us from the inherent unfairness of the market.

You have to leave a whole bunch of stuff out to do that.  And you have to establish nonsensical premises like “the rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty”, in order to advance your government intrusion thesis.

Thus the cycle repeats – government is again the only solution to the problem government created.  After all, the markets put us 14 trillion in debt, not the profligacy of government – or so I fully expect Krugman to explain in some future bit of nonsense in the New York Times.  It would make about as much sense as this nonsense.

~McQ


Stop the war on business

That’s the central theme of a Ken Langone op/ed in the Wall Street Journal. Langone is a co-founder of Home Depot who gives Obama a lecture he’s long deserved. He does a good job of summarizing the absurd rhetoric used by Obama and his administration and the attitude they project that has done nothing to help and everything to hurt the recovery:

Your insistence that your policies are necessary and beneficial to business is utterly at odds with what you and your administration are saying elsewhere. You pick a fight with the U.S. Chamber of Commerce, accusing it of using foreign money to influence congressional elections, something the chamber adamantly denies. Your U.S. attorney in New York, Preet Bahrara, compares investment firms to Mexican drug cartels and says he wants the power to wiretap Wall Street when he sees fit. And you drew guffaws of approving laughter with your car-wreck metaphor, recently telling a crowd that those who differ with your approach are "standing up on the road, sipping a Slurpee" while you are "shoving" and "sweating" to fix the broken-down jalopy of state.

That short-sighted wavering—between condescending encouragement one day and hostile disparagement the next—creates uncertainty that, as any investor could tell you, causes economic paralysis. That’s because no one can tell what to expect next.

Again we confront the difference between a politician in a permanent campaign and a leader.  And we see the result.

Obama seems mystified by the role of the president.  He seems not to understand that leaders don’t use the old, divisive and politically charged rhetoric of the campaign trail, but instead have the job of doing (and saying) what is necessary to move things in a positive direction.  That has not been something Obama has done at all when it comes to business.

There’s another point Langone made that is worth featuring:

A little more than 30 years ago, Bernie Marcus, Arthur Blank, Pat Farrah and I got together and founded The Home Depot. Our dream was to create (memo to DNC activists: that’s build, not take or coerce) a new kind of home-improvement center catering to do-it-yourselfers. The concept was to have a wide assortment, a high level of service, and the lowest pricing possible.

We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.

If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.

Regulations, taxes, compliance and mandates cost businesses billions each year.  That’s billions that aren’t spent on employees, customers, expansion or growth.  And it is especially stupid to increase all of those in a recession – yet that’s precisely what is going on now.  And it keeps the market unsettled and at least defers or may in fact kill any possible action by businesses which may benefit the overall economy.

Obama’s actions and rhetoric are a case study of someone who doesn’t understand his job, doesn’t understand the power of the words he utters (because he doesn’t understand his job) and has been very irresponsible with his rhetoric at a time when the damage that rhetoric can do are compounded by the situation (recession).

OJT is not something a president should be doing – especially in a recession.  And for the supposed “smartest guy in the room”, he sure seems like a slow learner when it comes to his job and the requirements of leadership.

~McQ


Barney Frank wants another chance to destroy the housing market

If you live in Frank’s district, this is the only reason you need to vote for Sean Bielat, his GOP opponent.  I.e. Frank is about to remake Fannie Mae and Freddie Mac in his own image.  That after the two institutions that he fought so hard to support with your tax dollars and attempted to keep Congressional oversight to a minimum, tanked and almost took the economy with them.

The Washington Post has a mostly sympathetic piece (poor Barney, he only wanted to use your money to help the poor put a roof over their heads) which, if you read carefully between the lines, at least hints at most of the story.  And the rest of the story ends with us pumping $160 billion and counting into the two institutions after the government took them over.

Back when it all started, Frank identified cash cows in the two institutions which would allow him to fulfill his personal agenda:

Fannie and Freddie were in the business of buying and guaranteeing mortgage loans from private lenders, which in turn could take the money and make even more loans to prospective homebuyers or developers looking to build apartment buildings.

Democrats, led by one of Frank’s closest allies, Rep. Henry B. Gonzalez (D-Tex.), wanted to require the two companies to spend a specific percentage of their funds on affordable housing. Under the proposed legislation, the companies were to buy home loans made to lower- and middle-class people and loans going to fund development of affordable rental housing.

This represented a rich new vein of money.

But even as Democrats were looking to expand Fannie and Freddie’s mission, a small group of Republicans, led by Rep. Jim Leach of Iowa, urged the government to pay more attention to the dangers posed by the firms.

Let’s see – “rich vein of money” or oversight and caution?  “Rich vein of money” of course.  So Leach’s warning were pushed aside:

The companies had been growing ever larger. Yet compared with their rivals in the banking industry, they were putting aside relatively little capital to cover potential losses. Leach proposed a tough new regulator that would restrain Fannie and Freddie.

Nah.  So onward we went, huge sums of money flowing out the door, very little oversight, with a political agenda driving the bus instead of financial sanity.  That was in 1992.  In 2003, the warnings were still coming and getting louder:

By late 2003, the firms had taken on more than $4 trillion in debt, rivaling that of the entire federal government. Yet Frank, who had by then become the top Democrat on the influential House Financial Services Committee, still wasn’t focused on the risks. He had his sights set on what else they could do to promote for affordable housing, particularly low-cost rental housing.

At a hearing called by Republicans, who controlled the committee, Frank made clear that he was reluctant to tighten oversight because it could limit the ability of Fannie and Freddie to help people get a roof over their heads.

The companies, he urged colleagues, "are two of the very important tools that we have" and had to do what "the market in and of itself will not do. "They were "not endangering the fiscal health of this country," he continued.

But, of course, they were and did endanger the fiscal health of the country.  Denial was his only weapon and he used it constantly – because his personal political agenda was apparently worth the risk – at least to him.  He even said once he wanted to “roll the dice” a little more, perfectly willing to risk the fiscal future of the country to push his political agenda.

And you all know the rest of the story. 

Fannie and Freddie proceeded to load up on securities backed by risky mortgages, such as subprime loans and no-document loans. The firms asserted that they were aggressively fulfilling their affordable housing mission, and some risky mortgages were indeed going to borrowers who couldn’t otherwise afford a home.

But many of the loans were going to people who could have afforded traditional mortgages, and the companies were bulking up on the risky loans purely in pursuit of even larger profits.

When the housing market crashed, the unprecedented surge in mortgage defaults blew a hole in the firms’ finances.

The Democrats and Frank want to deny this part of the story or pretend it is an insignificant part of it or that what happened to Freddie and Fannie were a result of Wall Street’s shenanigans. 

Not really.  The prime buyer and bundler of the sub-prime mortgages were those two institutions.   And, as the article notes, Freddie and Fannie believed they were “aggressively fulfilling their affordable housing mission” as legislatively enabled by Barney Frank and Congress.

And what has he managed to get for his effort?

For all his efforts, Frank readily acknowledges that there are more people needing decent housing than there were when he started in Congress. And with millions of others losing their homes to foreclosure, Frank asks to be judged by how much worse things would have been without him.

"In the political world, you get measured on the ultimate results," he said. "I think we’ve prevented things from getting as bad as they otherwise might have been."

Really?  Have you looked around you Mr. Frank?  This ranks right up there with the unmeasurable “saved jobs” nonsense pushed by the administration in the midst of 9.6% unemployment.  And now Frank is going to get another chance to shape the housing market’s future?

Time to put him into retirement before he can again try to do what he did last time.  Another reality of the “political world” is you should only get one chance and if you screw it up as badly as Frank did, you should join the ranks of the unemployed.

~McQ


Quote of the day – health care version

Got a huge chuckle out of Steven Levitt’s opening sentence at the Freakanomics blog:

Many economists view the health-care bill passed in the U.S. earlier this year as falling somewhere between “a complete waste of time” and “actually making the situation worse.”

Indeed.  In fact, I’d have to go with the “actually making the situation worse” determination, given what we’ve seen this past couple of weeks as more and more companies react to the impact of the legislation.

The context of Levitt’s remark is a story by Delia Lloyd talking about the UK going in precisely the opposite way.  Yes, a country which has had socialized medicine for over 60 years is looking at taking steps for a more market-based health care system, with the belief it will improve the British system.

Markets?  Pricing signals?  Competition? 

Nah, our Congress just rejected all of that – couldn’t be a good thing.

[/sarc]

Why are we always 60 years late and a dollar short?

~McQ


Government mandates and the law of unintended consequences

Your “Econ 101” lesson for the day is a lesson politicians never seem to grasp, although they do love to harp on is “greedy corporations” outsourcing “American jobs”.  In effect, they play off of free market decisions necessary to maintain competitiveness in order to characterize corporations as the bad guys (and, naturally, they and government as the white knights).

Of course the market decision I’m speaking of concerns doing what is necessary to remain competitive in highly competitive markets. And, one of the highest costs of production is headcount or the workers.  So in a free market, competitive industries are going to seek the lowest cost possible for labor to remain competitive. 

That may mean moving to a new country for labor intensive industries where labor costs are lower.

But sometimes it isn’t “greedy corporations” that drive American jobs offshore.  Sometimes it is the US Government.  Take light bulbs for instance:

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison’s innovations in the 1870s.

Wait, you say, there’s still a demand for light bulbs!  Of course there is – but thanks to government intrusion, that demand, by law, is only for a particular kind – not the incandescent types that we actually manufactured here.  Instead of letting the market decide which type of light bulb it wanted, the government decided to mandate it. And what you are now allowed to “demand” is a compact fluorescent, or CFL.

What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.

The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

Consisting of glass tubes twisted into a spiral, they require more hand labor, which is cheaper there. So though they were first developed by American engineers in the 1970s, none of the major brands make CFLs in the United States.

CFLs, as noted, are more labor intensive to manufacture than are incandescent bulbs.

China’s labor costs are far less than the US’s.  Therefore, the US government’s mandate ending the use of incandesents by 2014 and mandating CFLs be purchased in their place drove the domestic lighting industry – and the jobs it produced – off shore.  And all based on dubious science and the apparent belief that energy production is finite and waning.

Oh, and “how about those green jobs?”  Another promise shipped off to China.

When you screw that CFL in some family in China will thank you.  And when you pay your taxes some of which go toward unemployment benefits for former light bulb manufacturers here – make sure you thank the politicians for the job well done.  I’m sure those former GE workers will.

/sarc

~McQ


The folly of green protectionism

Here’s a formula for you to study:

Green groups want less forestry in the developing world. Industry wants green protectionism to cut the volume of competitive imports. Unions want green protectionism to stop imports to ensure they can keep workers in high-paying jobs.

So using the environment as an excuse, we have these three groups colluding to further their own agendas. Call it “green protectionism”.

In a recent case it has been to keep toilet paper made in foreign countries out of Australia.

That’s right, toilet paper.

Can anyone now figure, based on that formula, what the missing part of the equation might be? The part that is necessary to make such collusion pay off?

Yes, government. Certainly green groups can want less forestry in the developing world, and industry can wish for a way to cut the volume of competitive imports. And unions always hope to ensure high paying jobs.

But only one entity can actually make all those wishes, wants and hopes come true. If government becomes involved it has the power to fulfill the wishes and hopes of these three disparate special interest groups.

That’s what happened in 2008 when two Australian toilet paper manufacturers, Kimberly Clark Australia and SCA Hygiene as well as the Construction Forestry, Mining and Energy Union (CFMEU) and the World Wildlife Fund essentially colluded to keep foreign manufactured toilet paper, primarily from Indonesia and China out of the country. Their ostensible complaint was those countries were “dumping” their product in Australia.

For a short time they succeeded in getting imports restricted by the Australian Customs Service, until, it seems, the ACS did a study to determine the validity of the complaint. Their findings were significant. The Australian Customs Service report calculated that the potential downward pressure of imports could be as high as 42 percent of the price.

In other words, the collusion would cost consumers in Australia 42% more because the competitive pressure that kept prices low would have been removed. In addition, a recent report commissioned by the Australian government found that “illegally logged material” – one of the prime reasons these groups claimed Australia should ban imports of foreign wood products – only comprised 0.32 percent of the materials coming into Australia. In other words, the threat was insignificant.

That’s Australia, but what about here? Well, we’re hearing the same sorts of rumblings concerning “green protectionism”.

Sadly these campaigns appear to be part of a spreading green protectionist disease, where industry, unions and green groups work together. In the United States the disease was brought to life by the Lacey Act, which imposes extra regulation on imported wood and wood products to certify their origin and make them less competitive.

The Lacey Act is actually an update of a 1900 law that banned the import of illegally caught wildlife. It now includes wood products (2008). And that means, since extra steps and cost are incurred by foreign manufacturers, that consumers are stuck with the increased cost.

While the reasons for protectionism may sound good on the surface – save the forests, higher wages, less competition to ensure jobs – it isn’t a good thing. If freedom is defined by the variety of choices, what protectionism does is limit those choices and impose an unofficial tax on consumers. They end up paying the cost of collusive action between government and special interests.

So, each time your government announces that it is doing you the favor of limiting the imports of this commodity or that, based on “green” concerns, hold on to your wallet. Whatever the government is protecting you from, you can rest assured that the price of the domestic variety is headed up, since the other product of government intrusion is limiting competition. Rule of thumb: restricting free trade is rarely a good thing. And the only entity that can do so is government. “Green” is just the newest color in an old and costly game – protectionism.


The Economy In An Anecdote

I think this entire article entitled “Why I’m Not Hiring” could qualify as the QOTD. It neatly explains why businesses are so reluctant to hire anyone right now.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She’s been with us for over 15 years. She’s a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

[...]

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay … When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

There is no grand revelation in Mr. Fleischer’s explanatory essay. Just hard cold reality: make the costs of hiring more expensive, and less hiring will happen.

Some may argue that just because Mr. Fleischer’s company isn’t hiring for these reasons, that doesn’t mean that other companies are refraining on the same basis. True, but what are the other possible reasons then? Logan Penza summarizes some of the arguments:

It’s those Evil, Greedy Corporations.

That’s the simple explanation most of the talking heads have for the continuing high unemployment numbers. Those Evil, Greedy Corporations horde their money and refuse to hire anyone. When they do hire someone, they don’t pay them enough, don’t offer them enough benefits, don’t pay enough taxes, pollute the planet, steal candy from babies, kick puppies, and make obscene gestures at your auntie. Evil, Greedy Corporations are offered up as cartoon villains, detestable and vile and without any redeeming value.

The trouble with cartoon villains is that they are fictional.

Well, yeah, but it’s so much easier to blame fictional bogeymen then to address what the real businesses say.

Another argument I’ve seen advanced is that the marketplace is inherently uncertain, and that businesses who can’t cope with changes in the law are simply unfit to survive. There is a certain laissez-faire appeal to this argument, but ultimately it doesn’t make sense.

The fact of the matter is that the types of market risk that businesses can and do adjust to, aside from increased competition, are changes in demand and supply, natural disasters and war. The more savvy, efficient and customer-sensitive businesses do survive these sorts of uncertainties and ultimately enhance the economy when they do.

In contrast, when the government continually raises the costs of doing business in the first place (or threatens to do so), the only ones who really survive are either the politically connected or the very wealthy (yes, they are often the same thing). That doesn’t have anything to do with building a better mousetrap, as it were, or growing the economy. And it certainly doesn’t do anything to raise everyone’s standard of living. Instead, all it does is reward those closest to the rule-makers, thus creating more competition to be closest to the King rather than satisfying the marketplace. It is exactly the sort of crony-capitalism we claim to detest.

As Mr. Fleischer summarizes:

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

Perhaps instead of punishing business, the government could get out of the way. Maybe then we could get some of that job growth we’ve all been looking for. Unfortunately, it seems that few in Washington are listening, or worse, that they don’t really care.


Jobless claims “unexpectedly” rise

Yup, as Tim Geithner would say – “welcome to the recovery”.  And, given the trends, I would guess this isn’t the last of the “unexpectedly” high unemployment report we’ll see.  Again, ad nauseam, there’s been no incentive provided by government, but plenty of disincentives that are keeping businesses on the sidelines and consumers from spending:

Initial jobless claims climbed by 19,000 to 479,000 in the week ended July 31, the most since April and exceeding the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The number of people receiving unemployment benefits dropped, while those getting extended payments rose.

A cooling economy means employers will resist taking on more staff in coming months, raising the risk consumer spending will weaken further. The jobless rate rose last month as payroll increases weren’t large enough to keep up with gains in the labor force, economists forecast a government report tomorrow will show.

As if anyone has to be told, this is not good.  And it wouldn’t surprise me to see the U6 unemployment rate tick up over 10% again in the next few months:

“There really is no upside momentum in the labor market, and that’s a critical long-term determinant of where the economy is going,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. “People just aren’t getting jobs.”

That’s because jobs aren’t being created and offered.  Name the incentive, at this point, to do so?  Tax increases are in the offing, health care laws, 1099 requirements, Democrats still pushing for cap-and-trade, new financial regulations that impact the market and economic policies which give the impression the administration is at war with business.

Why would any sane business owner invest in his business in times as unsettled as these?

Answer: he or she wouldn’t.  And that’s the biggest reason unemployment continues to “unexpectedly” rise.  Headcount is the easiest thing to add when times are good.  It’s also the easiest thing to reduce when times are bad.  And if they stay bad – as we’re seeing now – few if any are going to be adding jobs.

Economics 101 – provide incentives to get the behavior you want.  Provide disincentives to discourage the behavior you don’t want.  The administration’s economic policies have, to this point, provided business with all manner of disincentives to hiring.  And then the “experts” are surprised when jobless rates are “unexpectedly” higher than estimated.

Go figure.

~McQ

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