Friday, June 3, 2011

The Conservative Freak-Out Theory of Unemployment

Could the jobs problem be a function of businesspeople who fear massive new regulations because Barack Obama is president? Because, after all, even if there aren't massive new regulations or a real threat of them, conservative alarmists convince the sorts of people who make hiring decisions in private business that those new regulations are just around the corner?

The latter from Will Wilkinson, who I think of as a fairly sensible libertarian, and it's plausible -- plausible enough that Kevin Drum doesn't rule it out.The only problem? Hey, we all know Steve Benen's job charts, and it's really hard to see the "scary Democrats" effect. It's worth also pointing out that the last two times that the White House shifted from Democrats to Republicans a recession struck in the very first year, which isn't exactly consistent with Wilkinson's theory. To get more big-picture, the general but contested scholarly view is that the economy has grown better under Democratic presidents, with the dissenting view, if I'm understanding it correctly (and I'm very much not an expert on this literature) looking better for Republicans because it ascribes the first year of presidencies to the previous administration -- a view which is not consistent with Republican managers and small business owners all freaking out every time a Democrat is elected.

Now, we live in a multivariate world, and as I said I'm not really well enough versed in the literature to know whether jobs in particular, as opposed to economic growth in general, has the same effects.  Still, while I agree that the theory isn't nuts on the surface, I'm going to say that readily-available evidence (you know, the last 18 years) speaks strongly to the idea that there's no such significant effect. Very strongly. Strongly enough that Wilkinson (and Drum) should have realized there can't be much, if anything, there.

What's really going on? People are absolutely terrible at self-diagnosing the reasons for their own actions. Here's my guess: it is actually very likely that the medium-sized business owner whose anecdotal evidence started all this truly believes that he's hesitating to hire because he's afraid of a massive increase in taxes or regulations next year, but in fact what's really going on is that every time he things the economy is improving, it levels off. In other words, if demand for his product was actually very strong, he'd be moving ahead despite his Fox-induced fears; since it isn't, he's hesitating, and blaming it on those fears. No, I can't prove it, but I'd bet that's what's happening.


  1. I'm also skeptical of Wilkinson's theory (heaven help us if partisan propaganda actually is driving the economy). The business climate is uncertain because we continue to pursue policies, fiscal and monetary, that manipulate the economy with the aim of artificially propping it up -- even with the explicit intent of keeping housing prices from falling further. Businesspeople reasonably conclude that we're not at the bottom of the market and there're still significant adjustments to come. So even where market indicators look good, they're assumed to be unreliable. Looking down the road, there's probably also some uncertainty about the austerity that will be necessary to deal with the debt, deficit and entitlements. We've seen European countries deal with this recently and the longer we put it off, the worse we can expect the austerity to be.

    (Hayek FTW!)

  2. Surveys of small business owners indicate their main concern right now is weak sales.

    So it isn't that business owners are blaming the wrong things. It is pundits doing it on their behalf.

  3. If you're a small business owner, and you're currently giving $0.35 out of each before-tax dollar to Uncle Sam, it sucks to increase that to, say, $0.40. No doubt. What would you do about it?

    Possibly...nothing. If your salary is in the SG&A line of the P&L, and your small business is closely held, the 'only' impact of the tax change may be that your residual wealth declines somewhat from lower retained earnings. But that won't necessarily cause you to operate differently.

    But many small businesses are operationally impacted by lower retained earnings. How do they make themselves whole? Some will no doubt fire/not hire employees, as Fox News breathlessly reminds us in every tax discussion. Others, though, will make themselves whole by hiring more 'line-type' staff (e.g. salespeople) to goose the topline and regain their earlier earnings level. Eventually those revenue increases will lead to a larger organization and more staff-type (back office) jobs.

    I'm not familiar with the mix of small businesses that a) shrink staff in response to higher tax rates, b) grow 'line-staff' in an attempt to offset higher taxes and c) ignore higher taxes. But there must be some of each, no? By contrast, it stands to reason that virtually all large, publicly traded companies would respond to higher taxes by cutting staff, since a) lower profits absolutely matter to every publicly-traded company, and b) the opportunity to offset lower after-tax profits with greater sales should be lesser in bigger companies.

    If its true, as everyone agrees, that small business jobs are the engine that drives the US economy, perhaps this explains why Democratic administrations have better economic performance: the threat of higher taxes ought to cause some small businesses to staff up, while virtually every large company will shed jobs under such a threat. I'm curious whether anyone has studied this, but I could be convinced that tax stigma associated with the political left correlates with a positive migration of jobs toward small business (contra every breathless rant on Fox News).

  4. The businessperson who was actually rational wouldn't have to look very far or very closely to understand that the Republicans have enough power in Congress to emasculate any and all "liberal regulations" before their birth into actual legislation, and to de-fund any regulations and filibuster any appointments of competent regulators if they do gat into legislation, and to hold hearings on repeal of the regulations if the previous 3 types of actions haven't made said regulations toothless and worthless.

    Look at the examples of Massie Coal and BP oil -- does business actually have any real reason to fear regulation in the current Fox News/GOP lemmings-off-the-cliff political environment?

  5. What BrianTH said. Small businesses cite low demand as their main obstruction to growth. See:

    The Republican Party has abandoned policy beliefs for resentments and conspiracy theories.

  6. I've been a business owner for 20 years. I spent the previous 20 years in marketing and advertising working with many different kinds of businesses; small, medium and large, local, regional, national and global.

    The absolutely most important thing that inspires business action is demand. When you write a business plan, the first thing you have to demonstrate is demand; who will want or need your product or service, how many, how often, what do you expect to happen to demand over time, etc. Government regulation provides a context within which a business must act, but that context is more likely to be beneficial, frankly, than otherwise. And, of course, it is usually accompanied by a great deal of government support.

    The theory that the business community is terrified of government action is ridiculous. Yes, businesses want less regulation, except, of course, when they believe more will serve their specific interests. And no one, of course, wants to pay taxes. But, there isn't a single industry that hasn't gone to and isn't willing to approach government to "interfere in the economy" when they think it suits their purposes.


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