Ambiance

A Dialog about Business and Government

November 12, 2012 at 9:18 pm (By Amba, Icepick)

Below is a dialog between Annie and me. It took place during the three days after the election. I am leaving it largely unedited, though some changes are being made for clarity. I am leaving out some of the more intemperate remarks on my part.

This mostly follows the title. A couple of digressions have been put in towards the end. This two digressions are, as best I can manage, the only things taken out of order, and even those occurred near the end, as here. I could scare up links for some of it, but if you care enough you can look it up yourself. I have only included one link as that was all I included in the exchange.

Anyhow, what follows is roughly 4500 words. I’ve said enough so don’t expect me to hang around in the comments, should any follow.

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Todd: Seriously, the country just voted for four more years of 8%+ unemployment. And it’s only that low because the participation rates have cratered. If they hadn’t changed the formula several years back we’d be closing in on four years of 10%+ unemployment. That’s now considered a successful Presidential accomplishment.

Annie: I know that the real unemployment rate is much higher than the “official” one, and that the latter is manipulated for elections and other ulterior motives. Many people are gullible and think wishfully.

I don’t fully understand, though, what policies of Obama & co. are driving unemployment. Is it mainly Obamacare? The business community’s mistrust of his intention to raise taxes and overregulate, making them keep their cash on the sidelines instead of investing? Can you fully believe the business community’s saying that if only the climate were business-friendlier, there would be lots more jobs, when one of the main ways corporations now increase profits is by cutting the costs of human workers — by downsizing, automating, minimum-waging, outsourcing, and offshoring? Without Obamacare, would humans be cheaper for employers to hire? I’m really trying to understand.

If you provide tax incentives for employers to hire here instead of offshore, that’s considered “protectionism,” being anti-free trade, therefore restricting commerce.

One great irony: they say Obama won Ohio because of the auto bailout. I guess they think their jobs were saved.

Todd: Annie: I don’t fully understand, though, what policies of Obama & co. are driving unemployment.

Here’s the thing. A President can’t create jobs, other than government jobs. What a President CAN do (with varying degrees of help from Congress) is create an environment that fosters economic growth. The big things are tax policy (which needs complete buy-in form Congress), regulatory burden and energy policy.

Taxes need to be collected to pay for the stuff government needs to do. How that is done has a big impact on how business gets done. For example GE typically files a tax return over 50,000 pages long. They conduct their business very precisely so as to avoid paying corporate income taxes. That conduct includes buying lobbyists to get Congressmen and Senators to introduce loopholes favorable to themselves. Side-effects of such policies include creating barriers to entry for competitors. If you come up with a better widget to replace some widget GE makes, your best bet is to get them to buy it. You will be buried by the tax code otherwise. GE can afford to keep an army of tax accountants and tax lawyers on staff. It’s worth it to avoid paying taxes and to keep competitors at bay. This is why big business is typically rather cozy with the government. But all that complication hampers new business formation and all those accountants, lawyers and lobbyists are ultimately not doing anything to add value to the economy.

This can also happen to individuals filing tax returns. After I lost my job my tax returns got about five times more complicated than they had been because of all the credits and other loopholes Obama had introduced via his stimulus package. Besides being so complex that no doubt many people overpaid, it creates a lot of wasted time and effort, and increases blood pressure in the nation collectively. Simpler and better solutions would have been to lower rates, or best of all to cut FICA taxes.

But I have yet to see a tax change during the Obama years that didn’t maximize complexity. I see nothing in their proposed policies that makes me think things will get any different.

So the barrier to entry problem and the drag on the economy (and our lives) from the useless complexity is a big net minus. The ObamaCare bill introduced a much lower dollar amount to necessitate businesses filing 1099 forms. That kind of thing will well and truly fuck a small business. In fact at the time I knew someone who had been planning on starting a two man business. When they found out about the 1099 thing (which must have been repealed eventually) they realized they’d have to hire a bookkeeper. There went the business plan.

The second item is regulations. Here the President has a lot more latitude through all the agencies he has an impact on, from the SEC to the EPA to Homeland Security to all the stuff around the ObamaCare bill. The more regulations, the harder it is to do business. Obama has been flooding the zone with regulations and it will only get worse as ObamaCare ramps up. It’s a total clusterfuck.

The third item is energy policy. The President has some latitude here but does have to involve Congress at times. The EPA has an outsized impact on this field. And Obama’s Administration has been adding to the regulatory burden of coal and natural gas businesses. In fact there are supposed to be new regulations on not only coal and natural gas but also on fracking coming some time this fall. How difficult will they make it to mine for hydrocarbons? The harder they make it, the more expensive energy will get. Coal country voted uniformly against Obama yesterday because he’s been so hard on their industry. In fact energy prices will spike big next spring and summer across large parts of the mid-west because of the need to shut down coal plants and replace them with natural gas plants. Those numbers are already baked into contracts.

Energy is important two ways. First it’s a baseline expense for everything. Second, energy, particularly coal, are important to manufacturing. You may have been hearing about the reshoring of manufacturing jobs. That has been possible in part because we’ve had decreasing energy costs here. (Gasoline excepted.) That (and other factors) are making it more feasible to make things here. This is especially true of coal, for reasons that make engineers get excited.

But Obama has been bad on all three, with assists from Congress where appropriate. In fact it was on these three things that Romney was strongest. His 12,000,000 additional jobs plan was an unrealistic goal, but reforming taxes (I would push for much more radical measures on that front), energy policy and regulatory practices would be a good start regardless of which kind of recession one believes we’ve had. (Your choices are cyclical, structural or balance sheet.)

What I need, and what the other LTUEs need, as well as the regular old UE, and the under-employed folks, is an economy that is growing strongly. We’re not going to get back in the game until and unless that happens. And the public has now endorsed the exact opposite of strong growth.

Annie: Gotcha!

Would you consider posting that?

Todd: No. I’m done posting for a while, I think.

Annie: about what you said last night . . . the essence of it seems to me to be, “We have to let the lions feed to their heart’s content and then maybe they’ll throw us meerkats some scraps.” You’re saying the problem with burdensome regulations is that they disproportionately hamper small businesses and discourage startups because large corporations can buy lawyers and accountants and lobbyists to both comply with them and evade them. But, given deregulation and low or no corporate taxes, wouldn’t the big boys just find other ways to stamp out competition and crush the small entrepreneur before he (or she) even gets started? E.g. Walmart undercutting prices and driving out local stores. Only the relatively few who came up with some new genius product or way of filling a need would survive to create jobs and products . . . and aspire to join the giant class. (I’m looking for an article I saw about the cycle of capitalism, through three ways of making profit, from innovation to expansion to cost-cutting . . . but I can’t find it.)

I’m not saying there’s a solution. That’s what’s so depressing: it seems that the big boys win no matter which party gets elected. It seems that the real problem (one of them) is there’s no social compact (which of course is cultural and can’t be legislated), as there is in Japan where executives by consensus limit their compensation to some nonobscene multiple of what the floor worker makes. Where they feel responsible to the community and feel shame if they blatantly betray it. Where, I have heard, they try (or tried) to employ nearly everybody whether they need them or not. Is that what sandbagged the Japanese economy for a decade, or was that other mistakes?=

Todd: Job growth doesn’t come from large businesses, not mostly. It doesn’t come from very small businesses either. For example, we like to spend time in downtown Winter Garden. It’s in the old style of Small Town USA Main Streets with modern amenities. We go there for the splash park in particular.

Anyway, back to the small business narrative. A used bookstore opened up there within the last year. I’m not sure but I think it was there before but now has new owners. (We only started going there last Spring.) A newly retired woman runs it with her husband and occasionally other family members. It’s a good little shop. That business, and those like it, will not create any jobs on net. It’s not going to grow, it’s not going to boom, it’s not going to be the next Google.

When Obama talks about his tax policies for “the rich” not affecting* 97% of small businesses he’s undoubtedly talking about “There be Dragons Bookshoppe” and similar businesses, as well as people that work independently selling Mary Kay, Tupperware and such.

But the small businesses that matter for the economy as a whole are those that grow. For example, Kim’s old company was started by two or three guys. It eventually grew into a company of a few hundred people. THAT is the kind of businesses that need to be nurtured, or better yet JUST DON’T HAMPER THEM. Every company the government nurtures is at least one other company being put at a disadvantage.

(The man running Kim’s old company eventually down-sized the company because he didn’t like having a larger company. When Kim was there I don’t think it was ever more than 50 people.)

Every now and then one of those little start-ups will become a colossus, such as a Google or MicroSoft. And that’s helpful too.

But the thing is we need start-ups that start small and grow. THAT is the backbone of the economy. The President would (implicitly) have you believe that it’s the little used bookstore that matters most, but that’s crap.

The one incontrovertible good thing about Romney was that he understood business. And that’s been tossed aside in favor of someone who either doesn’t know what he’s doing or is actively working against business growth. Us unemployed folk have been told to go fuck ourselves.

*Effecting? I just can’t figure out when to use “affect” even with a grammarian in the house.

PS Another thing to keep in mind is that there’s a difference between commerce and profit. Lots of big companies have been making profits in the last few years, frequently because of accounting changes. Lots of companies made profits in the late 1990s based solely on investment gains in their pensions plans. Their actual business models were coming apart but they looked strong on paper. GM was one such company.

What we need it commerce: People trading goods and services with each other.

PPS My bit about big companies not providing job growth does have a couple of caveats. First, I should say mature big companies. Big companies that are still expanding obviously provide job growth. Second, construction is different. Ramp up construction activity and construction jobs at big companies will surge.

PPPS There are also different business plans, as Schuler pointed out a while back. Companies used to try to maximize sales. These days companies try to maximize profits. I’m sure other strategies are possible as well.

Annie: Didn’t mean to offend, I just found it helpful

Todd: So much to touch on below, an I’m not offended by questions. I’m just hot under the collar now.

ObamaCare will make it more expensive to hire employees. It will make hiring full-time employees especially difficult. Darden Restaurants (Olive Garden, Red Lobster, and some others I think) is currently trying a trial program at some of its locations. They’re trying to reduce almost everyone in the staff to part-time status. If it works they will roll it out nationally. They are doing this explicitly to see if they can get out from under various PPACA mandates. The big drop in UE numbers in September was created by a surge in part-time positions. Hmmm.

Additionally all the regulations coming out will be burdensome for just about everyone.

Really, the PPACA is just about the worst possible change to the system imaginable. A truly nationalized system would have been much better. I don’t want nationalized healthcare (of whatever variety) but it would be much better than what we’re having foisted upon us. The new changes are doubling down on all the stupid practices of the old system (employer provided healthcare funneled through third party intermediaries) and are adding a huge layer of additional bureaucracy, and the whole thing is to ultimately be monitored by the IRS. Honest to God, Annie, I cannot think of a way to have made things worse.

Todd: [Responding again to Annie’s first exchange above] Don’t provide tax breaks for companies to hire. Every time something like that is done (and it is done a LOT by state and local governments) it distorts the markets in favor of one company or another.

And large corporations should be viewed with distrust. Any business is just a way of organizing how one or more individuals want to conduct commerce. But corporations tend to take on organizational lives of their own. Protecting turf and inhibiting competition can become the main goals.

Todd: [Responding again to Annie’s first exchange above] What you describe in the first paragraph is a problem, but not insurmountable. For one thing, this is why we do need government. (I view government as a necessary evil. But I absolutely do NOT forget the necessary part! It’s one of the things that drive me crazy about Libertarians.)

The Big Guys will have advantages, but they also have disadvantages. Large bureaucracies start getting in the way of thought, innovation and action. Little companies have much fewer problems in this area. Besides being quicker, little companies also have the advantage of being little. The big guys might not realize they’re about to be toppled. AOL gave way to Yahoo gave way to Google. Google almost certainly doomed to second class status (like Yahoo) but I have no idea who will topple them or how. (If I didn’t I sell what little I have to buy in!)

Really, a big company can look to swat all the upstarts, or it can get someone else to throw up barriers. The second is much more efficient and effective.

Also, government has a role to play it defending the rights of the little guys. This isn’t about altruism, but naked self-interest. Some of those little guys, if successful, will do more good for the economy than the big guy.

Big guys and little guys need to be remembered as relative things, too. For example, MicroSoft crushed a lot of competition that was actually of reasonable size. They did it by bundling software packages. By the time the government came down on them it was too late for all the victims, some of whom had been bought up as scraps by MicroSoft. I’m not sure if that latter bit was to get intellectual property rights or to protect themselves from lawsuits. (You’re competitor is unlikely to sue you if you buy them.)

Which gets to another problem with large government: It lacks flexibility itself, and thus becomes a slow actor. The OSS was started from scratch to fight Nazis. When you start from scratch you get maximal flexibility. It morphed into the COA to fight the Soviets. Over time it became so ossified it didn’t even notice that the Soviet Union was on the verge of collapse. Since the end of the Cold War it has been kind of purposeless. It would have been better after 9/11 if an entirely new intelligence agency were built from the ground up with the idea of combating Muslim terrorism. Instead the job was given to an agency whose middle and upper management were trained in fighting international communism.

Anyway, I’m straying from my points. Government should provide a fair playing field for businesses. That will mean interventions at time. (MicroSoft should have been stopped before they finished off all the other companies that provided internet browsers and office software. I hear tell that Lotus 1-2-3 was vastly superior to Excel, even more current versions of Excel. I’ll never know, as Lotus was all but dead by the time I started working in the corporate world.) But government interventions should only be in the interests of enforcing fairness and enforcing the rules. Picking winner and losers (Obama specializes in picking losers) is wrong, not just for moral reasons, but for practical reasons. Whoever’s in charge may well pick the wrong winner and thus hamper future growth.

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Economies are complex systems, very similar to ecologies. Most innovations in nature are failures. Most new businesses fail. But the ones that are successful sometimes are wildly so, and often provide new opportunities for other growth. Creating systems for easy electronic exchange of data has led to all manner of crazy things, such as blogging for profit (alas!) and Amazon.com and Google and internet porn. Since no one can predict what is ultimately going to work best, to the extent possible we need to just let it happen.

Todd: [Responding again to Annie’s first exchange above] Japan created singular solutions to their problems. Japan’s culture is much more cohesive and homogenous to ours. What they did would have never worked here.

As best I can tell their problems are multifaceted. They have onerous land-use laws. They have peculiar demographics. Their homogeneity of their business culture hampered innovation in some ways. (It helped in other ways, too.) They maximized what they could achieve with their old system and then hit a wall. They’ve been trying to break down that wall for 20 years with minimal success. In doing so they’ve run up huge national debt totals. But they seem to have built the wrong stuff, and they could borrow all that money within their nation because of their savings oriented culture. That kept rates low and has allowed them to borrow absurd amounts. If they ever have to start borrowing on international markets (and that’s probably coming soon) they’re going to get hosed by interest rates.

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One thing to be noted is that the more complex the system the more energy it can grab to sustain itself in spite of other considerations. That’s essentially what debt does -it allows for borrowing from the future for the present. That can be a good thing in moderation, but at some point we decide we want more and more goodies. (I’ve lived this.) individuals ultimately tap out on what they can borrow. So do corporations, though they can hide problems better and get away for more. (We call these problems unfunded liabilities in the actuarial world, and we hide them in retire pension plans and the like.) Governments can do all that too, and usually have the power of the printing press. It becomes easier for a government to borrow more and more and hide the problems until they’re so huge they represent nothing but disaster. This is what is happening across southern Europe. Their chickens are coming home to roost. Our will come home soon enough at this pace.

Annie: Obama’s single biggest . . . fuck-up? Crime? Forcing that through as he did destroyed any hope of bipartisan cooperation.

Todd: There wasn’t hope of compromise on healthcare anyway, except on small issues that the government wouldn’t have to pay for. Some of those small issues are the things Romney wanted to keep: Removing caps from lifetime insurance coverage, provided healthcare to children up to age 26 and not letting insurers refuse new signees. Of course, all of those things drive up insurance costs, but as long as the government didn’t have to pay for it…. (Not saying any of those things should or should not be done. Just saying that they will drive up expenses, which is almost guaranteed to drive more people off the insurance rolls.)

And Obama’s biggest crime is that he has not been a leader at all. He turned that over entirely to Reid and Pelosi. (Because of Senate filibuster rules it ultimately became Reid’s baby.) He did the same thing with the stimulus bill. He’s done that with everything. He’d have made a great president for the 1850s. But the Presidency is much changed since then, and Obama’s complete lack of interest in doing the job has been largely catastrophic. The country is without any direction at all now. That would be fine if the feds weren’t spending much less than almost four trillion dollars a year, but they do spend that much. So we have the largest single block of the economy rudderless. (Ask Ruth Anne or anyone else you know with military leadership training about the importance of having a plan and providing leadership.)

He likes being President, but Obama doesn’t like the work. This puts him in contrast with Bush, who I believe wanted to be President but committed to the work out of a sense of responsibility, and Clinton, who relished everything about the Presidency including the work.

Incidentally I think Romney was probably the right man for the job – four years ago. Now I don’t think so. I’m sure he would have been harder working than Obama. He brings executive and management skills that no one else can touch among our current leaders. (Patreus possibly excepted.) [Icepick: This was exchanged on Thursday, before the Petraeus fuck up became public.] He would have brought an understanding of business and its needs that would have been welcomed. He even had some good policy ideas.

But he also had problems in that his vision wasn’t bold enough, or if it was he lacked the ability to run on that vision. Campaigns are where the initial political capital of a politician are built, and he was not running as a transformational candidate. We don’t need a Reagan, we need an FDR type. But one that will seek to bring government to heel, and one that will seek to get government to actually function well.

Example of the government functioning poorly. There’s a commenter over at Schuler’s blog named Andy. Andy is one-time career military. He applied for a government job and got it. It took eleven months before he could start work, because of all the paperwork that had to be completed. This despite the fact that he was specifically requested for the job! Can you image some shop somewhere taking eleven months to hire the one person they wanted?

The government is very badly broken, both it what it does and in how it does it. (In some cases we’re lucky that they run the thing so poorly.) We need someone to fix the thing, but it is going to require large amounts of political capital to do it. Romney wasn’t willing to build that capital so he was doomed to have a small Presidency even if he won.

Annie: Todd: Companies used to try to maximize sales. These days companies try to maximize profits.

By slashing costs, which usually means slashing people.

Todd: Yes, exactly. And several large companies over the last several months have announced more cost cutting. I believe Dupont was one of them. You can cut headcount to achieve profitability for only so long before you destroy a company.

Here’s some more fun reading.

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A Digression on ‘AFFECT’ & ‘EFFECT’

Annie: Todd: *Effecting? I just can’t figure out when to use “affect” even with a grammarian in the house.

No, you used it right. To “affect” is to have an effect (n.) on something. (Go figure.) To effect is to make something happen. “They effected reforms.”

Todd: This all makes sense. For some reason I will forget it after I hit send.

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A Digression on Blogging

Annie: Your understanding of this stuff is crystalline in its clarity. It doesn’t lose the complexity, it illuminates it. Why aren’t you an econblogger (for profit?!)? =

Todd: There are too many of them. And too many that are either pitching product or have sinecures somewhere.

Besides, the economics of blogging is that if you want to make money off it you need to be one of the very first people to come up with an idea people want to read about. Mommy blogging? You had better get there first, or darned close to it. Political blogging got big in 2000-2002. Breaking in past the InstaPundits and Koses and TPMs of the world would be almost impossible. Econoblogging got big around 2008. No way to break the stranglehold now.

Plus my understanding is intuitive, not theoretical. I am undoubtedly making mistakes here and there. The established bloggers would rightly pounce on those mistakes. That should theoretically improve my ‘product’ but the truth is it would just kill readership. (Not necessarily completely though. The guy behind Zero Hedge makes the same mistake over and over again about the monthly employment reports, and he’s still got a decent sized following even though everyone, including some of his commenters point out the mistake.)

Also, some of what I discuss is macro-economics. And the truth there is that no one really knows what the fuck is going on. There are lots of theories (varieties of neo-Keynsianism seem to be dominate now) that can be shown to make incorrect predictions over and over again, but that doesn’t dampen the enthusiasm of backers, nor does it cut their influence (if they have any). I’d be pissing in the wind with everyone else, but without the happy circumstance of having a PhD to keep it from blowing back in my face!

Annie: Yeah, I know, but . . . nobody’s perfect, but you’re so damn good!

A mind is a perfectly good thing to waste . . . or something . . .

Todd: I think the quote was, “What a waste it is to lose one’s mind. Or not to have a mind is being very wasteful. How true that is.”

I’m pretty sure Quayle was talking about Biden.