Saturday, May 28, 2011

What's Stopping Job Creation at Medium-Sized Firms? It's Washington's "Climate of Uncertainty"

I highly recommend this very insightful Bloomberg article "Economic Stagnation Explained, at 30,000 Feet" by Yale law professor Stephen Carter, based on his conversation while flying and sitting next to a successful business owner, about how regulatory and tax uncertainty is preventing job creation at small and medium firms.

Because he faces a "climate of uncertainty" created in Washington, the successful business owner refuses to hire new employees despite rising demand and sales for his company's products.  

“How can I hire new workers today," he asks, "when I don’t know how much they will cost me tomorrow? I don’t understand," he continues, "why Washington won’t just get out of our way and let us hire. Government should act like my assistant, not my boss.”

About the businessman and seat-mate, Professor Carter writes:

"He’s not anti-government. He’s not anti-regulation. He just needs to know as he makes his plans that the rules aren’t going to change radically. Big businesses don’t face the same problem, he says. They have lots of customers to spread costs over. They have “installed base.” 

For medium-sized firms like his, however, there is little wiggle room to absorb the costs of regulatory change. Because he possesses neither lobbyists nor clout, he says, Washington doesn’t care whether he hires more workers or closes up shop."

MP:  Thanks to the anonymous businessman for making a very strong "laissez-faire" ("allow to do" in French) case for job creation.

HT: Pete Friedlander

15 Comments:

At 5/28/2011 9:26 AM, Blogger Jim said...

Consider that the main point of the article is not about uncertainty.

It is about the hubris of academics and organizers 'governing' society who have never actually run anything.

 
At 5/28/2011 11:20 AM, Blogger Che is dead said...

Regulation isn't intended to protect consumers and keep markets competitive, it's intended to make political insiders rich. The regulatory revolving door:

The Washington Examiner

 
At 5/28/2011 11:24 AM, Blogger James said...

“How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

I do not see how this argument would stop anybody not afraid of his own shadow.

Suppose he hires additional new workers and his worst fears happen and the new workers become unprofitable. He lays off the new hired workers and eats a small loss. The longer it takes Washington to do anything, a good bet, the smaller the loss. If he does not supply his customers with product they will go elsewhere. A big loss.

The late Mark Haines of CNBC said many times that when he had lobbyist on they blamed the lack of hiring on government but when he had businessmen on they blamed a lack of customers. That makes much more sense than Stephen L. Carter’s passenger who sounds more like a lobbyist than a businessman.

 
At 5/28/2011 12:19 PM, Blogger Walter said...

When I hear that business people won't hire because of "uncertainty", I suspect they are really saying that they are pretty damn certain that higher taxes and costs are coming. Uncertainty to economists means variance around a mean. Most business people do not believe there will be lower taxes and less regulation? No. Instead, its all on the upside. So the best strategy is to let the benefits from hiring a worker rise enough to pay those higher costs. Now for the technical part: health care and taxes are driving a bigger wedge between the demand and supply curve for workers (especially low wage workers) and that may explain why the recovery is slow, especially for low wage workers.

 
At 5/28/2011 4:28 PM, Blogger Ron H. said...

"Suppose he hires additional new workers and his worst fears happen and the new workers become unprofitable. He lays off the new hired workers and eats a small loss."

How much has it cost him to hire and train new workers? What about any capital goods and equipment he buys for the new workers to use? You call it a small loss, but unless his new employees only operate shovels, the cost could be substantial, and why should he eat a loss in any case, if he can avoid it?

What about the new workers? They could start planning their new lives based on income, and just as quickly it's gone. Now, however they are no longer eligible for unemployment benefits.

Of course if the new workers belong to a union, the employer needn't concern himself with their well-being, as they have opted for the security of union membership.

 
At 5/28/2011 7:29 PM, Blogger Scott said...

James says wtte - just get rid of them...

For most people in Small to Medium Enterprises this is a real personal problem - where you, often personally, have to escort the sobbing individual to the door. It's all much more personal than big business. I can assure James that I'm not afraid of my own shadow, but I certainly fear the almost unfettered power of government to blast my business out of existence on the basis of some political whim...

 
At 5/28/2011 8:05 PM, Blogger James said...

Scott,

A business could always get additional manpower from a temporary employment agency or hire someone direct with the understanding that the position is/may be temporary.

 
At 5/29/2011 1:00 AM, Blogger Ron H. said...

"A business could always get additional manpower from a temporary employment agency or hire someone direct with the understanding that the position is/may be temporary."

And this is exactly what's been happening recently.

 
At 5/29/2011 11:51 AM, Blogger Che is dead said...

The big growth area in America’s post-modern Republic of Paperwork is regulations about regulating regulations. For example, in New York City, applying for the “right” to open a restaurant requires dealing with the conflicting demands of at least eleven municipal agencies, plus submitting to 23 city inspections and applying for 30 different permits and certificates. Not including the state liquor license. Recognizing that this could all get very complicated, the city set up a new bureaucratic body to help you negotiate your way through all the other bureaucratic bodies. ...

And, for every little victory, there are a zillion crankings of the government vise elsewhere. Plucked at random from the Obamacare bill:

“The Secretary shall develop oral healthcare components that shall include tooth-level surveillance.”

“Tooth-level surveillance”? Has that phrase ever been used before in the entirety of human history? Say what you like about George III, but the redcoats never attempted surveillance of General Washington’s dentures. Why not just call it “gum control”?

The hyper-regulatory state is unrepublican. It strikes at one of the most basic pillars of free society: equality before the law. When you replace “law” with “regulation,” equality before it is one of the first casualties. In such a world, there is no law, only a hierarchy of privilege more suited to a sultan’s court than a self-governing republic. If you don’t want to be subject to “tooth-level surveillance,” you better know who to call in Washington. Teamsters Local 522 did, and the United Federation of Teachers, and the Chicago Plastering Institute.

And, as a result, they’ve all been “granted” Obamacare “waivers.” Rule, Obama! Obama, waive the rules! ...

According to the Small Business Administration, the cost to the economy of government regulation is about $1.75 trillion per annum. You and your fellow citizens pay for that — and it’s about twice as much as you pay in income tax. Or, to put it another way, the regulatory state sucks up about a quarter-trillion dollars more than the entire GDP of India ... It’s also about a quarter-trillion dollars more than the GDP of Canada. Every year we’re dumping the equivalent of a G7 economy into ever more ludicrous and wasteful regulation.

Mark Steyn

 
At 5/29/2011 8:41 PM, Blogger Methinks said...

Suppose he hires additional new workers and his worst fears happen and the new workers become unprofitable. He lays off the new hired workers and eats a small loss.

Have you ever hired and fired workers? Government makes it so costly to do both that it's not worth it.

The other thing that the businessman may not have mentioned is the rising cost of regulation that is effectively a tax on business and often cuts off opportunities for businesses. The business doesn't even know if and in what direction it will be allowed to grow, let alone hiring employees associated with that growth.

It may be combination of customers and regulatory hell for some particular businesses, but I know from my own experience that government has cut off opportunities through random regulation so that even though demand exists, I cannot supply.

 
At 5/30/2011 5:54 PM, Blogger James said...

”Have you ever hired and fired workers? Government makes it so costly to do both that it's not worth it”

I have done both and as far as I know government was not involved. The cost of hiring was a fee to an agency as the company did not do its own recruiting. The cost of firing was two weeks severance pay, company policy not a government requirement, pay for all hours worked, as required by law, and prorated vacation, which may have been required by law. All pay due the employee was paid on exit although state government allowed a few days delay.

It must be worth it as all the people currently working were hired and all people currently unemployed were both hired and fired.

I know of not cost of either hiring or firing today that have not been in place for decades.

 
At 5/30/2011 9:18 PM, Blogger VangelV said...

I do not see how this argument would stop anybody not afraid of his own shadow.

Look harder. When regulations increase your costs and your margins can't handle it you will go out of business. Most successful people don't like that kind of uncertainty because it is too hard to deal with. Fear has nothing to do with anything.

 
At 5/31/2011 1:26 AM, Blogger James said...

Look harder. When regulations increase your costs and your margins can't handle it you will go out of business.

It is not certain that cost increases due to more regulation are coming. If they do any cost increase that this guy incurs will also be born by his competitors. Therefore some, and maybe all, of any possible additional costs can be passed on in higher prices.

Remember the old saying that you make money by buying when there is blood in the streets. If this guy has a market demand for his product, as he says he has, then he can add staff cheaper now than when the economy improves and/or the uncertainty is reduced.

Business has a long history of complaining about regulation that turns out to be quite helpful or at least not harmful to them. After railroad prices were regulated shippers found themselves paying more not less. What railroad price regulation did was stop the railroads from cutthroat competition that had given shippers a good deal and prevented profits. The same thing happened to the airlines.

Historically business has had too much say in the content of regulation for it to be truly harmful. Example: remember the hue and cry when Senators Grassley and Sanders inserted a provision in the TARP bill that limited bank use of H-1Bs? Well it turns out that banks could in fact hire all the H-1Bs they wanted regardless of whether or not qualified Americans were available. How? Bank lobbyist had inserted a provision into the bill that allowed banks to convert a foreign worker from one visa to another. Employers could still hire foreign students under the Optional Practical Training (OPT) portion of their F-1 student visas, because these are self-petitioned, not employer-petitioned. Once hired those F-1 visas could be converted to H-1B status. Banks also could, and did, replace Americans with H-1Bs from bodyshops, since the bank was not the party requesting the visa.

Consider that oil industry complaint back when gas prices were high that there have been no new refineries built in decades due to regulations. What they never tell you is that refineries have been closed and others expanded.

 
At 5/31/2011 10:41 AM, Blogger VangelV said...

It is not certain that cost increases due to more regulation are coming. If they do any cost increase that this guy incurs will also be born by his competitors. Therefore some, and maybe all, of any possible additional costs can be passed on in higher prices.

First, we are certain that regulations have already increased costs. Second, the uncertainty about the future is the reason why businesses are not hiring as much as they could under a better scenario. We saw this in the 1930s. Without investment the depression lasted 15 years.

 
At 5/31/2011 10:43 AM, Blogger VangelV said...

Remember the old saying that you make money by buying when there is blood in the streets. If this guy has a market demand for his product, as he says he has, then he can add staff cheaper now than when the economy improves and/or the uncertainty is reduced.

But we are far from the blood in the street scenario. There hasn't been a liquidation and the bills have not yet been paid. The next dip could be just around the corner. If that is true, I see no reason why someone would take a huge risk with his/her personal capital.

 

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