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Uncertainty

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Kevin Drum et alia are mystified - just mystified - about why it is that business isn't more...upbeat.
Why does the economy continue to suck? The LA Times is hosting a symposium on the topic today, and USC business professor Ayse Imrohoroglu says the answer is uncertainty:
Businesses don't know what will happen to interest rates. They have trouble calculating what new workers will cost in light of potential new healthcare mandates and costs. They don't know what will happen to tax rates, which could rise dramatically. They are uncertain about increasing financial regulation and the possibility of a carbon tax. And as if that isn't enough, the soaring deficits and national debt raise very real questions about the federal government's long-term ability to meet its debt obligations.
I'm kind of amused that the progressive, Keynsian bloggers are baffled by why business is so...po' mouthed...these days. Here's Keynes:
"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
Business is moody. Consumers are moody. They're moody for a reason, to be sure...and I get it that the left wants to claim that government has no part in the uncertainty. But that just makes no sense. People don't parse the regulatory environment from the general environment, and they look, above all, to the government for leadership.

We're pack animals, and our moods are communal. Given that, I don't know how it is that Kevin gets to this:
The uncertainty meme is just mind boggling. Businesses always have a certain amount of financial and regulatory uncertainty to deal with, and there's simply no evidence that this uncertainty is any greater now than it usually is. (It is, of course, entirely believable that business owners who spend too much time watching Fox or reading the Wall Street Journal editorial page might believe otherwise, but that's a whole different problem - and one that Imrohoroglu should spend his time debunking, not promoting.) The only significant real uncertainty that American businesses face right now is uncertainty about whether there's enough customer demand to justify hiring more workers and buying more equipment.
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20 Comments

I like the jibe in there, that the only reason anyone could fail to be GUNG HO BUSINESS right now is because they read the Wall Street Journal or watch Fox News.

That's... an impressive moebius twist of a thought.

(I don't think that regulatory/governmental uncertainty is the only issue, of course, but it's certainly not nothing, either.)

The beatings will continue until morale has improved.

That Drum quote is... well, disgusting. This isn't theoretical for some of us. For small business people, if our taxes shoot up, or the new healthcare ends up costing us a boatload to figure out and implement (not all of us are juiced enough to get wavers), or some nutty carbon tax is imposed, we don't have the luxury of blaming Bush or Fox News and throwing up our hands. We call people into our offices and tell them they don't have a job any more. Drum should be ashamed.

The problem is not uncertainty -- that's an excuse.

Regards,
Ric

And Drum is either completely uninformed, or being entirely disingenuous when he suggests marginal tax rates have nothing to do with the uncertainty of business.

Most job growth comes from small business, and of the job producing small businesses (most small businesses do not account for the growth, a subset of them do), most growth comes from sub S corporations, which means the owner pays the company taxes as personal income. In other words, the expiration of the Bush tax code is a BIG tax on small businesses that do most of the hiring in this country. That is a fact, not an opinion.

Oh, and guess what, most of those owners fall into the 250k and above 'super-rich' category. Anytime you hear Krugman et al extolling the virtues of soaking the rich, they are directly targeting the people that hire in this country. Ever wonder why 250k is the magic number... IE why not pop that number up to 1 million and avoid the grumbling? BECAUSE of the above fact- the most money available for taxation comes from these small business owners. There are a relative lot of them and they aren't rich enough to hide from or avoid their taxation like the John Kerrys of the world can.

In other words, the only way to squeeze more taxation out of the country is to target the people who make money, and those are the ones who hire people. This shouldn't be surprising. How often have you been hired by a poor person? If you tax the small business hirers, they will hire less. If you threaten to tax them, they will hire less (its expensive to fire people after the fact).

The fact that Drum and company (and Obama and his crew fall into this category) don't remotely understand any of this explains their actions and their inability to understand the consequences.

Let's get this straight, if the Bush tax cuts expire, the tax rates will go from 33-->36% on those above 250k (from what I understand, this is net income of 250k). That means:

3%*250k = $7,500

While that is alot of money, it's certainly not a full time salary. That is, at best, part-time wages (and only if your business is burger king).

Have to agree with Drum on this, though:

There is no possibility in the near future of a carbon tax.

Except that you're not supposed to say carbon tax. You're supposed to say Energy Reform, and if some impudent knave asks what that means, you say comprehensive Energy Reform.

If you start calling things what they are, you get too much certainty, and certainty is no friend of progressives.

And you know, the more I thought about Drum's article, today, the more irritated I got, because it exemplifies so perfectly one trait of every disaffected, disconnected, soi disant "elite" out there: the frustration at imperfect mind control.

Economics at this scale is as influenced by mob psychology as anything else, and irrational exuberance can give way to irrational lethargy. We know that.

But you can almost hear Drum muttering, in the background, "I told you what to think! Why are you thinking something else? Stop thinking that! Stop thinking something else, and think this thing I just told you, instead! Stop this insolence!"

"While that is alot of money, it's certainly not a full time salary. That is, at best, part-time wages (and only if your business is burger king)."

Its a question of aggregates. 80% of the high income filers make between 200-500k (like I said, that's where the available money is to go after).

According to the SBA, approximately 640,000 tax payers file as 'self-employed' (as a sub-s business owner would) and were in the 33% tax bracket or higher link

If those percentages hold up, 512,000 (80% of 640,000) S corp tax filers make between 200-500k. Let say the average tax increase is going to be 3% for those folks (which is low as anyone over 373k goes up 4.9%), that might average out to 11,000 per tax payer (assumed $375,000 average, which is high as there are more payers close to 200 than 500).

This is spitballing but 11,000$ out of 512,000 business owners pockets is GOING to cost jobs. It may seem like chump change, but this is a significant portion of take home pay once all the other taxes are taken out... and this is off the bottom line.

Put yourself in the position of a business owner- somebody says you're going to be out $11,000 next year, are you more or less likely to hire somebody if you are already on the fence about it? The point isn't that you can or would hire somebody for 11k (or 7500, or whatever), the point is you've budgeted your mortgage, business, etc and now you have to come up with that money cash to pay the government... if that means maybe you clean your own bathrooms or answer your own phones.. well that's what you do. If your company is growing at 3% or 4% right now, that's not terrible. If you tax away that 3% or 4%, now you are growing at 0%.

This is hypothetical, this is exactly what is happening. And there are also sole proprietorship, partnerships, etc that also fall into this.

And of course we haven't started to talk about the impact of the hike in capital gains yet.

I will share my recent experience with my work that illustrates a small fraction of why business isn't more upbeat.

The company I work for was contracted in 2008 to construct 5 plants for a customer looking to produce methanol, from coal, using a solids to liquids technology. We have conducted the feasibility study and submitted our quote, and were going to begin construction in 2011.

Our customer has come back and placed all 5 projects on hold due to recent changes by the EPA to modify how sulfur emissions are to be measured. The EPA has now decided that emergency shutdowns and resulting plant start-ups are now required to be measured as part of the overall permitted ppm emissions.

Simple changes as how requirements are interpreted can have a broad of an effect as passing legislation. An issue as simple as expectations can literally tie up billions of dollars in limbo that would otherwise be used to move these projects forward.

You dont need a carbon tax or other significant legislation to be passed to sour business activities.

I will share my recent experience with my work that illustrates a small fraction of why business isn't more upbeat.

The company I work for was contracted in 2008 to construct 5 plants for a customer looking to produce methanol, from coal, using a solids to liquids technology. We have conducted the feasibility study and submitted our quote, and were going to begin construction in 2011.

Our customer has come back and placed all 5 projects on hold due to recent changes by the EPA to modify how sulfur emissions are to be measured. The EPA has now decided that emergency shutdowns and resulting plant start-ups are now required to be measured as part of the overall permitted ppm emissions.

Simple changes as how requirements are interpreted can have a broad of an effect as passing legislation. An issue as simple as expectations can literally tie up billions of dollars in limbo that would otherwise be used to move these projects forward.

You dont need a carbon tax or other significant legislation to be passed to sour business activities.

I started paying taxes in 1961. Since then taxes have been all over the place and the Republic has survived.

I think that uncertainty is always thge problem, but not the specifics like carbon tax, a 3% rise in top rates of 350K.

It is uncertainty, generally.

Had anything came out of this Congress, everyone would adapt to it. The tax code is full of creative ways to avoid takes. Nothing that is on the table is catastophic.

Once anything is passed the uncertainty is passed.

That being said, I think the reason the economy is in such bad shape is that the World Financial System has not recovered. anyone that thinks it has, has not been paying attention. BofA will not survive, and a lot more might follow. Germany cannot continue to carry Europe on its back Japan has been in a funk for 20 years and We are burdend under massive debt.

Time is swiftly running out for China because the world can no longer allow them to manufacture everything on a slave labor, no environmental law economy. NO one can compete with that.

A three percent tax rise on income over 250K. that is what we should be worried about. Give me a break. Get a freaking tax bill and live with it. the elections are over and I think the posturing should be too.

Toc- thats absolutely fine. But I don't want to hear any whining about jobs. You're right, if we decide that are acute problem is debt (and not the certainty of higher taxes later due to debt, as I maintain), than by all means, lets take the hit on jobs and growth.

But please DON'T pretend its not a hit. Just like politics, all job growth is local. What goes on in Germany may have some nebulous effect on whether I hire or fire, but what my P&L statement says once that extra tax money comes out directly does.

And a good dose of protectionism should really spin us into another great depression, just as it did in the 30s. You know why people buy 12 dollar t-shirts from Wal-mart? Because they wont buy 25 dollar t-shirts made in New York. You're not trading one for the other. Trade works with China because by and large they sell us things we wouldn't buy at all otherwise because they would be too expensive.

"Once anything is passed the uncertainty is passed."

HamOnRye just showed exactly how that is wrong. I'll just quote the WSJ:

In a recent note to clients, the law firm of Davis Polk & Wardwell needed more than 150 pages merely to summarize the bureaucratic ecosystem created by Dodd-Frank. As the nearby table shows, the lawyers estimate that the law will require no fewer than 243 new formal rule-makings by 11 different federal agencies.

Our style of government -- creating through law commissions and committees, bureaucracies which issue rulings and mandates with the force of law -- is nothing new, but I believe the sheer scale of change we've endured in such a small timeframe, the proposed changes (Energy Reform, et. al.), all in the middle of a recession is (forgive me) unprecedented.

At best, businesses are cautious and will be risk averse. At worst, they plan for the worst, e.g. most businesses have budgeted next year assuming the expiration of the Bush tax cuts. Our government has shown no qualms about writing 2,000+ page bills like Frank-Dodd, and has only recently shown any signs that this might slow down.

Back to the issue of tax cuts, I agree that taxes aren't the big problem, per se -- there are obscene amounts of liquid capital lying unused. Uncertainy is more the immediate problem. But taxes will hinder any growth happening now, and will continue to hinder future growth. We have every reason to reform our tax code and begin to tie it to debt levels.

...I'd also like to point out that I think Mark B. is absolutely right on this one. Overall, taxes aren't the biggest problem, but job losses will not be tolerated in the pols, and raising taxes on 250k+ will lead to exactly that.

"According to the Treasury Department and as shown in the chart below, 8 percent of small businesses pay the highest two tax rates. But those businesses earn 72 percent of all small business income and pay 82 percent of all income taxes paid by small businesses"

link

Since profitable businesses are the one that hire new people, it might be thought ill advised to raise the taxes of the 8% that make 72% of the income. Particularly when they create 2/3rds of new jobs. If these numbers don't prove the case I think we need to go to Professor Obama's commitment to facts and science.

You can argue that maybe jobs shouldn't be our top priority right now (good luck running on that), but you cannot honestly maintain that these tax increases won't affect the job makers in this country. In fact the evidence shows they are the most effected job creators by the supposed soak the rich proposals.

"But I don't want to hear any whining about jobs"

Well, Mark, I think you should be more worried about social unrest about jobs.

Your economic theory seems to based on

"You know why people buy 12 dollar t-shirts from Wal-mart? Because they wont buy 25 dollar t-shirts made in New York."

So, how do you employ people? Is everyone in the U.S. supposed to subsidize the $12 Chinese tee shirt by supporting blatantly unfair practices by the Chinese? Or should we just get to the point where we don't actually produce anything and go to a 100% service economy.

I am a free market man. I do not see one in operation vis-a/vis the Chinese, nor do I think anyone else in the world does.

So, the current situation, the chinese with a currency manipulation, no environmental laws, enforced labor, a centrally controlled economy should be something we should emulate? And, this somehow is to the benefit of free markets.

But let's get to the taxes. Somebody has to stand up and say that meat has to be cut from both sides of the cow. I think that the whining about this 3% being the disaster it is made out to be is ridiculous.

It smacks of dogma not something that has been thought through. It seems to me to be some species of beast on the right that mirrors an equally bizarre Keynesian beast on the left.

I have had a number of businesses. If you think that what goes on in Germany doesn't have an effect on your business wait untill the Euro collapses. I am sure that before the sub-prime bust you would have said the same thing about MBS's.

We have really significant problems and to blame them on uncertainty caused by the ending the Bush tax cuts, I do not believe is where the uncertainly lies. I believe the uncertainly lies in the fact that the health of the whole world financial system is still in doubt.

As far as protectionism is concerned there are a few things:

1. We already have protectionism in the FORM OF A CURRENCY WAR. A 10% fall in the dollar is a ten percent tariff across the board on all imported goods. If that is not protectionism, tell me what is. (Check in on you Chinese t-shirts there is plenty of protectionism there, already.

2. Protectionism, theoretically, may not be the best course of action, but people don't behave theoretically. Could you show me how anyone is going to argue against protectionsim if the economy is in this shape 2 years from now, which with another dead-locked, and more ideologically split Congress seems to be pretty certain from where I sit.

3. I am not against the Chinese. I would do the same thing if I were able to get away with it. I just wonder why we allow it. and more than that support it with nonsense like the $12 dollar t-shirt theory.

Well, I have heard the 12 dollar t shirt theory for years, and it hasn't won me over yet. It is not something that I would bet my economic policy on. I also don't think globalism has been as successful as it has been made out to be, for us.

Nor do I believe tax cuts are good fiscal policy in every situation. My main objection is how shallow the political debate is. The yelling across the aisle crap is getting very old and lobbing these theological tenets back and forth don't seem to be doing much good.

It would seem to be well past the point where everyone has to bite the bullet.

No one can possibly defend the tax code, nor the absolutely mindless idiocy that passes for legislation these days. Ham on Rye is talking about bureaucracy and not the Bush tax issue.

From where I stand, this is p[art of what pisses me off. How about tackling real problems instead of obscuring them. The election is over. This particular tax "debate" to my mind is a red herring.

Cost themselves the House, still not the slightest clue as to why. Obama really is their perfect avatar.

Will cost them the Presidency next. May Drum and his cohorts remain this clueless for a long time.

"So, how do you employ people? Is everyone in the U.S. supposed to subsidize the $12 Chinese tee shirt by supporting blatantly unfair practices by the Chinese? Or should we just get to the point where we don't actually produce anything and go to a 100% service economy."

Its better to employ people selling t-shirts, managing them, building and keeping up Wal-marts, etc.. than to manufacture widgets no-body buys because they are too expensive.

"The Broda-Romalis paper, “Inequality and Prices: Does China Benefit the Poor in America?,” shows that from 1994 to 2005, much of the increase in U.S. income inequality was actually offset by a decline in the price index of the goods that poorer households consume. Inflation for the richest 10 percent of U.S. households, which tend to spend more on services, was 6 percent higher than inflation for the poorest 10 percent, which tend to spend more on nondurable goods, the type of goods often imported from China and sold at Wal-Mart."

"Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”
link

How many jobs have the advents of the I-Pod (made in China) created across the board? If the I-pod cost $500, would it exist as anything but a nitch product? What would happen to all those jobs? What would happen to all the cash people save by getting away from overpriced CDs, and the jobs created by spending that cash in more productive areas? And on and on and on.

"I am a free market man."

Uh huh, sounds like it.

"So, the current situation, the chinese with a currency manipulation, no environmental laws, enforced labor, a centrally controlled economy should be something we should emulate? And, this somehow is to the benefit of free markets."

Toc- you act as if we're saints. How much do we poor into government subsidies in this country? Didn't we just intentionally devalue OUR currency twice? Don't we have tariffs and barriers? The fact that you can make a product in China (its hardly slave labor by the way, you speak as somebody with no first hand understanding) and ship it half way across the globe and still have it be far cheaper to sell tells you how ungodly expensive manufacturing is in America with all the regulations, taxes, etc.

"2. Protectionism, theoretically, may not be the best course of action, but people don't behave theoretically. Could you show me how anyone is going to argue against protectionsim if the economy is in this shape 2 years from now, which with another dead-locked, and more ideologically split Congress seems to be pretty certain from where I sit."

Err... show me how anyone can argue against pouring gasoline on a fire to put it out? Because it would be disastrously counterproductive? This isn't rocket science- YOU try telling people they are going to have to pay 50-100% higher prices and see how that works out for you. If thats the cure I'd like to see the disease.

"Well, I have heard the 12 dollar t shirt theory for years, and it hasn't won me over yet. It is not something that I would bet my economic policy on. I also don't think globalism has been as successful as it has been made out to be, for us."

Its not a theory, its a fact. You seem to suggest we'd be better off back in the 70s going out every day to the factory in a crappy American made car and then back home to watch tv on a 12" black and white set, etc, etc. Its just not realistic. We are SO much better off as far as quality of life compared to the alleged good ol days of employment for life it is apparently easy to forget. Do you really want 80% of the American people to give up their cell phones, GPS's, laptops, playstations, Taylor Swift T-shirts, etc etc etc because they become luxuries instead of staples again? But dont worry, you can go back to work at the chemical plant (which is of course ridiculous because the EPA and the greenie lawyers aren't about to let anybody open up a new chemical plant in this country). Yeah, great trade off.

"Nor do I believe tax cuts are good fiscal policy in every situation."

Nor do I. But i KNOW raising taxes in a shaky economy that isn't growing is suicide.

"It would seem to be well past the point where everyone has to bite the bullet. "

Everyone? Seems to me we're bending over backwards to make sure that only a very select group feels any pain at all... unfortunately that group is the one that hires just about everybody else. Like I said- fine, just don't whine about 10% unemployment of higher.

And from my point of view, I refuse to countenance tax increases until the wastrel, lunatic spending is strangled. We expect (and project) economic growth to help stem our budget deficits. Killing economic growth is a nasty spiral.

I think Mr. Drum is mistaken. They read the NYT... and get frightened to death.

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