Employment growth has been terrible for the last few years, and Keynesian economists think they know why \u2013 companies aren\u2019t hiring because demand for their products is weak in a debt-burdened economy.\u00a0 The problem with this notion is that corporate performance has actually been quite good.\u00a0 On a rolling four-quarter basis S&P 500 earnings have doubled from the 2009 trough and are 8% above their 2007 highs.\u00a0 Doctrinaire Keynesians claim there is nothing wrong with the labor market that another $1 trillion in government spending \u2013 or is it $2 trillion? \u2013 wouldn\u2019t fix.<\/p>\n
They would do better to consider another Keynesian insight having to do not with aggregate demand but, rather, with the \u201canimal spirits\u201d of businesses. \u00a0Unlike his more doctrinaire disciples, at Princeton and elsewhere, Keynes had a nuanced appreciation of the contingent nature of human behavior. \u00a0In the General Theory<\/strong> he wrote:<\/p>\n . . . a large proportion of our positive activities depend on spontaneous optimism<\/strong> rather than mathematical expectations, whether moral or hedonistic or economic.\u00a0 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 \u2013 a spontaneous urge to action rather than inaction<\/strong>, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.\u00a0 (emphasis mine)<\/p>\n President Obama has done a great job of snuffing out \u201cspontaneous optimism\u201d and \u201canimal spirits\u201d in the business community.\u00a0 Much of the economic weakness Keynesians blame on lack of demand is actually caused by over-regulation and hostility to business.\u00a0 Call it the Great Suppression<\/span><\/strong>, which has several dimensions, including health care reform, financial reform, the war on fossil fuels, and anti-capitalism.\u00a0 Start with:<\/p>\n Healthcare Reform<\/strong><\/p>\n We often hear it affects \u201cone sixth of the U.S. economy,\u201d but that is a gross understatement because it makes it far more costly and complex<\/span> for all small businesses to hire workers.\u00a0 Figuring out healthcare rules has become as daunting as calculating your taxes, maybe more so.\u00a0 Consider this small section of the law \u2013 a tiny slice of a 2700 page monstrosity which itself requires further elaboration by HHS and other agencies:<\/p>\n SEC. 45r.\u00a0 EMPLOYEE HEALTH INSURANCE EXPENSES OF SMALL EMPLOYERS.<\/em><\/p>\n \u201c(a) GENERAL RULE.\u2014For purposes of section 38, in the case of an eligible small employer, the small employer health insurance credit determined under this section for any taxable year in the credit period is the amount determined under subsection (b).<\/p>\n (b)\u00a0 HEALTH INSURANCE CREDIT AMOUNT. \u2013 Subject to subsection (c), the amount determined under this subsection with respect to any eligible small employer is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of \u2013<\/p>\n (1) the aggregate amount of nonelective contributions the employer made on behalf of its employees during the taxable year under the arrangement described in subsection (d)(4) for premiums for qualified health plans offered by the employer to its employees through an Exchange, or<\/p>\n (2) the aggregate amount of nonelective contributions which the employer would have made during the taxable year under the arrangement if each employee taken into account under paragraph (a) had enrolled in a qualified health plan which had a premium equal to the average premium (as determined by the Secretary of Health and Human Services) for the small group market in the rating area in which the employee enrolls for coverage.\u201d<\/p>\n This command and control legalese goes on for hundreds of impenetrable pages.\u00a0 Obamacare increases not only the cost of employing workers but the legal risks of the employer.\u00a0 A firm with fewer than 50 workers is not obliged to provide coverage, but if a firm goes \u201cover the limit\u201d it must provide coverage or pay a steep fine for all of its workers.<\/p>\n Financial Reform . . . or . . . \u00a0Jamie Dimon\u2019s \u201cGreat Fear\u201d Is Realized<\/strong><\/p>\n Washington also threw a big wet bureaucratic blanket, Dodd Frank, on the financial sector, which employs nearly eight million workers.\u00a0 Here, too, small business is hurt most because unlike large corporations they cannot afford platoons of lawyers and lobbyists and usually are not self-financing.\u00a0 In June 2011 JPMorgan\u2019s Jamie Dimon got to the nub of the matter in a prescient exchange with Fed Chairman Bernanke.\u00a0 Dimon started with a lengthy litany of reforms<\/strong>:<\/p>\n \u201cI have this great fea<\/strong>r someone is going to write a book in ten or twenty years and the book is going to talk about all the things we did in the middle of the crisis to actually slow down recovery<\/strong>\u2026..I made a list of all\u00a0 the things already done and a few things to be done.\u00a0 Already done:\u00a0 Most of the bad actors are gone, thrifts, all the mortgage brokers and obviously some banks.\u00a0 Off-balance sheet businesses are virtually obliterated, some are gone \u2013 SIVs.\u00a0 A lot of the insurers used to guarantee them are gone.\u00a0 CDOs are gone.\u00a0 Money market funds are far more transparent.\u00a0 Most very exotic derivates are gone. There is far more transparency in any remaining off-balance sheet thing.\u00a0 Fannie Mae and Freddie Mac are in the government hospital.\u00a0 Higher capital and liquidity are already in the marketplace\u2014we estimate more than double what it was before.\u00a0 There are tougher requirements, boards are tougher, risk committees tougher.\u00a0 There is an oversight committee.\u00a0 Regulators I can assure you are much much tougher in every way, shape possible.\u00a0 One of the core problems was mortgage underwriting, which has gone back to what it was 30 years ago.\u00a0 I think it\u2019s a good thing. But no more sub-prime, no more alt-A, no more mortgages being packaged.\u00a0 \u00a0\u00a0The CMBS market has been completely transformed, there is far more transparent accounting.\u00a0 We\u2019ve been through two stress tests, one at Treasury and one at the Fed. I believe most of the banks passed the recent ones with flying colors, partially for the reasons I just said.\u00a0 Now we are told there are even higher capital requirements, the so-called siffie charges et cetera and we know there are 300 rules coming.\u201d (Emphasis mine)<\/p>\n Then Dimon asked<\/strong>: \u00a0\u00a0\u201cHas anyone bothered to study the cumulative effect of all these things<\/strong>?\u00a0 And do you have a fear like I do that when we will look back and look at them all, they will be the reason it took so long that our banks, our credit, and our businesses \u2013 and most importantly, job creation start going again.\u00a0 Is this holding us back at this point?\u201d\u00a0 (Emphasis mine.)<\/p>\n Bernanke\u2019s admirably candid response<\/strong>:\u00a0\u00a0 \u201c\u2026.Has anybody done a comprehensive analysis of the impact on credit?\u00a0 I can\u2019t pretend that anybody really has<\/strong>.\u00a0 You know, it\u2019s just too complicated.\u00a0 We don\u2019t really have the quantitative tools to do that.\u201d\u00a0 (Emphasis mine)<\/p>\n Judging from recent jobs data, a year later it appears Dimon\u2019s \u201cgreat fear\u201d was well-founded.\u00a0 The Financial Times <\/strong>reports that in May nine investment banks met in Boston with big buy-side shops including Fidelity, Columbia Management, and Wellington.\u00a0 The buy-siders complained bitterly about the lack of liquidity in the corporate bond market; tougher capital standards and the Volcker Rule make banks less willing to hold large inventories of bonds to facilitate market making.\u00a0 Lower liquidity raises capital costs, especially for smaller companies.<\/p>\n \u201cTransforming\u201d the Energy Sector<\/strong><\/p>\n Remember \u201cclimate change\u201d?\u00a0\u00a0 Obama\u2019s energy policy attacks fossil fuels while subsidizing green energy projects that were expected to create \u201c720,000 job years by the end of 2012.\u201d \u00a0A chapter in the 2010 Economic Report of the President <\/strong>was titled \u201cTransforming the Energy Sector and Addressing Climate Change,\u201d <\/em>even as the Energy Department was forecasting that in 2035<\/strong> renewable energy, excluding biofuels, would account for only 3% of U.S. production while fossil fuels would still account for over 70%. \u00a0Obama\u2019s hostility to fossil fuels hurts not only energy producers (which directly employ 279,000 people) but their customers struggling with unnecessarily high energy costs.<\/p>\n Anti-capitalism<\/strong><\/p>\n Businesses under attack from their own government are disinclined to hire domestically.\u00a0 Just ask the CEO\u2019s of Emerson Electric, Intel, 3M, Loews, Boston Properties and Wynn Resorts, who in various ways have all made this point, even though CEO\u2019s generally do not like to criticize one of their biggest customers, Uncle Sam.\u00a0 A year ago David Farr, Emerson Electric\u2019s CEO, said on an earnings conference call:<\/p>\n There is a flood of regulations coming at us from the U.S. \u00a0The incentive to invest in the U.S. is negative. And from my perspective I have all the clarity I need. They\u2019re spending. They\u2019re taxing. Our tax rate in the US will be over 36% in the US this year. We pay, actually pay, the U.S. government over $500 million in taxes this year, and they say they want to raise it even more. \u00a0I run a company. \u00a0I have a lot of money to invest, but I\u2019m not going to invest it here.<\/p>\n Obama blames our economic woes on the Bush tax cuts and the recklessness of capitalists \u2013 never mind Fannie, Freddie, and the Community Reinvestment Act.\u00a0 Average Americans who \u201cplayed by the rules\u201d supposedly did not benefit from \u201cthe most expensive tax cuts for the wealthy in history\u201d while affluent Americans have failed to \u201cpay their fair share.\u201d \u00a0(In fact the top 10% pay 71% of income taxes while the bottom 50% pays 2%.)\u00a0 High earners have been anticipating an imminent tax hike ever since Obama became President \u2013 in addition to Obamacare\u2019s tax hikes on the affluent (which start in six months).<\/p>\n Beware Simplistic Equations<\/strong><\/p>\n Some economists live in an abstract, simplistic, ahistorical world where the behavior of millions of people supposedly can be modeled in a single chart or a few equations.\u00a0 In the real world policy, attitudes, ideology, and \u201canimal spirits\u201d matter.\u00a0 Lord Keynes recognized this even if some disciples do not. Obama\u2019s heavy-handed regulation has had predictable results.\u00a0 We first suggested in the summer of 2009 that we were headed for a third consecutive \u201cjobless recovery\u201d made worse than the first two by over-regulation.<\/p>\n","protected":false},"excerpt":{"rendered":" Employment growth has been terrible for the last few years, and Keynesian economists think they know why \u2013 companies aren\u2019t hiring because demand for their products is weak in a debt-burdened economy.\u00a0 The problem with this notion is that corporate … Continue reading