Thursday, February 04, 2010

It's the regulatory uncertainty, stupid 

Why aren't employers hiring? As we have been writing for months, employers are not hiring because the Obama administration and the Congressional majority have created massive regulatory uncertainty. Who in their right mind would borrow money at even zero interest when the arrow of regulatory pain can suddenly spin in your direction (no sooner had the election of Scott Brown put health care "reform" on life support than President Obama swung around and attacked the banks again)? This post nails it.

There are a number of reasons why small businesses aren't expanding, but you can boil most of these down to simple risk aversion. Banks are going through a massive deleveraging, and entrepreneurs are hesitant to expand until some of the uncertainty surrounding the administration's tax-and-spend-and-regulate agenda clears up.

You can't announce that you want to massively regulate businesses accounting for 35% of GDP and then expect the people who own those businesses to take risks because there is some cheap government money available. It is lunacy, yet this is what the flower and chivalry of our national government apparently thinks will work. Why? Delight in this bit of snark, which is funny because it is true:
The good news is that, when it comes to reshaping the U.S. mortgage market [any market for that matter - ed.], the Obama administration’s top guns are bringing to bear all of the brisk, rough-’n’-ready entrepreneurial know-how they picked up in their previous careers as university professors, nonprofit activists, and holders of political sinecures.

Evidence of that, by the way.

Sadly, it is not simply that the Obamans have no insight in to the thinking of the people who actually create private sector jobs. It is that they are reconstructing the regulatory state with great verve, and at least until Scott Brown's election were doing so quite consciously without regard for the impact on the economy. How else to explain the carefully staged "jobs summit" among Obama's donors in early December, followed almost immediately by the announcement from the Department of Labor that it would "enact an array of 90 rules and regulations next year aimed at giving more power to workers and unions"? Great idea, Rahm: Stage the summit for the cameras, and then when even the carefully selected and neutered corporate and union tools are safely out of Washington and cannot ask the president embarrassing questions in front of the carefully selected and neutered media, announce the intention to issue as yet unspecified regulations that will drive up the cost of employing people in some indeterminate amount at some indeterminate time in the near to middle term. What employer with two brain cells to rub together isn't going to hire as few new people as possible until he knows what those regulations will be?

In light of those facts alone, never mind the relentless activism of the rest of the Obama regulatory state, was there any doubt that -- before Massachusetts, at least -- Obama was trying to insure that virtually all growth in employment would come from the government, a development that would go a long way toward improving the electoral fortunes of the Democrats in future years? I see no other way to square the public statements of the administration and the Congressional majority -- that "jobs" are its top priority -- with its entirely contrary and obviously calculated campaign to destroy the ability of private sector employers to predict the future.

MORE: Some thoughtful advice to the Obama administration from a small business owner in, of all places, the New York Times. I reserve no hope that it will be followed.

CWCID: Directly and indirectly, Glenn Reynolds.


By Anonymous Mad as Hell, at Thu Feb 04, 09:42:00 AM:

Not disagreeing, but it's more than just regulatory uncertainty. Big permanent deficits mean big future taxes. The top 5% earners don't make enough to cover this. So what happens?

One of the corollaries of this, is that expected after-tax gains from any genuine long-term investment are zeroing out. That's even before you factor in potentially much higher costs for things like employee health and energy, which affect some businesses more than others.

I'd rather deal with Tony Soprano than Obama. If you take any risk or put in extraordinary effort, and succeed ... Obama will take your winnings. Collectively, this pushes investors to want to buy tax-free municipal bonds. Or speculate short-term .... not invest.

It's also telling people not to take jobs that require effort. Better to seek an easy government job or cushy BigCo job -- the kind where you just have to show up to get paid. All you need is "juice" or talent at sucking up. Resistance is futile -- so join the Borg .... but Obama's Borg isn't self sustaining.

With this backdrop, capital will likely move abroad over time. What's helped us so far is that the much of the rest of the world sucks too -- but that won't go on forever.

Obama just said. “We’ve got to be the party of business, small business and large business, because they produce jobs.” Is this guy clueless, or just playing us? I've wondered which it is, since I first started paying attention to Obama in June 2008. It may not matter.

Does anyone on Obama's team think that a $5,000 tax credit for new hires will solve double-digit unemployment? Can labor expert Larry Summers be that dumb? I wouldn't trust any of these guys to valet park my car.  

By Anonymous Dale, at Thu Feb 04, 09:57:00 AM:

Agreed. it's not about regulatory uncertainty, and the answer isn't your beloved tax cuts either. Besides, productivity is up and yet job losses continue.

Why's that? Because after trimming the fat, businesses large and small have learned to do more with less. I see it everyday in the legal industry, which went through a significant rentrenchment with Wall Street meltdown. None of us expect many of those lost jobs are coming back anytime soon. Technology, outsourcing, client pressure have all played a hand in how BigLaw is being forced to run its business. Secretaries are going the way of dinosaurs; fax, copy operators, mail room a shadow of their former selves. As for lawyers, there aren't enough tax cuts in your wishlist to make us hire one more first year than necessary when we have a pool of qualified contract lawyers we can call at a moment's notice and return to the pool when the document review is over. And if paying $45/hr for unemployed lawyers to review a terabyte of data is too costly for your client's pocketbook, there's always India at the ready. Lather. Rinse. Repeat.  

By Blogger TigerHawk, at Thu Feb 04, 10:02:00 AM:

@Mad -

I agree that tax uncertainty is a big part of it. Absolutely. But it is uncertainty more than the absolute amount. Much as I prefer lower taxes, people will learn to live with them and structure around them at some cost, but that will at least allow things to move forward. Right now, it is the uncertainty that hurts.

Is this guy clueless, or just playing us?

For the longest time I thought he was clueless, but the "jobs summit" followed the next Monday morning by the Labor Department's new regulatory initiative was all the evidence I needed that he is just playing us. I've gone from wondering to dead certain.  

By Anonymous Anonymous, at Thu Feb 04, 10:54:00 AM:

"Figures this week from the Institute for Supply Management showed manufacturing in January expanded at the fastest pace in five years as production and orders accelerated. " Hmmmmm. It appears large segments of the business world aren't reading TigerHawk.  

By Anonymous Anonymous, at Thu Feb 04, 11:33:00 AM:

The sole objective of the Kenyan and his masters is to destroy the middle class in America, nothing more, nothing less.
Anything else he says is just blather to obscure this objective.  

By Anonymous Anonymous, at Thu Feb 04, 11:33:00 AM:

Manufacturing expanded due to inventory replentishment. Sadly, inventory replentishment, while growing the economy in the quarter, is still at a rate that reflects ongoing overall diminshment of inventories (ie, we're still in decline, even in he manufacturing sector). As an element of GDP measurement, it may increase again in the next two quarters but it's a temporary effect, unless more economic activity starts taking off in the broader economy.

So, TH's point is still very (horribly) valid.  

By Anonymous Anonymous, at Thu Feb 04, 11:36:00 AM:

There is lots more at work here than just regulatory uncertainty.

The truth is that the real U.S. economy has been deteriorating for 20+ years, but the deterioration has been masked by the tech bubble (circa 1995-2000) and the credit bubble (circa 2001-2008). Now that the credit bubble has burst, the Fed and the Treasury are trying like hell to blow a government credit bubble--witness the tripling of the Fed's balance sheet--but it is failing.

The U.S. economy is now 70% consumer spending. But in the aggregate the U.S. consumer is now leveraged to the teeth and has just suffered a 30% loss in his 401k and probably a similar haircut on the value of his home. Retirement age looms for baby boomers, and household balance sheets have gone straight to hell. Not surprisingly, our savings rate is rising rapidly from below-zero to 5-10%. This results in what economists call "demand destruction." In an economy that is 70% consumption, collapsing demand means no new jobs.

It took 20+ years to get into this mess, and it will take a long time to get out. Meaningful government policy to begin reversing this trend starts with something like this:
1. Stop supporting asset prices. Both the housing markets and the stock markets want to fall. Let them.
2. Repeal the bankruptcy reform act of 2005. This is unpalatable but necessary. As long as consumers are servicing old debts they aren't buying new goods or services.
3. Drop the capital gains rate on INVESTED capital to zero. (Capital gains on stock grants and carried interest should be taxed as ordinary income, which is precisely what they are--sorry private equity folks.)
4. Flatten tax rates and broaden the base.
5. Deregulate like mad.
6. Implement a 30% VAT on services outsourced overseas, including those performed "in-house." This is also unpalatable, but necessary. Anyone who believes that American workers can compete with the labor cost structure in China, India, Brazil, or the Ukraine is fooling himself.

Separately, I am shocked at how many of my friends and social acquaintances are considering emigrating. It is becoming quite the hot topic being whispered at parties and meetings. Anyone else seeing this?  

By Anonymous Anonymous, at Thu Feb 04, 12:17:00 PM:

"Separately, I am shocked at how many of my friends and social acquaintances are considering emigrating. It is becoming quite the hot topic being whispered at parties and meetings. Anyone else seeing this? "

I'm a gen-exer that grew up in the U.S. heartland, my wife is American but mostly grew up overseas as an ex-pat who currently works for a European country. I have tried for the last year to get any type of job, I didn't even expect one that paid half of what I made before my company went under last February (I made about $160K). I'm overeducated and overqualified for most hourly jobs or any other place that is hiring, and the jobs in my industry are so saturated with qualified individuals that I've been told (honestly, at least) during my handful of interviews that they have literally have been contacted by hundreds of qualified applicants.

If my wife is offered a transfer to one of her company's Europe locations, we'd probably take it in heartbeat and leave all of our family and history here. 2 years ago this would have been unthinkable. For people 40 years and younger just starting out or having young families, the grim reality may be that the U.S. will not be the best place for your generation. It is a shame how fast and how far the country has fallen.  

By Anonymous Anonymous, at Thu Feb 04, 12:19:00 PM:

"who currently works for a European country"

d'oh! obviously meant European company.  

By Anonymous arte johnson, at Thu Feb 04, 12:20:00 PM:

For my business, i'm waiting to add employees until a couple of things get resolved...the health reform (big tax)fiasco getting slowed/stopped was great news, and the cap/trade bs needs to be shot down, too. i'd like to see the bush tax cuts made permanent, but i won't hold my breath.  

By Anonymous Mad as Hell, at Thu Feb 04, 02:43:00 PM:

We don't need to emigrate abroad, we just all need to move to DC.

We're on a path that's part Japan -- keep rates low, prop up the banks, keep kicking the can down the road ... and also part Argentina -- print money. That's the bad news. The good news is that we're still a rich country by many measures, our total debt is still manageable, etc etc. This is fixable. I'm intrigued that we're seeing something more like the Depression of the 1870s than the the 1920s.

What I can't get my head around is how oblivious DC - MSM are to the facts on the ground.

I liked a lot of Anon 11:36's ideas. If you use the model of our collectively going through a Ch 7 / Ch 11 bankruptcy, we're still capable of a reorganization over a liquidation. Right now, some stakeholders are refusing to take a cut. Seniors, many government workers etc. In fact, they're using Obama & Co to ratchet up their position. I'm afraid we need a crisis to create the political will to force national government to adjust.

I've long suspected that Obama is playing us. I'd love to be a fly on the wall at his key internal meetings. I imagine different potential scenarios -- each of them really unsettling.

Sidebar re BigLaw. That industry has had its own weird dynamics over the last decade or two. The typical partner at a typical Big Law firm shouldn't be making into seven figures. Am I wrong? Firing staff was a short-term measure -- and short-sighted -- when you have time-constrained partners charging $700 per hour and making over $1,000 per hour. I'd bet that client CFOs are pissed on principle and will start to look to drive better deals.  

By Blogger David, at Thu Feb 04, 03:50:00 PM:

We have a small office in France and of course the labor laws there are severe. When they want to expand hiring the government relaxes the cost of firing the employee (at least for a one or two year higher) and sometimes loweres the draconian cost of social security charges for a similar time.

One could probably create a similar incentive in the US. For example, no penalty on future state/federal unemployment contributions for new hires laid off in the first two years (and perhaps an elimination of the employer contribution to FICA for the same period).

While the employer still needs demand to require new workers, this cold lower the risk of hiring by reducing the cost of the short term.  

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