Posts tagged ‘economy’
I have always read Atlas Shrugged not as a character story (and thus I don't get bent out of shape by the stiff black and white characters) but as a story about the world itself changing and crashing under socialism and cronyism. As such, my favorite scene in the book is the hobo's tale of the socialist experiment on the 20th Century Motor Company.
Anyway, the final chapters of the book are full of more and more outrageous state interventions that build to a point that they are hard to believe anyone would actually ever try such things. Unbelievable, until one looks at Venezuela
Venezuelans soon may need to have their fingerprints scanned before they can buy bread and other staples. This unprecedented step was proposed after Maduro had the brilliant idea of proposing mandatory grocery fingerprinting system to combat food shortages. He said then that "the program will stop people from buying too much of a single item", but did not say when it would take effect.
Privacy concerns aside (clearly Venezuelans have bigger, well, smaller fish to fry) there was hope that this plunge into insanity would be delayed indefinitely, as the last thing Venezuela's strained economy would be able to handle is smuggling of the most basic of necessities: something such a dramatic rationing step would surely lead to.
Unfortunately for the struggling Venezuelan population, the time has arrived and as AP reported over the weekend, Venezuela "will begin installing 20,000 fingerprint scanners at supermarkets nationwide in a bid to stamp out hoarding and panic buying" as of this moment.The government has been selectively rolling out the rationing system for months at state-run supermarkets along the western border with Colombia where smuggling of price-controlled goods is a major problem.
On Saturday, President Nicolas Maduro said that seven large private retail chains had voluntarily agreed to install the scanners.
Last month the owners of several chains of supermarkets and drugstores were arrested for allegedly artificially creating long queues by not opening enough tills.
It gets better: Maduro also accused Colombian food smugglers of buying up price-controlled goods in state-run supermarkets along the border.
What a mess. An entirely predictable mess.
Dynamic scoring of budget proposals has been on the Republican wish list for decades. They have always been frustrated that tax cut proposals look like such budget losers with static scoring. In their supply-side bones, Republicans know that tax cuts will stimulate economic activity and thus increase future tax revenues. Taking this second order effect into account is what they mean by dynamic scoring (see: Laffer Curve).
I have some sympathy for this argument, but in making it Republicans are falling for the "this will work great when our guys are in charge" fallacy (I need to find a name for that). Democrats fall into this all the time, expanding government power only to be shocked at what their political enemies do with this power once in charge.
Because it is pretty clear what dynamic scoring will mean in a Democratic Congress. Remember that stimulus bill? Democrats all thought that expanded the economy, so its costs would, by their Keynesian assumptions, appear much lower under dynamic scoring. The Left thinks the auto bailout was stimulative. They even think that Obamacare was stimulative. Do you really want some BS Keynesian fudge factor obscuring the true cost of such proposals in the future?
Related: Greg Mankiw discusses why, if I read him right, dynamic scoring is impossible to do correctly
We have all heard that artists make very little money from their songs, and get "ripped off"by record labels and other folks in the chain. I have always had mixed reactions to this. I have no doubt that, with zero power and a burning desire to "make it big", young acts sign uneven deals with record labels. However, I find it hard to believe that Beyonce is getting hosed in that negotiation.
I saw this chart in TechDirt about where the money consumers spend on music goes (I think this is for a CD sale):
So the performers themselves get about 9% of the retail price after everyone in the chain is paid. That certainly seems paltry -- after all, they are the owners and creators of the music. Everyone else is just in the service chain to make sure the music reaches the customers, all the accounting is done, the legal documents are correct, etc.
But it turns out that they may not be doing that badly. I am a shareholder of ExxonMobil (XOM). I own a piece of all the oil that XOM owns and controls, along with all the other shareholders. Think of us as the band, though a really big band with lots of players. That oil we own, like the band's music, has a ton of value. When sold as raw crude, it goes for $40-$60 a barrel nowadays. When sold in pieces (such as gasoline, or asphalt, or lubrication oil) it can sell for hundreds of dollars a barrel.
But out of those proceeds, we have to pay people to help us. We have to pay managers, and lawyers. We have to pay oilfield services companies and equipment companies and transportation companies. We have to pay retailers. When all those payments are made, before taxes, in 2014 we were left with just under 8% of every dollar we sell. We own all this oil and we are not even getting as much as a musician!
And XOM shareholders do pretty well. Owners of Wal-Mart only get about 3% of every dollar they sell. In my company, I get about 5% of every dollar I sell. And those evil health insurers? Their shareholders get just over 2% of every dollar sold (all based on 2014 full-year financials).
Does that mean that Exxon shareholders are getting "ripped off" by Haliburton and Burlington Northern? Is Wal-Mart getting ripped off by Proctor and Gamble? Is Humana getting ripped off by GE imaging? No?
I will reveal the ugly secret: There is one person who is "ripping off" all of these folks, from Exxon to Rihanna to me. That person is.... the consumer. Yep, there are certainly many examples of people signing bad contracts in all these businesses, but the only entity systematically and consistently ripping all these folks off is us. Because in a capitalist economy, we have the ultimate power. We drive down the street to get the gas that is 10 cents cheaper, we now shop for our books and TVs at Wal-Mart and Amazon rather than at Borders and Best Buy, and we buy 99-cent individual songs on iTunes instead of buying a whole CD of songs we don't want for $14.99.
We generally use startup activity as a proxy for positive innovation and future increases in productivity and consumer value. But it is only a proxy - based on the theory that in a free economy new startups generally add new value or die. Startups per se are not inherently positive, especially when all they are doing is fixing the inefficiencies and mandates imposed by government regulation
I wrote about a new study suggesting that new federal regulation doesn't inhibit the creation of new startup companies in an industry. In fact, it might actually stimulate the creation of startups. This seems counterintuitive, but a reader with some experience in the education and health care sectors—which were influenced by NCLB and Obamacare, respectively—proposes an explanation for this:
Healthcare startups have absolutely exploded post-ACA....This was pretty well anticipated by venture capital; a bunch of Sand Hill firms started putting together ad-hoc health IT teams shortly after the ACA was passed, on the basic logic that anything that changed an industry as much as the ACA did would necessarily create a lot of startup opportunities.
Drum says, well this may be good or may be bad. Look, it HAS to be bad. All this investment and activity is going into trying to get back to even from productivity losses imposed by the government, or is being spent addressing government mandates for new services that the market did not want or value. This is a diversion of resources from new value-creation to fixing things, and as such is just the broken windows fallacy re-written in a new form.
The language he is using, of shaking things up, is a bit like that of chemistry. He seems to imagine that markets can reach and get stuck in local maxima, so that government action that shakes the system out of these maxima (like annealing in a metal) is positive in that it allows the system to progress to a better state over time even if the government's action initially makes things worse. I know of absolutely no evidence for this being true, and my strong suspicion given how many industries the government has trashed is that this is rare or non-existent. And impossible to spot, even if it did exist. Not to mention the fact it is a total joke to talk of health care as if it was some pristine untouched-by-government industry before Obamacare.
Conservatives say they are for free markets and free enterprise, but then I read stuff like this (have have added the bold):
Lynch supports Obama’s unconstitutional amnesty, believes illegal immigrants should have the same rights to employment as American citizens, opposes voter ID laws, advocates federal intrusion in local law enforcement under the guise of civil rights, supports the government taking private property on flimsy grounds, and offers no opposition to using drones against American citizens.
I agree with some of these concerns, but the one in bold is a real head scratcher. What theory of free markets do Conservatives hold that accepts as valid the government licensing of labor? On what possible grounds should a government bar me from hiring, say, a Russian immigrant to do my programming? Or crazier still, why can I hire a Mexican in my Mexico office but can't have the same person working for me in my Phoenix office?
I have a theory about the Romans that is probably shared by nobody. The Romans were strong and powerful and vital when they were creating a variety of citizenship types to accommodate multiple peoples who entered the empire in multiple ways. In particular I think of civitas sine suffragio or citizenship without the vote. But this was just one of many variations. By the first century AD (or CE per the modern academic trend), a lot of people of a lot of cultures and races and over a wide geography called themselves Romans.
By the end of the empire, the "reforms" of Diocletian and Constatine purged all flexibility from both governance and the economy (in sum, their laws amounted to the Directive 10-289 of the ancient world). By the time the Empire started falling apart, they had lost all ability to integrate new peoples or innovate with citizenship models. What was eventually called the Barbarian invasions began decades earlier as the attempted barbarian migrations. The barbarians wanted to just settle peacefully. And Rome desperately needed them -- their system was falling apart as their farms and countryside was depopulated from a combination of government policy and demographic collapses (e.g. plagues). Rome desperately needed new people to settle their farms and form the new backbone of the army and the barbarians desperately wanted to settle and had a lot of military skill, but they couldn't make it work.
I had an argument with someone of the Left last night. We both agreed that crony government protections and favors of businesses were one of the worst problems in the country. But we couldn't agree on solutions. It was a chicken and egg thing. She thought corporations were at fault for seeking them. I argued that the problem was given the government the power in the first place to grant such requests. She thought the only way to fight it was by empowering government to put more restrictions on business. My argument was that increasing the power of government to intervene in the economy only increased the problem. No resolution. I run into this all the time and need to think my way through a better way of expressing my concerns.
Anyway, I am reminded of all this because Stossel has a nice piece on the parasite economy and cronyism.
Postscript: I can say from this discussion that OFA and Media Matters and Common Cause and the like have really done their job on the Kochs because this particular person was absolutely convinced the #1 best thing we could do to improve the future of America was to shut the Kochs up and prevent them from spending any more money on politics and speech. My son says that is nearly impossible to argue any issue at all on campus without someone laying into the Kochs at some point in the conversation. I find this whole tendency to conduct politics by vilifying individuals rather than discussing issues -- individuals with absolutely no political position -- totally depressing. But it must work, because the Republicans did it too, in fact really pioneered this when they went after George Soros and made him the the secret villain behind everything Conservatives hated. People like Rush Limbaugh may get on the Left nowadays for vilifying the Kochs but go listen to his radio shows from 5 or 10 years ago -- he couldn't go three sentences without saying "Soros".
Brink Lindsey of Cato is gathering academic essays on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?" I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic. Here is my (uninvited) contribution.
The question of skills and the American workforce is typically tackled in only one direction: that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology. A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern. As Eduardo Porter writes in the Times:
To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.
The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....
“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”
A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them. School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system). But a large portion of the population apparently does not take advantage of the educational opportunities that do exist. Why is that?
When one says "job skills," people often think of things like programming machine tools or writing Java code. But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned. Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's. In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.
Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations. Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all. But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work. The experience gained from unskilled work is a bridge to future success, both in this generation and the next.
But this road to success breaks down without that initial unskilled job. Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work. And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.
Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job. As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills. I am not an economist, I am a business school grad. We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present. So a question we business folks might ask instead is: If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?
A few months back, I was at my Harvard Business School 25th reunion. Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school. I can't remember a single new business model discussed that relied on unskilled workers.
Is this just the way it is now? Have the Internet and computers and robotics and complex genomics made unskilled work obsolete? I don't think so. I have been running a business for over a decade that employs more than 300 people in unskilled positions. I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees." But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor. And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.
The reason for my despair comes from a single source: the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.
The costs that government taxes and rules add to labor have been discussed many times, but usually individually. Their impact is clearer when we discuss them as a whole. Let's take California, because that state is one I know well. To begin, the minimum wage is $9 (going to $10 an hour in 2016). To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims. For us, these add another $3.15 an hour. We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour. And the new California paid sick leave mandate adds another 45 cents an hour. So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.
But these direct costs don't even begin cover the additional fixed costs of hiring employees. We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed. We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety. In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.
In a smaller company, we don't have lawyers and a large human resource staff. In fact, we tend to have little staff at all. If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution. In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.
Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year. I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time. And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours. And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs. But come on! How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees? But that is the reality of trying to run a service business today. The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.
Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues. But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work. I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.
Until 2010, we never had an employee sue us. We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues. Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories). So what changed around 2010? Well, our work force composition changed a lot. Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security). However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company. Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate. But all eight of these legal actions were by these new, younger employees. I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it. They said that if I had fixed it, they would have lost the opportunity to sue.
I mentioned earlier that we had struggled to comply with California meal break law. The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day. They said they would sign a paper saying they had agreed to this. Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I. What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties. The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of). Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills. This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.
Hopefully you see my concern. I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits. That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed. As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees. If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?
Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce? Uber and Lyft at first seem to buck this trend, with their thousands of drivers. But in fact they prove the rule. Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them. I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart
We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success. If the government continues on its current course, it will become impossible to run a business that employs unskilled workers. The value of the work performed will simply not justify the cost. We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.
Greece is looking like it's falling apart again. Or perhaps more accurately: Greece continues to fall apart and the lipstick Europe put on the pig a few years ago is wearing off and people are noticing again.
I warned about this less than a year ago:
Kevin Drum quotes Hugo Dixon on the Greek recovery:
Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.
There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.
That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.
Color me suspicious. Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement. I hope like hell Greece has gotten its act together, but I would not bet my own money on it.
In that same article, I expressed myself skeptical that the Greeks had done anything long-term meaningful in their labor markets. They "reformed" their labor markets in the same way the Obama administration "reformed" the VA -- a lot of impressive statements about the need for change, a few press releases and a few promised but forgotten reforms. At the time, the Left wanted desperately to believe that countries could continue to take on near-infinite amounts of debt with no consequences, and so desperately wanted to believe Greece was OK.
I have said it for four years: There are only two choices here: 1. The rest of Europe essentially pays off Greek debt for it or 2. Greece leaves the Euro. And since it is likely Greece will get itself into the same hole again some time in the future if #1 is pursued, there is really only leaving the Euro. The latter will be a mess, with rampant inflation in Greece and destruction savings, but essentially the savings have already been destroyed by irresponsible government borrowing and bank bail-ins. At least the falling value of Greek currency would make it an attractive place at for tourism if not investment and Greece could start rebuilding its economy on some sort of foundation. Instead of bailing out banks and Greek officials, Germany should let it all fall apart and spend its money on helping Greece to pick up the pieces.
By letting Greece join the Euro, the Germans essentially let their irresponsible country cousins use their American Express Platinum card, and the Greeks went on a bender with the card. The Germans can't keep paying the bill -- at some point you have to take the card away.
There has been a lot of back and forth over the last few years about "austerity". I have wondered how government spending levels over the last few years that dwarf any peacetime levels in history could be called "austerity", but that is exactly what folks like Paul Krugman have been doing. Apparently, the new theory is that the level of spending is irrelevant to stimulus, and only the first derivative matters. In other words, high spending is not stimulative unless it is also increasing year by year. Kevin Drum provides an explanation of this position:
Austerity is all about the trajectory of government spending, and this is what it looks like. You can argue about whether flat spending represents austerity, but a sustained decline counts in anyone's book. The story here is simple: for a little while, in 2009 and 2010, stimulus spending partially offset state and local cuts, but by the end of 2010 the stimulus had run its course. From then on, the drop in government expenditures was steady and significant. It was also unprecedented. If you run this chart back for 50 years you'll never see anything like it. In all previous recessions and their aftermaths, government spending rose.
So, by this theory of stimulus, the fact that we spent substantially more money in 2010-2014 than in pre-recession years (and are still spending more money) turns out not to be stimulative. The only way government can stimulate the economy is to increase year-over-year per capital real spending every single year.
I will leave macro theory (of which I am increasingly skeptical) to the Phd's. In this case however, Drum's narrative is undermined by his own chart he published a few weeks ago:
In his recent austerity article quoted above, he describes a sluggish recovery with a step-change in 2014 only after "austerity" ends. But his chart from a few weeks earlier shows a steady recovery from 2010-2014, right through his "austerity" period. In fact, during the Bush recovery he derides, we actually did do exactly what he thinks is stimulative, ie increase government spending per capita steadily year by year. How do we know this? From another Drum chart, this one from last year. I changed the colors (described in this article) and compared his two charts:
By Drum's austerity theory, the Bush spending was stimulative but the Obama spending was austerity. But the chart on the right sure makes it look like the Obama recovery is stronger than the Bush recovery.
A better explanation of the data is that a recession driven by the highly-leveraged mis-allocation of too much capital to home real estate was made worse in 2008-2009 by a massive increase in government spending, which is almost by definition a further mis-allocation of capital (government is taking money from where the private sector thinks it should be invested and moves it to where politicians think it should be spent). The economy has recovered as that increase in government spending has been unwound.
I continue to see reports about how bad falling oil prices are for the economy -- most recently some layoffs in the steel industry were blamed on the looming drop (or crash) in oil drilling and exploration driven by substantially lower prices.
I find this exasperating, a classic seen-and-unseen type failure whose description goes back at least to the mid-19th century and Bastiat and essentially constituted most of Hazlitt's one lesson on economics. Yes, very visibly, relatively high-paid steel and oil workers are going to lose their jobs. They will have less money to spend. The oil industry will have less capital spending.
But the world will pay over a trillion dollars less this year for oil than it did last year (if current prices hold). That is a huge amount of money that can be spent on or invested in something else. Instead of just getting oil with those trillion dollars, we will still have our oil and a trillion dollars left over to spend. We may never know exactly who benefits, but those benefits are definitely there, somewhere. Just because they cannot be seen or portrayed in short visual anecdotes on the network news does not mean they don't exist.
Ugh, this is just beyond frustrating. I would have bet that at least with oil people would have understood the unseen benefit, since we get so much media reportage and general angst when gas prices go up that people would be thrilled at their going down. But I guess not.
I explained in simple terms why the world, mathematically, HAS to be better off with lower oil prices here.
The recent drop in oil prices has been met with a surprising amount of negativity, as if something bad is happening. This strikes me as insane. The world uses 90 or so million barrels of oil a day. The recent $30+ price drop in oil thus equals a world savings of $1 trillion a year.
Sure, oil companies and their suppliers are worse off (and believe me, I care -- a lot of my portfolio was invested in such things when oil started dropping). But the economy as a whole is clearly better off and wealthier.
To understand why, the analysis we need to undertake is an exact parallel of the broken window fallacy analysis. Its sort of a healing window analysis.
After the oil price drop, consumers have a trillion dollars more and oil producers have a trillion dollars less. Even right? Actually, not. Because consumers then spend that trillion on other things. Those other manufacturers and producers get the trillion dollars lost to the oil industry. Still even, right? No. Think of it this way:
Before the price drop
- Oil companies have $1 trillion extra revenue
- Other producers have no extra revenue
- Consumers have 90 million barrels a day of oil
After the price drop
- Oil companies have no extra revenue
- Other producers have $1 trillion extra revenue
- Consumers have 90 million barrels a day of oil AND $1 trillion of extra stuff (goods, service, savings, etc)
The world in the second case is wealthier. And this is assuming all the people involved are private parties. In fact, much of the oil revenue drop comes out of the hands of value-destroying governments so that in fact the wealth increase in the price drop scenario is actually likely even greater than in this simplistic analysis.
Postscript: OK, yes I am ignoring any cost of carbon pollution. But the market is not set up to price that, and readers will know that I am skeptical that the cost is that high. Never-the-less, this is a separate issue that if it needs to be dealt with should be dealt with as a carbon tax on fuels. The price drop should not affect the value of that tax. Or another way to put it, if one thinks the tax should be $30 per ton based on a $30 cost of carbon, it should be $30 per ton at $100 oil and $30 per ton at $60 oil.
Geographic mobility costs are a drag on the economy, because they slow and/or truncate relocation of labor to shifting areas of demand (a good example is the fact that North Dakota currently can't get enough workers because people can't/won't move there to take advantage of the opportunities.
Apparently, there are economists who make the argument that one reason for the post-WWII boom is that the war increased mobility for a variety of reasons, not the least of which was the forced extrication of young men from their homes via the draft. Apparently Hurricane Katrina may have had the same effect, blasting people out of the moribund New Orleans economy and forcing them to move to more dynamic areas.
This is probably true, but also one of those areas where economic analysis falls short of total well-being analysis (for lack of a better term). I know folks from New Orleans and they often seem to be deeply tied to the New Orleans culture and miss it when they have moved away. Many move back. So just because someone is better off economically with a job in Houston does not necessarily mean they consider themselves better off.
Update: I have posted an update with a side by side chart comparison here.
Last year, Kevin Drum wrote what I believe was the cover story of the September / October issue of Mother Jones (I read the online edition so exactly how the print version is laid out is opaque to me). That article, entitled "It's the Austerity, Stupid: How We Were Sold an Economy-Killing Lie" features this analysis:
He described the chart as follows:
In the end, for reasons both political and ideological, Obama decided that he needed to demonstrate that he took the deficit seriously, and in his 2010 State of the Union address he did just that. "Families across the country are tightening their belts," he said, and the federal government should do the same. To that end, he announced a three-year spending freeze and the formation of a bipartisan committee to address the long-term deficit.
The Beltway establishment may have applauded Obama's pivot to the deficit, but much of the economic community saw it as nothing short of a debacle. Sure, there were still a few economists who believed that even in a deep recession government spending merely crowded out private spending and thus did no good, but they were a distinct minority. Most economists acknowledged that deficit spending was appropriate at a time like this. Paul Krugman fumed that Obama was cravenly trying to score political points by doing a "deficit peacock-strut" that would be destructive in the wake of the financial crisis. Mark Zandi, a centrist economist who has advised leaders of both parties, used more judicious language, but likewise warned that spending cuts might "cost the economy significantly in the longer run."...
Taken as a whole, these measures have cut the deficit by $3.9 trillion over the next 10 years. And that doesn't even count the expiration of desperately needed stimulus measures like the payroll tax holiday and extended unemployment benefits.
This was unprecedented, as the chart above shows. After every other recent recession, government spending has continued rising steadily throughout the recovery, providing a backstop that prevented the economy from sliding backward. It happened under Ronald Reagan after the recession of 1981, under George H.W. Bush after the recession of 1990, and under George W. Bush after the recession of 2001. But this time, even though the 2008 recession was deeper than any of those previous ones, it didn't.
I thought the choice of baseline dates for his charts was deceptive, but never-the-less for the moment lets accept this at face value. Make sure to take a note of the red line, which is the current recession, and the brown line, which was the recovery from the recession in the late Clinton / early Bush years. By Mr. Drum's earlier analysis, the earlier 1990 recession was better handled than the current one (against his Keynesian assumptions) by the government continuing to increase spending after the recession to keep the recovery going. The point of Drum's earlier article was to say that Republicans in Congress were sinking the current economy by not increasing spending as was done after these earlier recessions.
So this is what Drum published the other day, I think based on a Paul Krugman article.
But I think Krugman undersells his case. He shows that the current recovery has created more private sector jobs than the 2001-2007 recovery, and that's true. But in fairness to the Bush years, the labor force was smaller back then and Bush was working from a smaller base. So of course fewer jobs were created. What you really want to look at is jobs as a percent of the total labor force. And here's what you get:
The Obama recovery isn't just a little bit better than the Bush recovery. It's miles better. But here's the interesting thing. This chart looks only at private sector employment. If you want to make Bush look better, you can look at total employment instead. It's still not a great picture, but it's a little better:
Awesome, Kevin! So I guess that austerity you were complaining about was the right thing to do, yes?
Seriously, in his article a year ago Drum argued that the Republicans in Congress were sinking the economy vis a vis the 1990 recession by not continuing to boost spending in the years after the recession. Now, he admits (though since he does not refer back to the original article I guess it is not an admission per se) that this "austerity" led to a stronger recovery than the spending-fueled 1990 version. All hail smaller government, the solution to growing employment!
PS- I wonder how much of this change in private employment since the last recession came in the oil and gas industry, whose expansion the Left generally opposes? Well, they'll bash on oil tomorrow but today, they will take credit for the jobs added.
Update: Here are the two charts combined, with other recessions removed and the colors on the data series set to match (click to enlarge)
“We oppose ALL subsidies, whether existing or proposed, including programs that benefit us, which are principally those that are embedded in our economy, such as mandates,” wrote Philip Ellender, president Koch’s government affairs division, in a Wednesday letter to members of Congress.
Ellender singled out the wind production tax credit as particularly deleterious. But unlike that provision, some of the tax breaks included in the House package benefit activities in which Koch and its subsidiaries are heavily invested.
Koch subsidiary George Pacific, for instance, qualifies for a tax break for the production of cellulosic biofuels. Another subsidiary, Flint Hills Resources, operates biofuel production facilities that could benefit from another of the provisions.
Those tax breaks could improve Koch’s bottom line, but the company sees federal tax preferences in general as economically harmful.
“Koch doesn’t view these as ‘benefits’ even if they are in industries we’re in,” explained a source familiar with the company’s public affairs strategy. “They are wasteful and market distorting, and allow other firms to run businesses that aren’t making money any other way.”
I would characterize long-term Japanese economic policy this way:
- Technocratically planned economy where the government chose winners and losers and directed capital to industries favored for development (e.g. MITI with steel, autos, electronics).
- Strong government favoritism for exports and exporters over the domestic economy -- export industries are heavily protected at the cost of raising costs for internal consumers and limiting competition in domestic markets.
- Enormous, near Herculean commitment to deficit spending as stimulus. With deficits consistently running in the 8% of GP range and total government debt a stratospheric levels, Japan is the poster child for Krugman's anti-austerity
To these three I would add something that is seldom mentioned, that Japan has a near Scandinavian GINI index, with income inequality well under that of the US. Oh yes, and they were an enthusiastic adopter of CO2 limits.
And the result of all this has been... 25 years of stagnation.
I remember when every one of these three planks was enthusiastically lauded by the US elite. I was at Harvard Business School in the late 1980's and much of the discussion was about the US needing to adopt MITI-like government industrial planning and management. If pressed at the time, people might kind of sort of acknowledge that life wasn't so good for Japanese consumers, but we were in a Michael Porter big picture competitiveness-of-nations phase, and no one seemed to care that their definition of national success did not turn out so well for the people actually living there.
To me, Japan is a giant case study in Austrian economics. It's like they set out to run a quarter-century test: "let's see if mispricing of credit and forced misallocation of capital is really the cause of recessions." So it is amazing that no one seems to want to acknowledge the results of this experiment. Paul Krugman appears weekly in the New York Times to frequently advocate for exactly this same economic plan.
A couple of quick thoughts on this map from this Vox article edited by Matt Yglesias
- I hate to diss my old cohorts at McKinsey, but isn't this entirely arbitrary to how you draw the map? If you made the map break in, say, the Atlantic Ocean with the Ivory Coast on the far left of the map and Newfoundland on the far right, won't this look different?
- People seem to want to get freaked out about China passing the US in terms of the size of its economy. But in the history of Civilization there have probably been barely 200 years in the last 4000 that China hasn't been the largest economy in the world. It probably only lost that title in the early 19th century and is just now getting it back. We are in some senses ending an unusual period, not starting one.
Paul Roberts has an editorial in the LA Times that sortof, kindof mirrors my post the other day that observed that corporate stock buybacks (and investments to reduce tax rates) were likely signs of a bad investment climate. Until he starts talking about solutions
Roberts begins in a similar manner
Here's a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.
Share buybacks aren't illegal, and, to be fair, they make sense when companies truly don't have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they're not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.
I suppose I would dispute him in his implication that there is something unseemly about buybacks. They are actually a great mechanism for economic efficiency. If companies do not have good investment prospects, we WANT them returning the cash to their shareholders, rather than doing things like the boneheaded diversification of the 1960's and 1970's (that made investment bankers so rich unwinding in the 1980's). That way, individuals can redeploy capital in more promising places. The lack of investment opportunities and return of capital to shareholders is a bad sign for investment prospects of large companies, but it is not at all a bad sign for the ethics of corporate management. I would argue this is the most ethical possible thing for corporations to do if they honestly do not feel they have a productive use for their cash.
The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We're seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up....
It wasn't always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — "assets" whose returns benefited not only corporations but the broader society.
Yes, much of that corporate oblige was coerced: After the excesses of the Roaring '20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence....
Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.
There is so much crap here it is hard to know where to start. Since I work for a living rather than write editorials, I will just pound out some quick thoughts
- As is so typical with Leftist nostalgia for the 1950's, his view is entirely focused on large corporations. But the innovation model has changed in a lot of industries. Small companies and entrepreneurs are doing innovation, then get bought by large corporations with access to markets and capital needed to expanded (the drug industry increasingly works this way). Corporate buybacks return capital to the hands of individuals and potential entrepreneurs and funding angels.
- But the Left is working hard to kill innovation and entrepreneurship and solidify the position of large corporations. Large corporations increasingly have the scale to manage regulatory compliance that chokes smaller companies. And for areas that Mr. Roberts mentions, like climate and green energy, the government manages that whole sector as a crony enterprise, giving capital to political donors and people who can afford lobbyists and ignoring everyone else. "Socially engaged" investing is nearly always managed like this, as cronyism where the politician you held a fundraiser for is more important than your technology or business plan. *cough* Solyndra *cough*
- One enormous reason that companies are buying back their own stock is the Federal Reserve's quantitative easing program, which I would bet anything Mr. Roberts fully supports. This program concentrates capital in the hands of a few large banks and corporations, and encourages low-risk financial investments of capital over operational investments
- All those "Social engagement" folks on the Left seem to spend more time stopping investment rather than encouraging it. They fight tooth and nail the single most productive investment area in the US right now (fracking), they fight new construction in many places (e.g. most all places in California), they fight for workers in entrenched competitors against new business models like Lyft and Uber, they fight every urban Wal-Mart that attempts to get built. I would argue one large reason for the lack of operational investment is that the Left blocks and/or makes more expensive the investments corporations want to make, offering for alternatives only crap like green energy which doesn't work as an investment unless it is subsidized and you can't count on the subsidies unless you held an Obama fundraiser lately.
- If corporations make bad investments and tick off their workers and do all the things he suggests, they get run out of business. And incredibly, he even acknowledges this: "And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling." So fine, the problem corrects itself over time.
- He even acknowledges that corporations that are following his preferred investment strategy exist and are prospering -- he points to Google. Google is a great example of exactly what he is missing. Search engines and Internet functionality that Google thrives on were not developed in corporate R&D departments. I don't get how he can write so fondly about Google and simultaneously write that he wishes, say, US Steel, were investing more in R&D. I would think having dinosaur corporations eschew trying to invest in these new areas, and having them return the money to their shareholders, and then having those individuals invest the money in startups like Google would be a good thing. But like many Leftists he just can't get around the 1950's model. At the end of the day, entrepreneurship is too chaotic -- the Left wants large corporations that it can easily see and control.
Scott Sumner is actually discussing discrimination, and how discrimination is often "proven" in social studies
The economy operates in very subtle ways, and often when I read academic studies of issues like discrimination, the techniques seem incredibly naive to me. They might put in all the attributes of male and female labor productivity they can think of, and then simply assume than any unexplained residual must be due to "discrimination." And they do this in cases where there is no obvious reason to assume discrimination. It would be like a scientist assuming that magicians created a white rabbit out of thin air, at the snap of their fingers, because they can't think of any other explanation of how it got into the black hat!
Most alarming climate forecasts are based on the period from 1978 to 1998. During this 20 year period world temperatures rose about a half degree C. People may say they are talking about temperature increases since 1950, but most if not all of those increases occurred from 1978-1998. Temperatures were mostly flat or down before and since.
A key, if not the key, argument for CO2-driven catastrophic warming that is based on actual historic data (rather than on theory or models) is that temperatures rose in this 20 year period farther and faster than would be possible by any natural causes, and thus must have been driven by man-made CO2. Essentially what scientists said was, "we have considered every possible natural cause of warming that we can think of, and these are not enough to cause this warming, so the warming must be unnatural." I was struck just how similar this process was to what Mr. Sumner describes. Most skeptics, by the way, agree that some of this warming may have been driven by manmade CO2 but at the same time argue that there were many potential natural effects (e.g. ocean cycles) that were not considered in this original analysis.
I don't think readers will be surprised to learn that I don't have any particular moral problem with tax inversions, reverse acquisitions that allow companies to take advantage of lower foreign tax rates. The US has perhaps the most costly and unwieldy tax code in the world, made worse by our unique insistence on double taxation of foreign earnings that prevents companies like Apple from repatriating billions of dollars. My tax plan begins with the elimination of corporate income taxes altogether, not only as an efficiency and growth step but as a huge step in fighting cronyism.
So I certainly don't share all this creepy Leftist desire for loyalty oaths and such from corporations. But I do have a concern about the economy. Over the past couple of years, it appears that a lot of corporate borrowing has been to:
- Buy back their own stock
- Reduce their tax rate, in part through inversions (apparently over 2/3 of 2014 M&A volume is inversions)
When the two best investments a company can find are in its own stock and in reducing tax rates, then there appears to be a problem with the underlying universe of investment opportunities.
Actually, the best investment our company has found this year is in closing operations in California and escaping that regulatory and litigation mess.
Back in April of 2013 I wrote about how Obamacare was increasing incentives for offering part-time rather than full-time work. I warned at the time that once employers got used to scheduling based on part-time shifts, they might never want to go back because it could actually be cheaper and easier than using full-time workers
The service industry generally does not operate 8 hours a day, 5 days a week, so its labor needs do not match traditional full-time shifts. Those of us who run service companies already have to piece together multiple employees and shifts to cover our operating hours. In this environment, there is no reason one can’t stitch together employees making 29 hours a week (that don’t have to be given expensive health care policies) nearly as easily as one can stitch together 40 hours a week employees. In fact, it can be easier — a store that needs to cover 10AM to 9PM can cover with two 5.5 hour a day employees. If they work 5 days a week, that is 27.5 hours a week, safely part-time. Three people working such hours with staggered days off can cover the store’s hours for 7 days.
Based on the numbers above, a store might actually prefer to only have sub-30 hour shifts, but may have, until recently, provided full-time 40 hours work because good employees expect it and other employers were offering it. In other words, they had to offer full-time work because competition in the labor market demanded it. But if everyone in the service business stops offering full-time work, the competitive pressure to offer anything but part-time jobs will be gone. The service business may never go back.
The future American service worker will likely be faced with stitching together multiple part-time shifts. Companies may partner to coordinate shifts so that workers split time between the companies, and third-party clearing houses may emerge in a new value-added role of helping employers and employees stitch together part-time shifts.
The worst thing about being on jury duty isn’t actually serving on a jury. It’s having to check in every day -- possibly several times a day, depending on your local system -- to see whether you’ll be needed. You can’t plan either your work or your personal life. Your schedule is unpredictable and completely out of your control.
For many part-time workers in the post-crash economy, life has become like endless jury duty. Scheduling software now lets employers constantly optimize who’s working, better balancing labor costs and likely demand. The process demands enormous flexibilityfrom part-time workers, sometimes requiring them to be on call all the time without knowing when they’ll work or how much they’ll earn. That puts the kibosh on the age-old strategy of working two or more part-time jobs to make ends meet. As my colleague Megan McArdle writes, “No matter how hard you are willing to work, stringing together anything approaching a minimum income becomes impossible.”
OBAMANOMICS IN ACTION: Typical US Household Worth One-Third Less Than Under Bush
Seriously? The bursting of the housing bubble, which actually began under Bush, is Obama's fault? Because that is what likely drove middle class household worth down (while the Fed-sponsored asset boom in financial instruments drove up wealth of the top 1%). I suppose one could say that the Republicans sponsored a bubble that helped the middle class while Obama is sponsoring a bubble that helps the wealthy.
I won't say this stuff is meaningless to the economy, because clearly they affect people's perception of wealth and thus spending and optimism. But sound long-term economic growth has got to come from stable and rational monetary policy that allows interest rates and financial assets to find their correct level. Getting political mileage out of bubble pricing of assets only creates incentives for politicians such that they will never stop fiddling with interest rates and credit.
This is a re-post of an article I wrote in 2012. I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.
My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples. Here is one for health care. The question at hand: Does government regulation including Obamacare increase access to health care? Certainly it increases access to health care insurance, but does it increase access to actual doctors? We will look at three major interventions.
The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors. At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.
I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.
The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance. These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go. The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).
The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation
As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls. Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more. This leads to huge doctor shortages, queues, waiting lists, etc. Exactly what we see in other state-run health care systems. The graph below posits a price cap that forces prices back to the free market rate.
So, is this better access to health care?
I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right. Since this has pretty much never happened in the whole history of government operations, I discount the claim. When pressed for specifics, the ideas typically boil down to price or demand controls. Price controls we discussed. Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."
Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs. But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions. The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups. In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.
Update: Pondering on this, it may be that professional licensing also makes the supply curve steeper. It depends on how doctors think about sunk cost.
I often criticize others for attributing 100% of any bad trend to their personal pet peeve. To some extent I am guilty of that in my last post, where I blamed declining business formation on increasingly complex regulation and licensing. I think there are good reasons for doing so -- I have spent the last 6 months passing up on business growth opportunities because I was too consumed with catching up on regulatory compliance minutia, particularly in California. And I have watched as many of my smaller competitors who have fewer resources to dedicate to such compliance issues have left the business, telling me they could no longer keep up with all the requirements.
But there is seldom just one single cause for any trend in a complex, chaotic system (e.g. climate, but economics as well). One other reason business formation may have dropped is the crash of the housing market and specifically in the equity many have in their homes.
Home equity has historically been an important source of capital for small business formation. My first large investment in my company was funded with a loan that was secured by the equity in my home. What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics. In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.
In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter. My company is no longer what many would call "small" -- we will do millions in revenue this year. But there is no way in the world that my banker of over 10 years will lend to my business unsecured -- they will demand some asset they can put a lien on. So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory. But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck -- unless the owner has a personal asset, typically a house, on which the banker can place a lien.
So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).
Postscript: Banks will make cash flow loans if guaranteed by the SBA. This is another whole can of worms, which I will not discuss today. SBA loans are expensive and difficult to get, and the SBA has a tendency to turn the money spigot on and off at random times. I have often wondered if the SBA helped to kill cash flow lending by banks. First, why make risky small unsecured loans when you can get a government guarantee? And second, with more formulaic lending criteria, SBA lending eliminated the need for loan officers who were good at evaluating business risks. I can say from personal experience that the folks who can intelligently discuss a business plan and its risks are all gone from banks now (at least in the small business market).
Harvard’s Institute of Politics released a poll yesterday that showed millennials’ trust in government at a historic low. This chart shows how many respondents said that they trust the entity in question to do the right thing either all of the time or most of the time. Notably, 20% of millennials said they trust the federal government to do the right thing; 32% said they trust the president; and 14% trust Congress. State and local governments (and, appallingly, the United Nations) fared a little better, but distrust of government is clearly the order of the day....
Which raises, not for the first time, a question I can’t answer: why do people who don’t trust government keep voting for more of it? For a long time, young people have voted mostly Democrat. Which means they are voting to give more of their money, and more control over their lives, to government–especially the federal government. Why would they do that, if only 20% of them trust the federal government to do the right thing?
I won't give a simplistic answer to a complex social issue, but I have a theory that explains at least part of this: gay marriage and other social issues. I get a chance to work with young people a lot, and generally they don't seem to be focused on tax and regulatory issues. They haven't been deep enough into the productive economy (and many will be convinced by their universities never to enter the productive economy) to understand the effects of government interventionism in the economy.
But one thing young people do know is that they are absolutely turned off by the social conservatism of Republicans. I read an article the other day by a Conservative lamenting that young people use certain political positions as social status symbols, as self-identifiers that they are among the elite. But certain ideas also have the opposite affect, acting as a big scarlet A that no one would willingly wear. Among those are opposition to gay marriage, for example. Many young folks, regardless of their position on anything else, would be as unlikely to vote for someone who opposed gay marriage as would be a Victorian society woman to openly admit she was a prostitute. There are certain social positions that many Republicans hold that are complete non-starters to young people, such that they could not consider voting for such a politician even if they agreed with 99% of all the politician's other positions. This tendency is reinforced by college professors, overwhelmingly of the Left, who tell kids that Republicans are not just people with whom they disagree, but bad people who have no place in civil society.
A year or so ago I got tapped to lead an all-too-brief center-right effort in Arizona to legalize gay marriage. I cannot tell you how many Republican leaders and politicians came to me in private and thanked us for what we were doing, saying that the Republican party has to be saved from itself. In the end, we eventually shut the effort down because prominent groups on the Left didn't want a center-right group to get any of the credit. Some of them wanted the effort to go forward, but only if non-Leftists would bow out of the leadership group, and some said explicitly that they did not want the issue solved yet, because the Democrats wanted to flip Arizona blue in 2014 and 2016 and they needed the gay marriage issue to run on, knowing it was a way to pull otherwise libertarian leaning young people away from the Republicans.
Update: I would add that opposition to gay marriage among Republicans also poisons young people to other Republican positions, such as smaller government and free markets (though this libertarian would argue that such Republican positions are often in name only, and not consistently followed, but that is another rant). The biggest lie every person in this country is taught is that somehow Republicans and Democrats offer opposing and internally consistent positions on a political spectrum that only has two dimensions. So if we don't know much about politics but KNOW Republicans have one really bad position, then the whole package must be bad and we should vote Democrat. Which causes us to start self-justifying support for things like economic interventionism that we may not know much about but now is part of our team's position.