Response from Brad DeLong on fiscal policy

by on June 20, 2010 at 5:17 am in Economics | Permalink

Read the whole thing; my original post was here.  

On my point 1, that the central bank moves last, Brad writes:

Yes, the central bank can neutralize any additional fiscal stimulus by raising interest rates. (It is not clear that it can undo any fiscal contraction by some combination of lowering interest rates and quantitative easing: it may be able to.) What is clear is that the U.S. Federal Reserve and the Bank of England are right now definitely not in a place where they would neutralize any additional fiscal stimulus by raising interest rates. And my bet is that the ECB is also not in such a place–although it is much harder to figure out what they think and what they will do. That the central bank moves last is important and relevant, but not determinative when you are in the neighborhood of the zero lower bound on interest rates.

Maybe the central bank cannot undo a fiscal tightening, but surely it can undo a fiscal expansion, by making money tighter, limiting QE, and/or changing the pace at which it undoes previous QE.  My assumption is that the central bank has a preferred inflation vs. unemployment position for the economy, so why be so sure they won't undo the expansion of the fiscal authority, if only probabilistically?  Portfolio considerations, or public relations, may matter, so I am not postulating strict neutrality, rather changes in fiscal debt do less good than we might think.   

On point two, that monetary expansion is easy, even at the zero bound, Brad writes:

That's why having the government hire unemployed people to do useful things and paying for it by printing up money at basically zero budgetary cost (right now) is an even better policy. Even if consumers do save all that money, fiscal stimulus on the spending side still has an impact: useful stuff gets done.

That's fine, with the side note that I am more skeptical about public sector spending.  I'll push this line of reasoning to the next step, however, and stress we don't need to increase debt at all to have a big and effective stimulus.  (By the way, accepting this argument means that a central bank can undo a decrease in the federal debt, as mentioned in point one.)   

On point three, on federalizing Medicaid, we agree.  Point four is about the value of worst-case thinking and that means a fiscal crisis can come even when it appears unlikely.  I wish to heed that risk by doing something other than pledging our next President and Congress will solve the problem.

Elsewhere, Brad has written:

The obvious policy is the long-term debt neutral stimulus: spending increases and tax cuts for the next three years, standby tax increases with triggers and spending caps with triggers thereafter, all calculated to guarantee that the debt is no larger ten years from now than in the baseline.

An alternative version of this would be:

We can and should do major stimulus without increasing the debt burden, short-term or long-term.  Increasing M, through monetary policy, is usually more effective than making periodic attempts to keep V up and running, through fiscal policy.  Plus it is often easier to turn monetary rather than fiscal policy on a dime, especially in a democracy and for Brad I can cite the risk of a Republican administration.  Talk of the zero bound doesn't matter much for the policies we should choose, namely money-financed, non-exotic direct stimulus.

Why is it necessary to take on or intellectually defend higher debt levels?  Short-term debt can too easily become a long-term commitment.  Why is it necessary to discuss the zero bound so much?  In my view of this exchange, Brad and I largely agree, but he does not (yet?) agree that we largely agree.  I want to see him criticize debt finance more than he seems willing to do.

I believe the "zero bound" is perhaps the single largest "red herring" in the economics profession today.

Addendum: Arnold Kling comments.  And Brad DeLong responds in the comments section.

NC June 20, 2010 at 5:22 am

Now macroeconomics is not just a theory and fiscal policy and monetary policy both have real effects.

Hahaha, so much for the “intellectual consistency”.

andy June 20, 2010 at 7:08 am

I just wonder why there is no more discussion if the stimulus is …well..stimulating the economy. If it makes sense to stimulate. Because if it is NOT – and it seems to me that the empiricist are calculating the multiplier closer and closer to zero (e.g. here http://www.nber.org/papers/w15464 ), you have to stop thinking in terms of ‘stimulus’ and start thinking on the ‘business line’ – is this “state investment” worth it? How much is the return rate? Does it make sense to get in debt when making this investement?

And we all know that for most goods the private sector makes those decisions much better…

DanC June 20, 2010 at 8:00 am

Long term the United States is becoming a country were investment makes less sense. Any business investments today will see potential future profits reduced by increasing taxes. And those taxes will be both direct and in the form of increased regulatory costs.

Tax and spend Democrats have become the spend and tax Democrats. Reagan followed a policy of trying to starve the beast: saddle the government with debt to block some future spending. The Democrats have used a crisis to feed the beast with the hopes and dreams of our children.

The Obama goal is to redistribute income not to foster growth. Soaking the rich to fund often wasteful, but politically powerful, projects does little for the long term health of the country. Look at the trail of former Governor Blagojevich to understand how back room deals to fund highway spending. Or look at Senator Dodd and his favors to Indian casinos. Or look at government bailouts of banks which appears to al least in part be a function of what connections current government officials had with former employers.

Playing with economic models, dancing on the head of a needle about stimulus spending too often ignore the structural changes in the economy. Those changes are making the United States a less desirable place to invest.

Candidate Obama screamed about politicians who, he claimed, were helping to send jobs overseas. But his anti-business views are pushing smart investors away from the United States to countries that want and encourage real and profitable growth.

You want stimulus, then create incentives for the private sector to invest and grow.

Doc Merlin June 20, 2010 at 8:12 am

‘What is clear is that the U.S. Federal Reserve and the Bank of England are right now definitely not in a place where they would neutralize any additional fiscal stimulus by raising interest rates.’

I disagree with his statement. They have effectively raised rates, by paying interest on reserves. And the federal government has done the same, effectively tightening the money supply, by requiring good banks to accept what amounts to loans with 6% interest rates with the “bailout”.

Erik Brynjolfsson June 20, 2010 at 8:47 am

Here’s a picture of the zero bound.

http://bit.ly/9AYKU7

As a result, the Fed’s usual option of lowering interest rates when inflation and employment are very low is not feasible.

The suggestion of sending checks to citizens, financed by printing money (aka a helicopter drop) is fine, but it is not that different from having the Fed buy up any bonds that the Treasury issues after further cutting taxes and/or further increasing spending.

BruceT June 20, 2010 at 9:19 am

Why has there been so little serious discussion about quantitative easing? Is the fear of future inflation so severe that it is completely off the table for policy makers?

hrg June 20, 2010 at 9:55 am

Where is the acknowledgement that we all eventually pay for printing more money in the form of higher prices, that this result adversely affects the poor, and that such policies to get “unemployed people to do useful things” have the long-run effect of creating a more dependable constituency for the government, which is the unfortunate political lesson resulting from the policies of the 1930s?

I am sorry, but this post sounds like a plea for a mutual admiration society between Tyler and Brad (with Tyler being spurned). Both men sound way too establishmentarian, and neither come out looking like terribly good economists.

E. Barandiaran June 20, 2010 at 10:34 am

And finally Tyler great news (sorry I read about it only in El Mercurio –the Santiago Chile’s newpaper):

http://www.emol.com/noticias/internacional/detalle/detallenoticias.asp?idnoticia=420003

In English I could find only this reference
http://www.france24.com/en/20100611-financial-crisis-le-monde-french-print-press-bourmeau

I look forward to a world in which French intellectuals and politicians are free from Le Monde’s complex. Let us hope that the NYT is next.

Tom June 20, 2010 at 11:06 am

“Tell us what unemployment you project.”

The same as it is now. Stimulus is not working not for economic reasons, but because of the additional and expected additional regulatory burdens placed on businesses.

You should expect capital gains taxes rising, cap and trade taxes, the healthcare funding debacle, backing away from free trade, and the bullying of investors to help favored groups (auto bailouts)to contract business activity.

Businesses (especially small)do not trust the current business atmosphere. They will not hire until they are sure their capital will not be confiscated.

malcolm June 20, 2010 at 11:19 am

Tyler: What is your model of the monetary transmission mechanism? Are you a quantity theorist
at heart? (If so, then how do you explain the CBO
analyses of the effectiveness of government fiscal policy?) The zero bound only matters if your theory of the transmission mechanism says it does.

Lord June 20, 2010 at 2:11 pm

As a proponent of 2, it should be a last resort as it is effectively a vote of no confidence in the monetary authority. Prior to doing this all favorable nominees should be appointed to open board seats, caution should be issued privately that more needs to be done, if no movement is forthcoming public announcement of policy preferences, and eventually public announcement of proposed actions to remedy the situation. One may need some clear evidence of shortfalls to persuade others to go along, perhaps even appearing to react reluctantly to calls of others to intervene. Combining it with something popular such as check issuance to everyone in a flat blanket amount, letting existing taxes separate the deserving from the undeserving, without borrowing to do so would be a good start. Potentially one time without disturbing general budgetary financing so investor fears are assuaged at the same time could work.

Bill June 20, 2010 at 3:55 pm

@Tom, Great rhetoric. Now where’s the analysis. Don’t look for it on Fox News. And, also, don’t state that stimulus hasn’t worked to prevent and turn around a worse situation when the non-partisan CBO says otherwise.

So far, no one has taken up the challenge of projecting unemployment and unused capacity if we do nothing.

Nor can they explain how, with .25% interest, monetary policy will get them out of this.

They must be Japanese economist at heart because that was what they were saying at the beginning of their lost decade.

Come on, tell me, how with 70% plus capacity utilization, with 10% unemployment, what your plans are. Cut interest rates? Fed rates are at .25% and the banks still haven’t fairly valued what is on their books.

DP Roberts June 20, 2010 at 4:57 pm

@Tom: good job telling what’s going on in the real world, not the chalkboard of academic organ grinding complete with monkeys and cups.

The stimulus hasn’t stimulated anything. The whole point of “stimulus” is to achieve a multiplier effect. There is no serious economist who can say with a straight face that ARRA has had more than a dollar for dollar impact on GDP. The evidence is quite clear the multiplier has been closer to zero than one, an indication of crowding out.

Would the situation have been worse without the spending? Of course. But you have to judge what the spending did for recovery, not what it maintained. It only temporarily maintained some consumption for the unemployed and some government workers. That’s all going away very soon. Retailers seem to be doing well because the best time to have money is when nobody else does. There are great bargains out there, but the LCD TVs bought today will not be bought next year.

Banks are not lending. Businesses are not hiring. Houses are not being built. Inventories have already been replenished after LIFO liquidation. CRE is dropping like a rock. The “recovery” has stalled.

An unemployed drunk could figure out that borrowing can help improve your situation in the short run. Only a fool believes in pump priming. “Useful works” is only slightly better than digging holes and filling them back up again. The usefulness is always a matter of opinion and usually involves things the spender wants, not things we need.

How many more Hoover Dams do we need?

DanC June 20, 2010 at 5:08 pm

Bill

The CBO is garbage in, garbage out. They are subject to the assumptions that they are given to work with.

The Obama projections of unemployment with and without stimulus were way off. Their projected unemployment without stimulus is below unemployment levels with stimulus.
http://gregmankiw.blogspot.com/2009/10/click-here-for-my-interpretation-of.html

Even with .25% interest rates projects can not overcome the burden of Obamacare, high energy costs (coming), higher taxes (coming), increased regulation (coming), and uncertainty about the future.

What to improve the economy – dump Obama policies.

What would Milton Friedman do

What is Washington’s advice? Fiscal stimulus; spend more; cut tax. It’s bad advice. Japan has introduced fiscal stimulus five times in the past seven or eight years and each time it’s been a failure and that’s not a surprise. Fiscal stimulus is not stimulating in and of itself, in my opinion. I think the Keynesian view is wrong on that issue. Fiscal stimulus has generally been accompanied by monetary expansion and then monetary expansion has been stimulating. However, in the Japanese experiments of the last five or seven years, fiscal stimulus has been accompanied by a restrictive monetary policy rather than an expansive monetary policy and the result has been that you’ve had continued recession or depression. If the Keynesian orthodoxy were out of fashion, Washington would be giving Japan very different advice. It would be saying to Japan: ‘Well, maybe it’s a good idea for you to cut taxes in order to increase incentives, but there is no need for the government to increase spending, that’s a bad thing to do. What you should do is encourage a more expansive monetary policy.’

http://www.abc.net.au/money/vault/extras/extra5.htm

Bill Stepp June 20, 2010 at 5:57 pm

“Useful works” is only slightly better than digging holes and filling them back up again. The usefulness is always a matter of opinion and usually involves things the spender wants, not things we need.

Exactly. If DeLong were to teach a micro course based on this, he should be hauled up for malpractice. Entrepreneurs start buisnesses, and investors invest capital in order to satisfy consumer demand, rather than the whims of government bureaucrooks, not that a business-illiterate statist such as DeLong would understand this.

And Tyler, why don’t you highlight some of DeLong’s illiberal and frankly totalitarian remarks, such as advocating shutting down the New York Times, Washington Post, and other businesses, Chavez-style?
(FTR, I occasionally look at his blog for the same Menckenian reason that people go to the zoo. It’s not like there’s much to learn there.)

Bill June 20, 2010 at 6:34 pm

I thought it might be interesting for Tom, DP Roberts and DanC to guess who the author of the following quote is relative to Japan’s deflationary spiral, as to zero bound interest rates and the inability of monetary policy to do much, leaving a choice of fiscal policy as the alternative.

The author is listed at the last line:

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.

However, a deflationary recession may differ in one respect from “normal” recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the “zero bound.”

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous “cross of gold” speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America’s post-Civil-War return to the gold standard.4 The financial distress of debtors can, in turn, increase the fragility of the nation’s financial system–for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of “debt-deflation”–the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America’s worst encounter with deflation, in the years 1930-33–a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.”

Ben Bernanke in 2002 commenting on Japan’s lost decade.

bkarn June 20, 2010 at 7:28 pm

“Where is the acknowledgement that we all eventually pay for printing more money in the form of higher prices, that this result adversely affects the poor, and that such policies to get “unemployed people to do useful things” have the long-run effect of creating a more dependable constituency for the government”

That’s exactly what DeLong and his ilk want, because he is little more than a hyperpartisan shill both wanting and willing to twist his expertise as an any-means-to-the-end tool. Tyler routinely trumpets folk who, despite being great minds, are clearly ideologically (politically or personally, driven by ego) incapable of intellectually honest discourse, at least on certain topics.

And I agree, it is interesting to note that the level of discourse here – as regularly tainted as it is by a couple of ideological and/or hyperpartisan twits, as it is in this thread – is galaxies beyond that of DeLong’s own blog. I think that speaks volumes to the quality of the leads of the respective blogs, and what kind of audience each attracts.

DanC June 20, 2010 at 7:38 pm

Ok Bill thinks Obamacare is a repeat of the miracle of the loaves and fishes.

On the CBO scoring;
These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented.
In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

http://gregmankiw.blogspot.com/2009/09/cbo-on-baucus-plan.html

And that is just one false assumption that was baked into that cake.

Simply the assumption that future Congresses will cut expenditures is a trip to la la land.

Cap and Trade will increase energy costs even as economies that are interested in growth, China, India, Brazil increase demand for oil.

Pelosi and Obama want a VAT tax. And you think the top 2% can fund all of the increased spending. Please get serious.

And Japan followed Friedman’s advice? Where, when. Not even close.

And if Europe had followed Friedman’s advice against the Euro they would be better off today BTW.

Where did Bernanke talk about the failure of monetary policy? Once again Bill sees something that isn’t there.

indianajim June 20, 2010 at 8:20 pm

The dichotomy of “do something” or “do nothing” is false: If an individual named say, Sam, were spending beyond his means on gambling and liquor, no one in his right mind would tell that spending more would solve anything. Quite the contrary; the only sage advice is for Sam to curtail his gambling and boozing. Joe Biden, like any vulgar Keynesian, says that the solution to American’s economic woes and debt problems is for government to “spend, spend, spend.” Biden’s advice, and that of all vulgar Keynesians, is as poisonous to the American economy as it would be to advise a person like Sam to drink up to steady his nerves to be able to double down at the gambling table. The only sage advice is for this nation is to slash G and T simultaneously, sizeably, and immediately (slashing G more than T). And, BTW, slapping more green ink on paper is not the solution at this point either.

Bill June 20, 2010 at 8:50 pm

Tom, Oh, Come on. This pitiful story of the small businessman being unwilling to do anything because of the “regulatory climate”.
Businesses make decisions based on whether there is demand for their goods and services first and foremost. When an economy is running at 70% plus capacity, I just bet businesses are “waiting” because — not because of demand — but because of Fox News “uncertain regulatory climate”. By the way, I am in a business also–a lawyer–and I work with Fortune 500 companies and don’t buy this uncertain regulatory climate claptrap, nor do they. They look at aggregate demand.

But, where I did see “uncertain business climate” take a hit was on the 700 point drop on the day that the House did not pass TARP in 2008.

Now, that was something you could point to.

What we have now is just deadlock with timid politicians scared by Tea Party nuts. A real winner.

DanC June 20, 2010 at 9:41 pm

I wonder if Bill has taken a macro class.

From Friedman
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

http://www.hoover.org/publications/hoover-digest/article/6549

DanC June 20, 2010 at 11:29 pm

I hope Bill will list his fortune 500 clients that don’t care about after tax income, changing regulatory standards, or have such certainty on the future.

So please list me what companies only care about “aggregate demand”. I would like to short companies with such poor management.

Or even just the top five.

a June 21, 2010 at 1:29 am

BDL writes at the link: “Marginal costs of further stimulative macro policy in the G-5 economies are very low in every model anybody has written down or spoken out to me. ”

IMOH we need a Dr. Johnson to kick a rock in reply. If macro really doesn’t have a model in which the costs of further stimulus are low, then macro is in far worse shape than I imagined.

I can well imagine BDL in an investment bank a few years back saying, “Well, all the models I know of say that housing prices won’t go down.” If all macro models really show that the marginal costs are low, then could we not have macroeconomists apply a little critical thinking about their models, before they start giving advice?

Ricardo June 21, 2010 at 8:01 am

Giving the unemployed “useful work” diverts them from seeking or making corrective actions now. We now have career unemployed people with up to two years of lapsed job history.

Wait, you are saying we should not hire people who have been unemployed for long stretches of time because we will give them a disincentive to find private-sector work? Have you ever actually worked for a recruiting or HR department before in the private-sector? If you have, can you tell me honestly what you do with a resume you see that has a year-long or 18-month long gap in employment?

The best thing that can happen to an unemployed person’s future job prospects is to get hired. Now. Anywhere.

Working now signals to future employers that you are not a loser, an alcoholic, a drug addict or a felon. That is a very useful signal to send.

Tom June 21, 2010 at 9:26 am

Bill, one more point.
Just read in the WSJ ( I know, just like Fox News) that businesses have 1.85 trillion on the sideline. Highest since 1952. Sounds like they have enough cash to do whatever they please.

Yancey Ward June 21, 2010 at 11:33 am

No, jimbo, but we are rearranging the claims on future production.

Andrew June 21, 2010 at 12:32 pm

Bill, there are other possibilities. One is that there will be deflation and it cannot be avoided. I’m running out of fingers to count how many times we’ve tried to avoid it in the past decade. To use the cliche, if the problem is debt, then more debt won’t solve it. I don’t think the problem is debt per se, but that we just came off an era of pervasive uncritical thinking about our spending. While it may not be a good time to suddenly become critical about everything we buy, it is probably never a bad time to make sure that what we buy is worth it.

This is what the Tea Parties are mad about. They aren’t mad about people having jobs. They are mad because our government’s solution to indiscriminate spending is indiscriminate spending.

Dan H. June 21, 2010 at 5:11 pm

Bill said,

“Tom, Oh, Come on. This pitiful story of the small businessman being unwilling to do anything because of the “regulatory climate”.
Businesses make decisions based on whether there is demand for their goods and services first and foremost. When an economy is running at 70% plus capacity, I just bet businesses are “waiting” because — not because of demand — but because of Fox News “uncertain regulatory climate”. By the way, I am in a business also–a lawyer–and I work with Fortune 500 companies and don’t buy this uncertain regulatory climate claptrap, nor do they. They look at aggregate demand.”

Your experience is with the Fortune 500. I work in the Fortune 500, but I’ve also been a small business owner (for 15 years). And let me tell you, the things that drive small business are NOT the same as the things that drive large corporations.

This may be one area where macroeconomists consistently go wrong. They simply don’t understand the psychology of the small business. They don’t understand what makes entrepreneurs tick, and what factors influence their decisions.

Small business people don’t sit around reading financial reports about aggregate demand – large corporations do. Small business people think more about opportunities and ideas and building a better mousetrap.

But above all, the main driver in the choice to start a small business (or not), or to expand a small business (or not) is RISK. And most small businessmen are not lawyers or accountants. They are experts in their own domains. I may start a restaurant because I believe I’m the best damned cook around, or because I know a lot of people in my neighborhood who complain about a lack of places to eat. Or I may be an engineer contemplating leaving my corporate job and striking out on my own with an idea, because I think it’s a good one that people will want.

Making this choice means giving up security for uncertainty. It means putting your kid’s college fund on the line. It’s personal. And for most of these people, some of the biggest fears involve government. Will I get that permit on time? Will government pass a law forcing me to rebuild my bathrooms? How much will it cost me to hire an accountant to do my taxes? What if the tax law changes? Am I going to have to pay for my employee’s health care? If so, how do I do that? How much will the regulatory burden of the new health care bill cost me?”

An expert carpenter may want to start his own carpentry business, but for a guy like that, accounting and regulations are scary. He’s not trained in those fields, so they’re an unknown. He knows that the minute a lawyer or an accountant is added to his business plan, costs skyrocket. He’s heard horror stories of businesses being shut down because the owner missed a permit or forgot to fill out a form. He lives in fear that his lawyer will inform him that a new government mandate is going to shut his business down.

This is not hyperbole or unreasoning fear. The ‘lead in toys act’ that passed last year devastated small thrift stores and second-hand toy stores. Anti-smoking laws decimated local pubs and bingo halls.

Entrepreneurs often have great faith in their own abilities. They don’t like putting their fortunes in the hands of strangers.

As for stimulus, that rarely helps small business. More likely, the stimulus money will go to a large corporation, which will then have a competitive advantage over small business. The Davis Bacon act ensures that only larger, unionized businesses get federal contracts. Or at least, it seriously biases the playing field towards them. So even the offer of a stimulus can cause small businesses to react negatively.

It’s not just the cost in money that slows down new business growth, or the financial uncertainty. Sometimes it’s just the distraction of government demands. The guy who’s willing to take a risk because he really wants to build that new widget he thought up may look at the array of regulations, paperwork, liabilities, and other hassles the government is dropping on him and say, “Oh, screw it.”

I’ve had this discussion with my wife when considering whether to hire a new employee. Small business is almost always under-capitalized. A new employee at first often means extra work – especially that first employee. And at least at first, his or her salary usually comes right out of the salary of the business owner. It’s a scary thing to do. Running a business yourself is relatively easy. Add an employee to the mix, and you’re taking on a whole new level of responsibility. So the first place small businesses cut back is in hiring new people.

Finally, entrepreneurs often take big hits to their income and standard of living starting out. They give up their corporate jobs and pensions, and put all their money into the business and live like paupers for a while. And why? Because they hope to get rich. Or at least, they hope to be successful and reasonably well off, while having more freedom. So the specter of higher taxes on the rich in the future can act as a serious brake on business startups. It biases the risk/reward evaluation more towards risk, as the reward curve is flattened by progressive taxation.

I believe that an atmosphere that encourages entrepreneurism is a fragile thing. It’s very easy to screw it up. Demonize the ‘rich’ a bit, threaten new taxes, downplay the romance of entrepreneurial spirit, promise wave after wave of new regulations to ‘check the excesses of the free market’, shuffle a trillion dollars to cronies and local politicians and unions, promise to make it easier to unionize and to hold businesses hostage to union demands once a union is formed, and you too can destroy small business job creation.

DP Roberts June 22, 2010 at 1:19 pm

@Ricardo

Yes, I actually have worked in HR in the private sector and was a hiring manager in the private sector. I have also been a hiring manager in the public sector.

Your statement is correct but overly general. If someone is skilled at job X and they are unemployed for a long period of time, their skills in X deteriorate; they are less desirable.

If someone is skilled in job X and after a period of unemployment takes a more or less temporary job Y which is slightly related to X, that sends a signal the person is not a bum and has maintained some skills but it HARDLY brings them to the top of the hiring list. He will still be evaluated on his ability to perform X RELATIVE to the candidate pool.

If government hires the person for “useful work” Z which is likely unrelated to X then it’s no better than being unemployed. Worse, it prevents him from taking Y which is peripherally related to X.

BTW, I was working as X in 2003. I took a job W from 2003 to 2007. I was unemployed for five months and took job Y. Then five months later I found a job X. Had government provided me temporary employment I would not have found job X. Finding a job is a full time job!

I am not saying that work isn’t better than no work. I’m saying that any job provided by government for “useful work” (whatever the hell that means) is MORE LIKELY to be unrelated to a person’s primary skillset and divert their attention from gainful private employment in their skillset. If this “useful employment” is for the most-affected workers in construction, then government is misallocating resources and robbing the workers of opportunities to gain new skills desired by the workforce.

It’s an issue both of incentives and misallocation. Government seldom gets these right.

Tom Grey June 23, 2010 at 9:42 pm

it is not that different from having the Fed buy up any bonds that the Treasury issues after further cutting taxes and/or further increasing spending.”

Huge difference of who decides how the money is spent.

Tax cuts leave cash with those responsible enough to use resources in a sustainable, wealth creating way.
Positive Return on Investment.

Gov’t spending is done by bureaucrats with negative rates of return — meaning you might get a $100 million building, but it costs $200 million.

The magic of the “market” is that all deals are win-win. The tragedy of gov’t spending is that it is funded by force, a win-lose lost for the workers who created the taxed wealth.

Bill June 24, 2010 at 7:58 am

@DanC, Also, what you might not know, what is provoking the BRT (Business Roundtable) are provisions in the tax code tightening up provisions that have enabled multinationals (and even some non-multinationals with licensing capacity) to evade US taxes through transfer pricing mechanisms. Of course, domestic firms without foreign operations cannot use these tricks to reduce their taxes below 20% as most MNCs do.
As to regulation, yeah, I would expect Verizon not to like that.

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