What’s holding back small business?

by on September 16, 2010 at 1:08 pm in Economics | Permalink

Catherine Rampell has a very useful graph, displayed here, and cited favorably by Krugman and also deLong.  Karl Smith correlates sales complaints with high unemployment and complains about Arnold Kling.

Sales

Krugman wrote, for instance, "Businesses aren’t hiring because of poor sales, period, end of story".

I didn't read this graph the same way.  I saw poor sales as a "biggest problem" for fifteen percent (or so) of small businesses in periods of full or near-full employment.  I also see "poor sales" as a "biggest problem" for about thirty percent of small businesses today.  That change — about fifteen percent of the total — struck me as relatively small and indeed puzzlingly small, if indeed we are in a liquidity trap and weak AD is the overwhelmingly dominant problem.  (In fact I might expect an Austrian to cite such a number in support of their story.)  I do think weak AD is an important problem to be addressed, I just don't think the absolute levels here imply "end of story."  I look at that graph and think "this is a multi-factor problem."

I also note that larger businesses have fairly high levels of profit right now and that the pattern of unemployment — lots of permanance, and among the less educated — is not obviously correlated with where we would expect to find either most nominal wage stickiness or the greatest lack of spending.

I note as well that the most plausible sectoral shift stories also imply that businesses will complain about poor sales.  Furthermore, many of the synthetic RBC-neo-Keynesian models — which long ago displaced the simple MC-driven RBC models of the early 80s — are consistent with these data as well.

A lot of the correlations in the diagram don't quite make sense, such as "inflation" becoming a much more serious problem in 2007, or how "insurance cost" changes.  And might such a diagram ever imply that we should lower taxes on business?  Russ Roberts comments:

In fact, if there had been one category called “Taxes and Government Regulations” it might have been seen as the biggest problem, listed by 36% of respondents, up from 29% in the year before and surpassing sales as the biggest problem.

One key question is how to get sustainably higher sales, most of all for wealth-elastic and income-elastic and credit-elastic goods and services.  This diagram doesn't tell me how to fix that problem or where that problem comes from, but that is a critical issue, maybe the critical issue.

Overall, I look at that chart and I think the jury is still out, to say the least.

Andrew September 16, 2010 at 1:22 pm

Interesting how interest rates goes to zero right before while inflation blows up.

RC September 16, 2010 at 1:25 pm

If we want to look at this graph to gain insight into the causes of the current slump, then the important thing to look at which factors have changed relative to historic patterns. And that shows that concerns about poor sales have gone up significantly, while concerns about regulations and taxes have not.

Matt September 16, 2010 at 1:31 pm

One other way to read the graph is to say that over 60% of small businesses have worse problems that week sales

k September 16, 2010 at 1:49 pm

if you stare at the graph long enough the colors appear to change.

this is meant in a literal and metaphorical sense.

Samuel September 16, 2010 at 1:58 pm

I agree with Tyler that the graph is by far not definitive, and I would even go further to say it’s completely useless if our goal is understanding the true causes of macroeconomic change.

What IS definitive about this post, it seems to me, is the extent to which Krugman is an ideologue and Tyler is not. I have always been sceptical of the Krugman bashers, but reading his nytimes post was incredibly annoying. He is so arrogantly certain of his position on such weak, flimsy evidence. I say this as someone who in the end agrees with Krugman’s stance that recessions are predominately maintained by deficiencies in AD.

Travis Ormsby September 16, 2010 at 2:08 pm

This is certainly a case where rates of change are more important than levels.

Since the diagram adds up to 100% for each survey period, the levels give no idea the degree to which the problems have changed over time. Since we’d like to be able to explain why businesses are having more problems now than in, say, 2007, rates of change is the appropriate metric. Even if 99% of small businesses cited poor sales as their biggest problem, that doesn’t point to low AD as a source of economic stagnation if it’s 99% in the good times too.

But “low sales” do in fact show a dramatic increase of 100% relative to full employment. Even concatenating “Taxes” and “Government Requirements” signifies a change of less than 25%.

And happyjuggler0, your concern is a non issue since the survey is repeated often. Business that have gone out of business would have been caught during a previous period in which they were about to go out of business.

anon September 16, 2010 at 2:13 pm

This is probably one of the worst ways that this data could have been plotted. The spikes and noise makes it impossible to compare anything. A local smoothing filter would have worked wonders. Really, for a 13 year time scale do I need to know the daily noise to make sense of the data?

Maybe not stacking the series would make sense too.

Andrew September 16, 2010 at 2:53 pm

I don’t like these type charts. Hard to compare. The bottom one is always the one emphasized because that’s the only one that is easy to compare. Extremely sensitive to how the data is aggregated. Etc. This is going to sound like nit picking except that I always dislike these style charts.

The question I’ve been asking for 2 years about fiscal stimulus is how to target sales to those specific businesses that have irrationally low sales.

Lou September 16, 2010 at 3:07 pm

“Inflation” in 2007 no doubt refers to the cost of energy. It doesn’t meet the technical definition of a sustained increase in prices, but the responses weren’t being given by professional economists.

spencer September 16, 2010 at 3:10 pm

Russ has to have alot better eye sight than me if he can get the detailed reading from this chart that the sum of two categories rose from 29 to 36.

It looks to me like the long term trend is for govt and taxes to decline as a share of the total.

But then again, my eye sight is not what it use to be.

Ryan Vann September 16, 2010 at 3:18 pm

Spencer, Russ’ eyesight may or may not be better than yours, but that is irrelevant. He derived those numbers using the actual numbers from NFIB, not from eyeballing the graph. The graph is definitely an eyesore though.

Palms September 16, 2010 at 3:37 pm

The lack of major trends in the graph suggests to me that alot of business owners would have the same answer regardless of the environment. Want to rail on taxes, poor sales, labor costs, labor quality? Then finally somebody just asked for your opinion! Take advantage!

I guess polls just annoy me. Turning opinions into hard numbers. A quantitative analysis of each small business could come up with an entirely different graph.

Sigh.

BKarn September 16, 2010 at 4:04 pm

“Look, this “uncertainty” business is nothing but a political ploy. Don’t fall for it. Sure there is uncertainty, but it is around normal matters like sales and the state of the economy.”

Insisting concerns over government action to come is “nothing but a political ploy” is, itself, a political ploy.

Alex September 16, 2010 at 4:39 pm

It would be nice if Karl Smith’s final figure had the same time-line as Catherine Rampell’s figure… As it stands it ends sometime in 2011 and it is hard to tell how the timing fits in exactly-unemployment looks like it may be a lagged response to poor sales.

Brad_sk September 16, 2010 at 6:11 pm

Removing Italics. Done

Jay September 16, 2010 at 6:15 pm

Paul is preying on the Paulie Krugnuts who are too stupid to look at the data and think for themselves.

20% of the NFIB respondents are construction companies!!!

So lets say during the housing boom 5% of construction firms cited low demand (just below the indexes average).

And lets say that during the housing bust that increases to 60% (and I bet I am being conservative with this estimate).

(60%-5%) * 0.2 = 11%.

The response of weak demand increased from 10% to 31%. Half of that increase is guaranteed to be solely because of construction My estimates put it at explaining 2/3 of the increase.

I wonder if Krugman is too stupid to realize he is indirectly promoting the government start another housing bubble. Krugman’s utopia where we build bridges to nowhere in every state will not boost business for Joe the Drywaller.

Geof September 16, 2010 at 7:44 pm

I think that the strongest argument for “poor sales” is that — at least with my 30-second stare — it appears that poor sales increased the most relative to 2004-2007.

Tyler Cowen September 16, 2010 at 9:16 pm

Mr. E, no one is doubting some businesses are hurting in sales. One question is whether the absolute percentage is high enough to support a story based exclusively on *aggregate* demand, rather than selective shocks, and that is far less obvious.

Bill September 16, 2010 at 9:46 pm

The way you can look at the graph is to ask what is the biggest delta between 2007 and today, and, despite what you may think of him, Krugman is objectively correct.

Just because it is Krugman, doesn’t make it wrong. If you are an economist, you have to rectify to data and not the author.

FE September 16, 2010 at 10:05 pm

As an aside, note that “quality of labor” fluctuates with the employment rate, but “cost of labor” stays at a constant low rate over the entire period. So when the labor market gets tight, the universal response is to hire lower-quality labor rather than raise wages.

Karl Smith September 16, 2010 at 10:40 pm

@Alex

I think the data end at the same point. The St Louis Fed chart generator tags on extra space sometimes for reasons I don’t completely understand.

@Tyler

I think complains is a bit strong. I think I said some nice things about Arnold and I meant them. I just also think that we want to stick with the most parsimonious data driven story that we can.

We could think up a lot things. However, only a subset of those things actually concords with reality. Our goal is to discover which subset that is. Not make elegant esoteric arguments.

joan September 16, 2010 at 10:58 pm

Since the data is not weighted by the number of people that a business employs, I don’t think it is possible to determine who is right without more information.

However one thing that got my attention is that very few employers complained about the quality of workers after the the housing bubble begin to form

a September 17, 2010 at 3:28 am

1/ I think it’s a Rorschach test.

2/ Surveys asking small businesses what their major problem is, probably don’t reveal what their major problem really is.

WindyCityEagle September 17, 2010 at 8:38 am

What I find interesting is that Quality of Labor seems to have declined in the recession, while Poor Sales has increased. Granted, I only have 20/40 vision, but that’s what struck me about the graph. May I posit that the two go hand in hand, if a business can hire all the A+ level talent that it wants, then it’s going to seem like weak sales are biggest issue, because all the components are in place to grow the business, but the owner just can’t because of poor sales.

Tom September 17, 2010 at 12:11 pm

mulp:”Since Obama was certain to be elected, health care costs fell dramatically as a concern”

Yes, we still expect increasing healthcare cost, more increasing even. Thing is now the major concern is the over-reaching government.

You hit someone in the head with a 2×4, the forget about having their foot stepped on.

R. Richard Schweitzer September 17, 2010 at 11:01 pm

AND – the sum of all these factors: which is the difficulty of forming a coherent expectation.

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