Employment growth has been terrible for the last few years, and Keynesian economists think they know why – companies aren’t hiring because demand for their products is weak in a debt-burdened economy. The problem with this notion is that corporate performance has actually been quite good. On a rolling four-quarter basis S&P 500 earnings have doubled from the 2009 trough and are 8% above their 2007 highs. Doctrinaire Keynesians claim there is nothing wrong with the labor market that another $1 trillion in government spending – or is it $2 trillion? – wouldn’t fix.
They would do better to consider another Keynesian insight having to do not with aggregate demand but, rather, with the “animal spirits” of businesses. Unlike his more doctrinaire disciples, at Princeton and elsewhere, Keynes had a nuanced appreciation of the contingent nature of human behavior. In the General Theory he wrote:
. . . a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. (emphasis mine)
President Obama has done a great job of snuffing out “spontaneous optimism” and “animal spirits” in the business community. Much of the economic weakness Keynesians blame on lack of demand is actually caused by over-regulation and hostility to business. Call it the Great Suppression, which has several dimensions, including health care reform, financial reform, the war on fossil fuels, and anti-capitalism. Start with:
Healthcare Reform
We often hear it affects “one sixth of the U.S. economy,” but that is a gross understatement because it makes it far more costly and complex for all small businesses to hire workers. Figuring out healthcare rules has become as daunting as calculating your taxes, maybe more so. Consider this small section of the law – a tiny slice of a 2700 page monstrosity which itself requires further elaboration by HHS and other agencies:
SEC. 45r. EMPLOYEE HEALTH INSURANCE EXPENSES OF SMALL EMPLOYERS.
“(a) GENERAL RULE.—For purposes of section 38, in the case of an eligible small employer, the small employer health insurance credit determined under this section for any taxable year in the credit period is the amount determined under subsection (b).
(b) HEALTH INSURANCE CREDIT AMOUNT. – Subject to subsection (c), the amount determined under this subsection with respect to any eligible small employer is equal to 50 percent (35 percent in the case of a tax-exempt eligible small employer) of the lesser of –
(1) the aggregate amount of nonelective contributions the employer made on behalf of its employees during the taxable year under the arrangement described in subsection (d)(4) for premiums for qualified health plans offered by the employer to its employees through an Exchange, or
(2) the aggregate amount of nonelective contributions which the employer would have made during the taxable year under the arrangement if each employee taken into account under paragraph (a) had enrolled in a qualified health plan which had a premium equal to the average premium (as determined by the Secretary of Health and Human Services) for the small group market in the rating area in which the employee enrolls for coverage.”
This command and control legalese goes on for hundreds of impenetrable pages. Obamacare increases not only the cost of employing workers but the legal risks of the employer. A firm with fewer than 50 workers is not obliged to provide coverage, but if a firm goes “over the limit” it must provide coverage or pay a steep fine for all of its workers.
Financial Reform . . . or . . . Jamie Dimon’s “Great Fear” Is Realized
Washington also threw a big wet bureaucratic blanket, Dodd Frank, on the financial sector, which employs nearly eight million workers. Here, too, small business is hurt most because unlike large corporations they cannot afford platoons of lawyers and lobbyists and usually are not self-financing. In June 2011 JPMorgan’s Jamie Dimon got to the nub of the matter in a prescient exchange with Fed Chairman Bernanke. Dimon started with a lengthy litany of reforms:
“I have this great fear someone is going to write a book in ten or twenty years and the book is going to talk about all the things we did in the middle of the crisis to actually slow down recovery…..I made a list of all the things already done and a few things to be done. Already done: Most of the bad actors are gone, thrifts, all the mortgage brokers and obviously some banks. Off-balance sheet businesses are virtually obliterated, some are gone – SIVs. A lot of the insurers used to guarantee them are gone. CDOs are gone. Money market funds are far more transparent. Most very exotic derivates are gone. There is far more transparency in any remaining off-balance sheet thing. Fannie Mae and Freddie Mac are in the government hospital. Higher capital and liquidity are already in the marketplace—we estimate more than double what it was before. There are tougher requirements, boards are tougher, risk committees tougher. There is an oversight committee. Regulators I can assure you are much much tougher in every way, shape possible. One of the core problems was mortgage underwriting, which has gone back to what it was 30 years ago. I think it’s a good thing. But no more sub-prime, no more alt-A, no more mortgages being packaged. The CMBS market has been completely transformed, there is far more transparent accounting. We’ve been through two stress tests, one at Treasury and one at the Fed. I believe most of the banks passed the recent ones with flying colors, partially for the reasons I just said. Now we are told there are even higher capital requirements, the so-called siffie charges et cetera and we know there are 300 rules coming.” (Emphasis mine)
Then Dimon asked: “Has anyone bothered to study the cumulative effect of all these things? And do you have a fear like I do that when we will look back and look at them all, they will be the reason it took so long that our banks, our credit, and our businesses – and most importantly, job creation start going again. Is this holding us back at this point?” (Emphasis mine.)
Bernanke’s admirably candid response: “….Has anybody done a comprehensive analysis of the impact on credit? I can’t pretend that anybody really has. You know, it’s just too complicated. We don’t really have the quantitative tools to do that.” (Emphasis mine)
Judging from recent jobs data, a year later it appears Dimon’s “great fear” was well-founded. The Financial Times reports that in May nine investment banks met in Boston with big buy-side shops including Fidelity, Columbia Management, and Wellington. The buy-siders complained bitterly about the lack of liquidity in the corporate bond market; tougher capital standards and the Volcker Rule make banks less willing to hold large inventories of bonds to facilitate market making. Lower liquidity raises capital costs, especially for smaller companies.
“Transforming” the Energy Sector
Remember “climate change”? Obama’s energy policy attacks fossil fuels while subsidizing green energy projects that were expected to create “720,000 job years by the end of 2012.” A chapter in the 2010 Economic Report of the President was titled “Transforming the Energy Sector and Addressing Climate Change,” even as the Energy Department was forecasting that in 2035 renewable energy, excluding biofuels, would account for only 3% of U.S. production while fossil fuels would still account for over 70%. Obama’s hostility to fossil fuels hurts not only energy producers (which directly employ 279,000 people) but their customers struggling with unnecessarily high energy costs.
Anti-capitalism
Businesses under attack from their own government are disinclined to hire domestically. Just ask the CEO’s of Emerson Electric, Intel, 3M, Loews, Boston Properties and Wynn Resorts, who in various ways have all made this point, even though CEO’s generally do not like to criticize one of their biggest customers, Uncle Sam. A year ago David Farr, Emerson Electric’s CEO, said on an earnings conference call:
There is a flood of regulations coming at us from the U.S. The incentive to invest in the U.S. is negative. And from my perspective I have all the clarity I need. They’re spending. They’re taxing. Our tax rate in the US will be over 36% in the US this year. We pay, actually pay, the U.S. government over $500 million in taxes this year, and they say they want to raise it even more. I run a company. I have a lot of money to invest, but I’m not going to invest it here.
Obama blames our economic woes on the Bush tax cuts and the recklessness of capitalists – never mind Fannie, Freddie, and the Community Reinvestment Act. Average Americans who “played by the rules” supposedly did not benefit from “the most expensive tax cuts for the wealthy in history” while affluent Americans have failed to “pay their fair share.” (In fact the top 10% pay 71% of income taxes while the bottom 50% pays 2%.) High earners have been anticipating an imminent tax hike ever since Obama became President – in addition to Obamacare’s tax hikes on the affluent (which start in six months).
Beware Simplistic Equations
Some economists live in an abstract, simplistic, ahistorical world where the behavior of millions of people supposedly can be modeled in a single chart or a few equations. In the real world policy, attitudes, ideology, and “animal spirits” matter. Lord Keynes recognized this even if some disciples do not. Obama’s heavy-handed regulation has had predictable results. We first suggested in the summer of 2009 that we were headed for a third consecutive “jobless recovery” made worse than the first two by over-regulation.
