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Economic Myths Debunked Debunked IV

Mother Jones says:

Myth 4: Regulatory Uncertainty is Clogging the Economy

In its most recent quarterly survey (PDF) of small-business trends, the National Federation of Independent Business reports that sales—i.e., lack of demand—is the No. 1 concern, beating out taxes, regulations, inflation, and everything else. This is backed up by another survey by the Small Business Majority, in which nearly half of respondents said economic uncertainty was one of their business’ top problems; 13 percent said regulation.

There are two problems with this ‘debunking’, the first is, according to the BEA, aggregate demand has returned to pre-recession levels.

People, please look at the data. They are conveniently available to one and all at the website maintained by the Commerce Department’s Bureau of Economic Analysis, the outfit that generates the national income and product accounts for the United States.

According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

The second problem is the survey has its own inherent selection bias. Two parties have not been included in this survey. The first group represents those small business owners who are no longer in business; the second those people who intended to create a business and couldn’t, for whatever reason.

The problem with only asking existing businesses about their current problems is they are almost always going to say “low sales” whether the economy is good or not. The pressure to make sales is constant in business. Also, existing businesses have successfully navigated the regulatory barriers start-ups often encounter and existing businesses have yet to be put out of business by either government taxes and regulation or lack of sales (among many other reasons businesses fail).

And look at the survey results:

Government, either through taxes or regulation, represents the #1 problem for 36% of respondents, which is higher than the 23% worried about their sales. In fact, inflation and cost of labor could also be tacked on to the “government is a big problem” list.

This survey does nothing to help the Mother Jones point of view that more stimulus spending is needed to help small businesses. At best, the results are mixed. Government is still a big problem to small businesses, more so than their larger corporate competitors or even a lack of sales.


5 Responses

  1. What’s with this “aggregate demand” hocus-pokus you write of?

    Even if such an “aggregate demand” curve existed, and if it was in the same place as 2007, costs are higher than 2007.

    The 2010 Nobel winner’s research created an equation for the individual firms decision to hire or not. Believe it or not, many firms actually have to pay more during the recession to hire an incremental worker.

    • The current liberal paradigm is the government needs to spend more money in order to boost aggregate demand. I’m replying to this by saying 1) the economy has already basically done that (CPI increases aside) and 2) their economic ideas are incoherent anyway.

      I have no idea what the rest of your comment means though.

  2. Right.

    In the event yer wikipedias wasn’t working yesterday, here’s a quick summary of the 2010 Nobel work:

    Firms hire additional worker if wage < benefit. (no shit). But the work that helped them win the Nobel was creating a formula to calculate what the prevailing wage is.


    Basically, if firm's RIOs are depressed by additional taxes and regulations, Unemployment Insurance can be like a double-whammy. It inflates the wages needed to pay to get worker to work.

    Let's say we have a firm, that values worker "M.A." at $10/hour incremental benefit. But if UI is paying worker "M.A." at $11/hour to sit on his ass, eat Papa Murhpy's pizza and buy on electronics. Thus, the firm would need to pay him $12/hour to pull "M.A" away from his pizza and Star Wars videos. But it doesn't work for the firm to hire him at $12- therefore they don't hire.

    • That’s actually a great article. The utility of being unemployed was one of the factors, but another involved the future value of a new employee in a world of increasing taxes or regulations. Interesting stuff.

  3. Thanks. It’s nice to see the last few Nobels awarded to non-Keynesians.

    It wasn’t the 2010 awardees, but maybe some European economists, who theorized that UI benefits should be paid based on future expected income and not based on historical income.

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