EPI’s Paper on Regulatory Uncertainty, AEI’s Respond and Small Businesses Freaking Out

There are a variety of arguments you see on the “supply-side” argument on why the economy is so weak. The one that generates the most heat is “regulatory uncertainty” – a way of explaining what is wrong with the economy that fits nicely with the Republican and conservative agenda of repealing the healthcare and financial reform bills specifically and regulation generally.

Larry Mishel has a great paper over at EPI – Regulatory uncertainty: A phony explanation for our jobs problem – which debunks this claim using three points. Ezra Klein has a summary.  Here is the key graph:

As asymptosis points out, this story requires that uncertainty is driving business to be “investing more in equipment and software — which is a permanent sunk cost – than in any recent recession, but they won’t hire workers, who they can fire if necessary?”

I was curious what kind of blowback this paper would get from conservative wonks.  Over at EPI’s spiffy new blog, Larry Mishel responds to an American Enterprise Institute review of the paper by James Pethokoukis, Why Business Uncertainty Really Is Killing Growth, noting that there’s no there there.  Pethokoukis:

EPI points out, for instance, that a recent survey of small businesses found “poor sales” to be their single-most commonly cited problem. So time for Uncle Sugar to borrow/spend more money pumping up consumer demand, right? Maybe not. While it’s true that 25 percent blamed “poor sales,” 37 percent blamed either regulations (19 percent) or taxes (18 percent.)

Another piece of EPI evidence: Private sector employment is up 1.1 percent during the 25 months of this recovery vs. a 0.6 percent drop during the “jobless” recovery following the 2001 recession. But go ahead and contrast the Obama recovery, instead, to the Reagan recovery where private sector jobs grew 9.9 percent during its first two years. One difference then: taxes and regulation were on a pro-growth trajectory—unlike today. (EPI credits Fed easing rather than Reaganomics.)

Maybe EPI should run its own survey and ask entrepreneurs whether they would like to operate in an economy where government spending was running at 28 percent of GDP, revenues 24 percent, and big budget deficits extended as far as the eye could see. That is, by the way, exactly the fiscal scenario EPI recently concocted.

I’m pretty certain of how business would answer.

Pethokoukis has just joined AEI, presumably based on the strength of his recent Commentary magazine article against the stimulus, an article which had a brutal takedown by Ezra Klein right after it came out and to which Pethokoukis hasn’t responded.  (Seriously, it’s a brutual takedown.  It’s the econ wonk equivalent of “Why are you hitting yourself?”)

Three things.

1.  There’s an important nugget buried here about right-wing arguments on the economy in this Lesser Depression.  Notice how Pethokoukis’ evidence is actually an hypothesis.  For he’s making an argument: that businesses are responding to growing uncertainty on budget deficits, taxes and uncertainty, and if you asked them it would be obvious.

Mishel does ask them by observing their aggregated behavior in the marketplace – their choices concerning sunk-cost business investments – as well as their answers to business surveys, etc.  Pethokoukis simply repeats the hypothesis but stronger, and believes this is some sort of actual piece of data.  But “businesses hate the budget deficit” is a theory, not a conclusion and especially not a piece of evidence.  Where’s the evidence?

2.  I really should just join the right-wing.  Here’s how Pethokoukis, if he wanted to, could structure the Small Business’ Single Most Important Problem data to try and refute Mishel.  Here’s the Single Most Important Problem, with four relevant data points.  December 2007, when the recession started.  April 2010, when it became clear that Obama was going to be successful in passing Health Care and Financial Reform.  November 2010, when the GOP routed the Democrats out of the House and reform was dead and it looked like Obama might try to tack to the center, and now:

(Data: Here’s May 2010, covering April; December 2010, covering November; September 2011, covering August; January 2008, covering December 2007.)

Instead of posting all the data you post just a little bit of it, and here’s what you type at the AEI blog:  “As you can see from these two data points [Regulation, April 2010 and now], when you compare regulation concerns between when Obama passed Health Care and now, regulation concerns have gone up!  Also Poor Sales is declining since then, so liberals are destroying the economy.”

You don’t mention regulation concerns only went up since the GOP took over, you forget to mention that there’s a separate “cost/availability of insurance” index which is down, you especially don’t mention that taxes as a concern is down in 2011, and you extra especially don’t point out the massive changes between poor sales and labor quality/cost from the beginning of the recession to now.  Just sneak that one gotcha datapoint there so there’s some data to back up your idea.  Now where’s my oil company funded right-wing scholar position in DC?

3.  I actually haven’t looked at the small business data in a while.  And wow, it had a terrible August.  Business confidence is plummeting in real-time due to, yup, demand problems.  Check this out:

Confidence in the future of the economy crashed in August, taking the Small Business PESSImism Index down 1.8 points to 88.1. This was the sixth monthly decline in a row. The expansion is officially two years and two months old, but the small business half of the economy is still in the “tank”. Expectations for real sales growth and business conditions were the major contributors to the decline for the second month in a row.

Confidence has been declining for six months, with a big drop in August due to sales and general business conditions, not regulatory issues or cost of labor. Here’s their confidence metric:

And here you can see future expectations of sales in the next three months plummeted as well:

Bad times on the horizon, and efforts to combat Too Big to Fail aren’t causing them.

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8 Responses to EPI’s Paper on Regulatory Uncertainty, AEI’s Respond and Small Businesses Freaking Out

  1. Steve Roth says:

    Ask risk of breaching netiquette, I can’t resist reposting my comment on Pethokoukis’ post:

    >a recent survey of small businesses found “poor sales” to be their single-most commonly cited problem

    Whaddaya know. Demand!

    You know what they say is the very *last* thing on their list of business constraints? Financing and investment.

    And it’s *always* last. Even in the depths of the “credit crisis,” it was last. NFIB does that survey every month, have done for decades. And Financing and investment is Always. Dead. Last!

    When will conservatives figure out that there’s a difference between real business and financial business? Between Main Street and Wall Street? And stop carrying water (and various bodily fluids) for the bloated and excessive financial industry?

    We need some intermediation; it’s like lubricant (*not* like fuel). We need maybe one tenth as much (in transaction volume) as we have. Fama and French showed us decades ago that it takes *very few* trades and very few traders to make a market efficient.

    Finance (except a small part of it) is not a “means of production.” It’s a catalyst. It’s time for you guys to start championing real businesses instead of the vampire squids that — I’m thinkin’ — probably pay your bills.

    Funny thing is, all the other data agrees with the NFIB story re: business investment. I’ve been ranting to myself about these results, and their implications, for years (please excuse the self-shilling):





  2. Tim says:

    It must be frustrating watching conservative economic commentators essentially avoid intellectual scrutiny. Not to say that they all do, but the money for them to do what they’re doing is immense. I greatly respect those who go through the materials of their work and really take the excruciating amount of time it takes to try to come to meaningful conclusions.

  3. wetcasements says:

    Facts and truth don’t matter to (a mind-blowing majority) of right-wing economists.

    They should be ashamed of themselves, but those wingnut welfare checks from the Koch brothers must allay most of their qualms.

  4. Hi,

    Great analysis and nice charts, if i may suggest, here is a long chart we just published and i’m sure it could help your readers to have an overview of the current European Debt Crisis.




  5. jult52 says:

    “You don’t mention regulation concerns only went up since the GOP took over, you forget to mention that there’s a separate ”cost/availability of insurance” index which is down, you especially don’t mention that taxes as a concern is down in 2011, and you extra especially don’t point out the massive changes between poor sales and labor quality/cost from the beginning of the recession to now. ”

    The survey asks for the single most important problem, so the fact that some factors are decreasing doesn’t mean that the situation is getting better, but they are losing relative importance, which is not necessarily a sign of progress. It’s notable that in a tight environment with weak growth opportunities, regulation is increasing its share as a leading problem. The counter that the GOP is now in charge is laughable. A lazy hit piece. You’re better than this.

  6. Jon Simons says:

    I know it’s a tiny part of your very interesting article, but I must agree that most small business owners struggle with sales. Since most small business owners are so focused on the day to day of delivering to customers, and few come from a sales/marketing background, the vital effort of actually bringing in customers is often either haphazard or low priority (even though it obviously shouldn’t be).

    I would say this largely comes down to lack of knowledge and lack of skills many small business owners have about proven ways to actually bring customers in, and many do because of this fall prey to certain ‘experts’ and businesses selling information and services of dubious value.

    And like most things, you get good at something by doing it, and you can only get good at growing a business by doing it, and without a stable customer base at the start (or significant investment) to help tide you over during the early difficult period where you don’t really know what you’re doing, it’s not a surprise most businesses struggle, and fail.

    • Lahou says:

      Hi DougI must say that I don’t uestrdnand why anyone in any country would object to paying taxes. Where do people think the dollars come from to repair roads, build schools and pay for the infrastructure to keep things running? I’m baffled.

  7. Pingback: Pillar 2: The Necessity of Austerity « Second Thought

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