That Graphic I Said I’d Post

August 3rd, 2012 at 4:05 pm

Brian Hamilton and I were debating—on CNBC—what’s really holding back hiring.  He basically said it’s uncertainty regarding tax policy and I said it had more to do with consumer demand (ala this loop).

At one point, I noted that for months, small businesses have been saying the poor sales, i.e., weak demand, was their “single most important problem.”  Though, to give the tax argument its due, I pointed out that in fact the poor sales line has been drifting down and is now about equal with taxes.

I believe Brian challenged me on these points so I said I had the data and here it is (see below), from the NFIBs survey of small businesses.  (I know, seems rude to always dis the NFIB and then use their data, but whaddyagonna do?)

Note that in the bottom graph, as I stressed in the debate, poor sales has been the dominant problem for a few years (circled), though it’s come down significantly as the recovery has proceeded.  The problem of taxes, on the other hand, has been trending flat, while regulation has been climbing.

While it’s obvious that resolution of outstanding federal tax issues—as in the fiscal cliff—would make for a better business climate, I find the argument that tax uncertainty is an important culprit re job creation to be awfully squishy. 

First of all, it lacks evidence whereas the linkage between consumer demand and hiring is well established in economics.  In fact, it’s the first principle of labor economics (demand for labor is derived demand, derived from the demand for goods and services employers produce and consumers/investors demand).

Second, it belies common sense.  Do the following thought experiment.  Suppose Congress woke up tomorrow, the scales fell from their eyes, and they passed a budget deal including smart tax policy which the President signed that afternoon (a huge fantasy, yes, but bear with me).  At the same time, imagine real GDP growing at 1.5%, driven by weak consumer spending, which is in turn driven by relatively weak job and wage growth—(ok, that part you don’t have to imagine, though employment got a nice pop last month).

What employer is going to change their plans and kick up hiring based on the Kumbaya tax resolution, absent strong demand?  It’s of course possible that future projects that appear less profitable at the margin could appear more so if tax rates were favorably tweaked, but that has little to do with near-term hiring.  Moreover, the uncertainty argument does not imply that hiring will get a boost if taxes go down; it’s that hiring will increase if the tax debate is settled one way or the other.

Finally, this is all very tangled stuff.  Taxes factor into demand, raising or lowering the after-tax incomes of taxpayers so there’s no clean break between uncertainty and demand in the first place. 

Basically, I think the uncertainty folks may be coming from a Keynesian “animal spirits” place—the climate point I made above.  I get that and agree.  I’m just afraid that the resolution of outstanding fiscal questions by itself–absent better jobs and paychecks for the broad middle class leading to greater consumer demand—won’t get us very far.

Source: NFIB, link above.

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3 comments in reply to "That Graphic I Said I’d Post"

  1. Paul F. says:

    I wonder if another thing holding back hiring has to do with the size of the derivatives market. The Credit Default Swap market was larger than the New York Stock Exchange before the collapse, and by some reports, is only bigger now. The entire derivatives market (the value of all investments covered by those derivatives?), by some reports, is greater than the whole world economy.

    In other words, if more people are hedging their bets (and some are making lots of relatively unregulated money off of derivatives–which come from failed investments), then it might seem the wrong time to hire, when so many are betting on failure or hedging bets. It would seem, instead, to be time to be conservative about cash reserves (and not to “bet” in a hopeful way by hiring).

    It might change the equation if one of two things happened:
    1. Reenact Glass-Steagal, and outlaw many of the derivatives that allowed or caused the crash to occur.
    2. Short of that, regulate and tax derivatives in a major way so as to make it *much* harder to profit from betting an investment will fail. The money would then have to move toward betting that good investments will succeed, and toward helping them succeed.

    If the economic climate changed in that way, it would make much more sense to hire new employees.


  2. David says:

    And while the worry about regulation has been going up recently, I don’t think that there is any credible evidence that the amount of regulation small businesses are facing is an higher today than it was a few years ago.

    I tend to take this kind of subjective poll with several large grains of salt. The issues that small businesses will mention in a poll are at least as much driven by the discussions in the media and in the political process as they are by the facts.


  3. Jake says:

    The huge spike in concern about inflation in 2009 shows that this is largely BS. There was no inflation anywhere near there, except in the fevered imaginations of right-wing apocalyptics. To me it looks like the response of businesses to poll questions like this reflects largely what the talking heads are telling them to think.


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