Confidence Fairy Speaks: Says “It’s Demand!”

July 19th, 2011 at 7:48 am

This WSJ piece reminded me of a conversation I had the other day with a guy who runs his own very small business (a car service).  He told me the biggest problem he faced was “uncertainty.”

“What?” I thought.  Don’t tell me this guy is about to complain about health care reforms that kick in years from now and don’t even effect businesses of his size?

In fact, he said: “Yeah, I can’t count on enough customers coming through the door to even plan shifts for my drivers.  I don’t know where this economy is headed.”

In other words, he’s uncertain, but it’s about demand, just like most of the respondents to the WSJ survey (hat tip: KR):

“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.

“We’re hiring a little here and there—but it’s not what it should be,” said Daniel Cunningham, chief executive of Long-Stanton Manufacturing Co., of Hamilton, Ohio. “And it’s because of the lack of demand.” Long-Stanton, which makes metal parts for the aerospace, medical and other industries, has snapped back from the recession, “but volume is still not up to where it was, or where it should be,” Mr. Cunningham said.”

What’s happening here is business owners, especially those with smaller operations who lack access to faster growing emerging economies, are having trouble forming expectations about future demand.   So they can’t plan ahead.  That makes them nervous and risk averse in the present.

Getting rid of “Obamacare” wouldn’t help them a whit.  Generating some demand could help them a lot.


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5 comments in reply to "Confidence Fairy Speaks: Says “It’s Demand!”"

  1. chris says:

    “Obamacare” ENSLAVES every American citizen to the corrupt and unregulated (costs) private insurance industry that is at the heart of our fiscal nightmare. No aspect of “Obamacare” or any other “health for profit” system will ultimately survive the bad and unworkable math it generates. Eventually, a single-payer universal system – the one which Obama pointedly (and foolishly) kept “off the table” and out of the discussion (indeed he worked hard to defeat the very idea) will be the only thing that works.

    What part of the consumer having more money in his pocket to spend, rather than wasting it on overpriced and private junk insurance, won’t help small business?

  2. Mary says:

    I found the Leonhardt piece really interesting. Overall, I thought he made some good points, but “the old economy is gone” is bit too glib for my tastes. I’m not really sure that is the case, which is one of the points I was entertaining when I started thinking about minimalism. For his statement to truly hold, there has to have been a shift in American values, not just behavior as a result of the (persisting) downturn. (In my opinion, it would be good for all economists to think more about sociology and psychology.) A movement like that is not just about coping with the present economic malaise; it’s about reprioritizing what matters. I think it’s hard to argue that focusing more on relationships and experiences over material possessions would be anything but good for the country. However, I don’t see this movement as anything but fringe right now. A quick survey of what’s trending Hollywood-wise, etc would confirm this. So I don’t actually believe that the old economy is gone. I think it’s suppressed by the overhang of debt and the lack of purchasing power.

    But his article reminded me of my initial criticisms of the stimulus package. Most liberal economists for a long time simply said that it was too small. I believed that to be true, but also that it wasn’t as well composed as it could have been. (I think recently more economists are shifting to my view of it.)

    So what would have made it better composed? I think it’s important to diagnose the nature of the problem correctly and to appreciate that since there is only so much political will for these kinds of interventions, you have think carefully about the size and composition of the package. If you have an over-indebted problem and a really large crisis simply propping up demand is not going to be sufficient. Firstly, I think Obama made a serious miscalculation by choosing to go with a smaller package rather than the larger one because of deficit concerns. (This is what I mean by a lack of thinking ahead, strategy, etc.) Secondly, the transfer payments were necessary because anything else would have been heartless. You have to help Americans who lose their jobs with unemployment benefits and healthcare. (From a health care perspective, this price tag would have been a lot less if we had a better health care system. The government rather than employers were subsidizing those outrageous premiums via COBRA.) But the rest I think should have very much focused on job creation. I think most of the tax cut portion was just saved or used to pay down debt. But the best way to pay down debt is not by this one time payment, rather by giving people a job. I also think that creating some way of helping with the foreclosure mess would have helped considerably.

    Anybody who argues that the problem is anything but demand (and personal debt, obviously) is delusional. It’s clearly about demand; however, what was created by the stimulus package was not self perpetuating, and even if it were larger, I’m not sure that it would have been. It may just have taken that much longer to exhaust its temporary stimulative effects. In my opinion, there has to be a willingness in this country to adopt some measure of state capitalism during these downturns. This might seem unpalatable to Americans that have a resolute (if not patriotic) belief in the powers of free enterprise. But if we want to stay on top of the global competition, we have to be adaptive and flexible. Adopting aspects of our competitor’s system temporarily is not defeat, it’s smart.

    I think the vast majority of the stimulus package should have focused on infrastructure and on R&D. I tend to agree with Lomborg on clean energy. I think the focus needs to be on research and that would have been a great place for money to go. Why not provide more funding to our public research universities or create new institutions with money to conduct this type of research? Also, I think that creating the institutions to bring down health care costs would also be important. Why can’t the government create a pharmaceutical company? Why can’t we have a national bank? People think that having state controlled companies are inefficient. My argument is: that’s not necessarily the case and if you want to transform an economy toward a different type of framework, these shifts often happen via investments driven by the public sector. It would be acting as a catalyst for innovation and change, not as a replacement for the private sector. I am aware that this would require a rather profound shift in attitude and approach that is practically impossible in this environment. Although I don’t think the old economy is gone, I think it should go because on a longer term basis it is neither sustainable nor healthy. To arrive at a true transformation — a new economy — Americans have to dispense with ideology, and embrace practically. They also have to stop determining their self-worth by money or material possessions. To me, American exceptionalism is based on ideas, whether that comes from the private or public sectors does not matter.

    Anyway, I have other thoughts on this, but that’s all for now.

  3. Virgil Bierschwale says:

    maybe we ought to examine this little article to see what our corporations are doing to the american dream.

    Uncertainty hell,

    I’m against all regulations, but I also realize that if it were not for some regulations we would all be committing suicide in sweatshops like Foxconn so that apple could sell more widgets.

    One of these days a fellow like yourself that has access to the media is actually going to team up with a bunch more and show americans what really is happening here that the media will not tell them.

  4. tjfly says:

    More importantly, in the long run, this is how wealth gets recirculated, invest in new ideas and solutions. New wealth replaces old, this is the American dream.

    Opposition to this comes from old money, yesterdays industry, afraid of change.

    It’s not about free markets, or even privately controlled markets. Its about hanging on to what you have, on a personal level maybe that’s ok. For the country it’s a disaster.

  5. Mary says:

    People like to compare things on an absolute basis because it’s easier; however, it’s often more informative to look at things relatively.

    When I look at this chart,

    My initial observations are based on how things shift in relative importance.

    When the economy was doing quite well, especially during the end of the Clinton era, poor sales were not much of a problem, but the quality of labor rose in importance. This fits with other macro data.

    Then when you look at the Bush era, you see that aside from the mild recession post 911, sales were fine, but insurance costs increased in relative importance.

    Now, obviously, demand is the main problem.

    To suggest that we should look at this graph on an absolute basis, as Hamilton does, is poor logic. None of these factors will disappear. Just like there will always be land, labor and capital, the factors in the chart will always be present. What’s important is the relationships between the variables and the trend.

    I also want to note that looking at the Bush era should be a wakeup call to those who oppose Obamacare. Assuming that the US finally fully emerges from the Great Recession, guess what the biggest problem will be? It would simply shift back to health care costs. Hopefully, the new legislation will help mitigate some of the increases.

    On the job creation front, I think credit conditions for small businesses will become increasingly important when the recovery takes hold, but they are also important now because of the debt overhang. There doesn’t seem to be much done with this 2010 Small Business Jobs Act, even though it seems like business credit cards have increased. “Since 1990, an increasing number of small businesses have used credit cards to help finance operations. Spending on small business credit cards tripled between 2002 and 2007, according to the Nilson Reports, to about $150 billion. Credit cards made up roughly 14 percent of small business credit in 2009.”

    I would argue that a simple measure that the government (the stimulus plan) could have taken was decrease debt burdens by reducing interest rates; for example, they could have lowered the rates for student loans by allowing for consolidation or they could enable businesses to tap lines of credit with the federal government instead of paying higher rates to private credit card companies. The federal government could still make money on these loans. I don’t think solutions have to cost money or be all or nothing. They don’t necessarily have to hand out money. Mitigating the debt load seems like a practical solution given the nature of the crisis.