Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
VDH has a piece on his blog at PJ Media today, and though I love the great professor, and he does get much of his analysis right, he also helps perpetuates some myths about the nature of the current economic downturn and its persistence. He perpetuates the myth that businesses are not hiring for fear of the cost of new entitlements, because of the uncertainty of the tax code and because of anxiety over our national finances, generally. He also conflates the entrepreneur with the investor, as if they are both the same and serve the same role in the economy. They are different and play a very different role.
Businesses are run by entrepreneurs. Entrepreneurs may or may not be investors, but they are motivated to hire by one single factor – need. If a business is profitable and viable, and wants to grow to meet new demand, it needs to hire people. The fact that the current administration is adding cost burdens to businesses (in the form of health care entitlements or regulatory requirements) means the entrepreneur, when facing a slow to no growth marketplace, must absorb or pass on these additional costs, or shed further jobs (asking the current workforce to make up the productivity) to remain viable. Since passing on costs to customers is not feasible given competition, employees bear the double burden of increased productivity and loss or increased cost of benefits as employers react to requirements. So entrepreneurs are not hiring because growth is scarce, costs are up, competition is fierce and profits are tough to come by. In fact, small business, that is those who lack the resources and huge employee base of larger businesses, are really struggling to stay afloat. This is not because they cannot access bank loans (to pierce yet another myth) but because they can’t maintain profitability. Note: banks don’t lend to unprofitable entities.
The investor is a person who has assets that exceed his lifestyle requirements. He has choices as to how to invest those assets. He can choose to become an entrepreneur and invest in his own business. Or he can simply invest passively. It is this passive investor who worries about future tax implications and the national currency. These folks are the ones likely to chase hard commodities or tax-avoidance related investments, or government bonds. These kinds of investment do not benefit the private economy and while there are always conservative investors who prefer these risk-averse strategies, in times like these a larger proportion of “investors” are making these choices. Some of this trend might be demographic – a larger proportion of our population is approaching or in retirement and has shifted its wealth into these kinds of investment choices. And much of this conservatism is simply an attempt to avert risk.
[As an aside, some of the downturn in the housing market may as well be reflective of an increased exodus of retirees from larger family homes, increasing supply without a commensurate increase in demand, as they downsize their lives. Keep in mind that many of these new retirees are sitting on substantial gains, even given the recent cliff-drop in home prices.]
We need policies that give incentives to the investment class to pursue investments in the private sector. It is the entrepreneur who needs capital, so there should be incentives to help small business investors. Likewise, deficits need to be cut dramatically so that the federal government is not in the position of both creating uncertainty and sucking capital out of the private economy at the same time. All we hear on the radio and television is the "buy gold"
mantra. Gold only helps the private economy when it is extracted from the earth. Otherwise, an investment in gold is like carbon monoxide, it sucks up all the capital in the economy like oxygen in the body, eventually killing its host.
To summarize, employers are entrepreneurs. They are not hiring because there is insufficient demand for their goods and services while costs are still rising. They don’t need more employees. Investors are being goaded and scared into investments in non-productive assets. They need to be re-engaged in the risk and reward that can only come from an investment in commerce. And finally, the government needs to stop spending and borrowing as this creates both uncertainty and a counterintuitive flight by investors into treasury note investments.
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Aug '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
You're both right to a certain degree. Yes, demand is down and that affects hiring. But risk and uncertainty are a big part of the problem here as well. Risk has a cost that must be priced into the cost of labor, and when the cost of labor rises above the value of that labor, no job will be created.
But a bigger problem you are overlooking is that there is a difference between risk and uncertainty. Risk is quantifiable and measurable, and therefore investors can be found who will take the risk. Give them a business plan that puts upper and lower bounds on potential costs and profits, and they can then compare their investment return against other investments of equivalent risk.
Uncertainty is not like that. You can't measure uncertainty - it's an 'unknown unknown'. If you know the government is going to throw a pile of new rules and taxes at you, but you don't know exactly what they will be, you can't plan, you can't assign a cost to the risk, and you can't write a business plan. Without a business plan, you can't attract investors or create jobs.
Mar '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
To be fair to Dr. Hanson, not only is he a professor, columnist, author, and general-purpose genius, he's also a farmer. I am not a farmer, but I am the grandson, nephew, and cousin of quite a few. In general, the farmer is both the entrepreneur and the investor...and the financial analyst, the market forecaster, the bookkeeper, the engineering manager, the head of the shipping and receiving departments, and the labor force. The unknown unknowns of farming start with the weather and get more unpredictable from there on out. Adding any more uncertainty to that is mind-numbing.
Mar '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
There is also the expansion factor that you are discounting. As an entrepreneur who runs a business that employees over 100 people directly or indirectly, my calculations revolve around ROI. Do I invest in my business to increase my return or hold on to capital because I am risk adverse. If you cannot calculate your ROI because of uncertainty, how do you make a decision to expand.
Here is one example: I was recently approached to buy out one of my competitors who is looking to retire. The margins of his business when combined with my own make it an attractive proposition except that the uncertainty revolving around tax and regulatory policy make it a far riskier proposition than it needs to be.
I'm an entrepreneur and that means, by definition, someone who is comfortable with risk as long as that risk is something I can understand. Unfortunately, I cannot fathom what that risk will be a year from now, especially if our current President is reelected.
Jul '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
I don't know about that. Isn't that what got us into this whole mess in the first place?
Feb '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
"He perpetuates the myth that businesses are not hiring for fear of the cost of new entitlements, because of the uncertainty of the tax code and because of anxiety over our national finances, generally."
Not sure why you think this is a myth. Most businesspeople when contemplating an investment want to have a rational expectation of profitability, in the sense of good return on investment. This requires projecting the future stream of cash flows, which in turn requires projecting costs as well as revenues. How are you going to do this when you have no idea of your future healthcare benefits costs, regulatory compliance costs (see for example the prospective industrial boiler regulations), or energy costs driven by EPA policies? Most people will build in higher cost estimates to compensate for the uncertainty, which means many projects which otherwise would have met the ROI threshold will now fail to meet it.
Nov '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
I have to say that the post's headline really pulled me into this one. I think VDH is one of those constants on the right, much like Thomas Sowell, who tend to speak truths seemingly impossible to challenge, let alone refute. They do so not so much in a partisan manner as an academic and intellectual one. To challenge them then generally devolves into ad hominem attacks. So I was genuinely attracted to the subject to see how it might be done and appreciate the attempt, especially as it comes from our own side.
Honestly, however, I am left wanting.
I think your observations are interesting, and add color to the usual use of the terms in regular discourse. They are, at the most, clarifications of definition, not stabbings of myth.
This isn't to say that I don't welcome challenges to their perspectives. The debate would be exciting to behold. I often find myself wondering who on the left can speak of their cause with as much sobriety and integrity as VDH, Sowell and the rest of their fraternity of stalwarts.
Nov '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Rising Costs: somebody actually mentioned this 'little' item. Inflation hardly gets a mention these days?? An off-shoot of this is we can't afford to buy in quantity and wait until we have to. Our vendors are doing the same, however, and often do not have the item in stock to ship right away putting us behind-ROI can't be calculated and it's hard to even fund your known requirements in other words. We have no cushion- it is gone and only take out a loan on the basics (for example a great load of wood in our case). If you look you will see this even on the Walmart shelves. We need more of these articles and less philosophy. (BTW 27 employees, to 8, now 16- 4 went part-time and we have 1 year learning curve on the positions, did not re-hire a couple because they said they were doing just fine on unemployment).
Jul '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
I'm sorry, but this generalization just isn't true. My company did quite well throughout 2011, much better than expected. We desperately need to hire more people, particularly in some key support areas, if we want to continue to develop new products and new markets. But upper management just won't hire new, full-time employees for the simple and stated reason that there is too much uncertainty in the commercial and residential building sectors, and we don't know what is going to happen to our cost of employing people when Obamacare is fully implemented (and litigated).
Perhaps the "myths" you are concerned to debunk aren't so much myths as they are facts that apply in some cases but not others. VDH's analysis may not be true in every situation, but it certainly rings true in my, admittedly narrow, experience.
Jul '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
To further clarify my point above, it is quite possible for a company to need more employees right now while at the same time fearing that they won't need them in a few months' time. That, not insufficient demand, often explains why companies refrain from hiring new employees that they apparently "need".
Edited on December 31, 2011 at 5:15pmNov '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
As an executive (I am the CFO) in a ~$30 million per annum company I can safely say that regulation and tax policy are not the number one or two topics at any of our senior staff meetings. Hiring is not number one either, hiring is a far more pragmatic decision. We hire if there is a high probability that that hire will have a payback in the near term -- heathcare costs or otherwise. The decision is on the cutting edge -- will there be a marginal return on the hire? Nothing more, nothing less. That marginal return is only created through demand creation -- not in a Keynesian sense -- but true demand by creating goods and services that customers want to buy.
BTW, banks do lend to unprofitable companies. They do make sure that there is a >90% probability that they will get their money back by attaching to every liquid asset and never lending beyond those assets. That's where VCs come in. They invest in ideas and people that they believe can deliver an ROI. They invest in intangible assets.
Nov '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Further to my previous note.
We prefer to chase demand rather than get in front of it. That is, we like to say that we are always running "hot" on purpose. Customer demand is a an ethereal thing. Some things it is stable other times it is not. Therefore, until we see a level of stability in demand we do not expand our fixed cost base and run our existing resources (human and otherwise) - "hot". People work longer hours without extra pay. Existing capital assets are made to just "do". I personally work 60+ hours per week and so does the rest of our senior staff. Do I feel set upon? Best to ask my wife about that.
Feb '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
I run a 2 person software company out of my house.
I would like to hire another person. Regulations and filing requirement are so complex I will not do that.
(Although it would make my CPA happy.)
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Dan Hanson:
But a bigger problem you are overlooking is that there is a difference between risk and uncertainty. Risk is quantifiable and measurable, and therefore investors can be found who will take the risk.
Uncertainty is not like that. You can't measure uncertainty - it's an 'unknown unknown'.
I think I understand the distinction you are trying to make, though I suggest that uncertainty modifies risk - the higher the risk, the more uncertain. Risk is always difficult to predict and quantify. Entrepreneurs assess risk organically and verify assumptions with historical financial data. One must be comfortable with financial results and trends to assume the risk of hiring and expansion. When the overall economic outlook is negative, and government seems poised to support policies that are detrimental, historical financial data have to be compelling to overcome a general sense of pessimism. I don't want to oversell the idea of a bully pulpit, however entrepreneurs are affected by a positive view of economic future in deciding whether to expand. In the case of this president, one can only conclude that the Obama administration is extremely hostile to free markets and enterprise. This certainly suppresses hiring.
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Wade Moore
I don't know about that. Isn't that what got us into this whole mess in the first place? · Dec 31 at 6:29am
Very interesting point. The answer is, not really. Fanny and Freddy made the loans. Banks brokered the loans and made money on an initial spread and under servicing agreements. So, in the end, it was the federal government (as founders and guarantors of those GSE's) that loaned money to folks who could not pay it back.
They're doing it again, in part, with the SBA loan program, though in that instance the banks bear some proportion of the loan risk.
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Wade Moore
I don't know about that. Isn't that what got us into this whole mess in the first place? · Dec 31 at 6:29am
Very interesting point. The answer is, not really. Fanny and Freddy made the loans. Banks brokered the loans and made money on an initial spread and under servicing agreements. So, in the end, it was the federal government (as founders and guarantors of those GSE's) that loaned money to folks who could not pay it back.
They're doing it again, in part, with the SBA loan program, though in that instance the banks bear some proportion of the loan risk.
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Wade Moore
I don't know about that. Isn't that what got us into this whole mess in the first place? · Dec 31 at 6:29am
Very interesting point. The answer is, not really. Fanny and Freddy made the loans. Banks brokered the loans and made money on an initial spread and under servicing agreements. So, in the end, it was the federal government (as founders and guarantors of those GSE's) that loaned money to folks who could not pay it back.
They're doing it again, in part, with the SBA loan program, though in that instance the banks bear some proportion of the loan risk.
You are correct, sir. There is debtor in possession lending and banks might lend to an asset rich company with a temporary earnings issue, provided cash flow is still OK and prospects are positive. However, companies with persistent losses, even those with great collateral, will find conventional financing difficult to obtain. Next tier asset based loans become the costly alternative. These kinds of arrangements are extremely difficult to manage and make operation and growth exponentially difficult.
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
AaronNYC: There is also the expansion factor that you are discounting. As an entrepreneur who runs a business that employees over 100 people directly or indirectly, my calculations revolve around ROI.
I'm an entrepreneur and that means, by definition, someone who is comfortable with risk as long as that risk is something I can understand. Unfortunately, I cannot fathom what that risk will be a year from now, especially if our current President is reelected. · Dec 31 at 5:24a
ROI, even in the best of times, is difficult to assess in any commercial venture. But we entrepreneurs know that hiring and expansion decisions have to be based upon compelling opportunity. The decision to buy out a competitor, I submit, is an even more difficult decision. So many factors to consider, along with historical financial data and prospects. In such a case, one has to consider the effects of possible negative trends, and discount the price according. You might not want to roll the dice at all and the overall risk might be too great and difficult to assess.
Good luck!
Aug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Robert Promm: Further to my previous note.
We prefer to chase demand rather than get in front of it. Therefore, until we see a level of stability in demand we do not expand our fixed cost base and run our existing resources (human and otherwise) - "hot". People work longer hours without extra pay. Existing capital assets are made to just "do". I personally work 60+ hours per week and so does the rest of our senior staff. Do I feel set upon? Best to ask my wife about that. · Dec 31 at 8:54am
I agree with you 100%! In an uncertain, hostile commercial environment, historical trends and expansion opportunities must be significantly compelling to justify the risk of hiring or deployment of capital. We also know that there are limits to just how much we can retrench and how much we can ask of existing staff. There are times, even in difficult environments like this, where growth is mandatory. Fixed costs of doing business rise while prices remain fixed or decline. Volume has to increase to remain viable, and that cannot always be achieved with productivity gains alone. The business must expand capacity.
Edited on December 31, 2011 at 7:27pmAug '11
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Lance: I have to say that the post's headline really pulled me into this one.
This isn't to say that I don't welcome challenges to their perspectives. The debate would be exciting to behold. I often find myself wondering who on the left can speak of their cause with as much sobriety and integrity as VDH, Sowell and the rest of their fraternity of stalwarts. · Dec 31 at 7:21am
I certainly appreciate VDH and have for years. My intention in writing this entry was clarification of what I saw as an oversimplification, to distinguish the entrepreneur and the investor. Entrepreneurs deal with risk, and chase opportunity, in a very dynamic, visceral way. They are builders, not preservers. This uncertainty, this constant barrage of hostility, is extremely frustrating. Entrepreneurs want to grow, succeed, hire, win, but can't because they just can't get profit traction in this environment.
Sep '10
Re: Deflating a Few Myths Perpetuated by VDH (Whom I Generally Adore)
Businesses are run by entrepreneurs.
To summarize, employers are entrepreneurs.
Douglas, you make your own error is conflating business owners and employers with entrepreneurs. Entrepreneurs can be business owners and employers but business owners and employers are not necessarily entrepreneurs. IMO most businesses are not run by entrepreneurs. The majority of businesses are run by administrators, or what Harvard’s Howard Stevenson calls "trustees". Entrepreneurs are risk takers and thrive in unstructured environments. Administrators or trustees are risk risk adverse, process-driven and control oriented. BTW, calling some business owners trustees is not meant as a pejorative. Some businesses are more suited for entrepreneurs at the helm and others more suited for administrators.
I think generally entrepreneurs are not hiring because of lack of demand, as you correctly point out. But I think the administrators out there are looking at the uncertainty in regulatory policy (Dodd-Frank, ObamaCare, NLRB rulings, EPA regulations) and erratic tax policy and see it is not an environment to grow. Add to that our political uncertainty (another Obama term? will GOP lose, gain more control of Congress?) and the administrative-type business owners have plenty to worry about as VDH outlines.