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.