President Obama’s Chief
Economics Adviser, Christina Romer, resigned last week. Private sector
jobs declined about 130,000 or so according to the July jobs report.
That’s what she deserves for supporting political policies in stark contrast to her own research The Macroeconomic Effects of Tax Changes where she states in the abstract: “…….tax
increases {designed} to reduce [an} inherited budget deficit or to
promote long term growth…..are highly contractionary. The effects are
strongly significant {and} highly robust…..The large effect stems in
considerable part from a powerful negative effect of tax increases on
investment”. As Reason Magazine’s Tim Cavavaugh noted re: Ms. Romer, “Now how will you get your soul back”?
Further, and as ludicrously, informal Obama economic advisers Mark
Zandi and Allan Blinder also declared that the $800 billion stimulus
“worked” even though its predictions failed.
This is one reason Macroeconomic science is viewed with such disdain.
For those interested in the statistical and logical errors inherent in
this declaration please read economist Arnold Kling’s commentary How the Blinder-Zandi Study Was Done . In short, Zandi/Blinder “corrected the model’s past forecast errors, so that it would track the actual behavior of the economy over the past two years exactly”. This is generally called “data fitting” and has been the scourge of the
macroeconomics profession for decades. Zandi’s studies are simply
fitted mathematical “models”, not evidence empirically deduced as at
least was the case in Romer’s tax study referenced above.
In an idealized world, citizens disagree about political policy for
one of three reasons; 1) core moral principles; 2) differences of
opinion about utilitarian/practical outcomes relative to alternative
policies; and, 3) the self interest of various constituencies, usually
using oneof the two other reasons as rationales. Sometimes all 3
reasons can be in agreement or stark disagreement. For example, what if
we could harvest body parts from convicted serial murderers to save the
life of multiple children in need of transplants? (This was the theme of the television show “The Closer” this week). Closer to political reality perhaps, what if we could harvest “stem cells” from unborn children to save the lives of the
“born”? Or, what if Steve Jobs’ self interested insatiable desire to be
the global gadget king creates a secure life for millions of employees
and vendors without taking away their liberty?
In matters of economics, it is reasonable to believe all 3 of these
reasons can generally be in harmony. This was assumed by our founding
fathers to be possible under the right set of constitutional principles
and laws. The moral principal of individual freedom, the “selfish”
pursuit of life, liberty and happiness, and the Adam Smith derived
belief that competition by the many produce better utilitarian results
than planned actions by the few, were all taken for granted by our
founders. There were no Marxists or Socialists in their time, but there
was Mercantilism, anti-free trade
and government supported monopolists. For reasons known only to Obama,
Pelosi and Reid they have rejected our founders’ notion in favor of
more central planning.
My fellow New Jersey citizen, Michael Fleischer, a small business
owner, details in a highly intuitive WSJ editorial on why business
isn’t hiring. Rather than summarize what he wrote, let me provide some
evidence that Fleischer’s example is not merely an anecdote but a
representative condition as predicted by Christina Romer in her own
study. The following facts can be found here on the Small Business Administration website. We have all heard these kinds of statistics before, but it is worth focusing on them again as election time approaches.
One half of all private sector jobs are provided by small business,
defined as companies with less than 500 employees. More importantly,
64% of all net new jobs are created by small businesses. The word "net"
is small but dense with meaning. "Net" means the sum of all people
hired minus all people fired/quit/retired. The gross numbers hired and
eliminated are multiples more. Each year approximately 600,000 new
companies start up and 600,000 companies close down. Our economy is one
gigantic pool of "business experiments" where extraordinary competition
results in only the most effective and efficient surviving.
How does
any intelligent person believe that government, i.e., non business
bureaucrats choosing who should receive the people's dollars, can
possible create better outcomes than our competitive system? Does one
really need a degree in economics to perceive this? Imagine if the
government chose who got to play football for Notre Dame or who got
drafted by the NFL? Or, for that matter, which sport or music Americans
should prefer? Its obvious in these examples, but when applied to
"economics" our eyes glaze over. Yet, under the Obama administration
all marginal increases in "investment" has come from the federal
government.
Small business as a whole is successful despite the fact that our
government's policies favor big business explicitly. This has always
been true, but has reached new heights under the Obama administration.
As Fleischer showed in his WSJ article, small business is especially
burdened by regulation. On average it costs &15,000 to comply per
worker versus large firms $10,000 per employee. This data is from 2005.
Compliance, or feared future compliance, with the new health care
mandate, potential CO2 mandates, potential increases in SS taxes, and
higher marginal tax rates all lead to the lack of investment Romer
predicted in her study and Fleischer sees in his business. But the
Zandis, Krugmans and Obamas of the world just say lets do even more
of what has not worked.
The Federal Reserve produces a quarterly report called Flow of Funds - Z.1.
Page 2 tells a remarkable story. Our average annual growth rate in
total debt outstanding (public and private together) has been the
lowest during the last 5 quarters than any of the last 10 years. But
government debt growth has been the highest since WWII for such a
sustained period. Business has had negative growth. Debt can be seen as
a proxy for investment. Small Business in particular has declined
approximately 9% while the government has increased over 20%--(see page
16). That is an enormous swing from the productive private sector to
the self-evidently unproductive public sector.
I suppose one should raise the question of which is the
cause and which is the effect? Did Government have to step in and
invest because the private sector would not? Or did the Obama
Government announce its preference for increased spending, borrowing
and taxation first, thus causing the uncertainty and decreased
investment which Fleischer outlines? Given that Obama's own model
failed in its prediction, I am going with Romer's study and-----as
Sarah Palin often says-----the "common sense conservative" answer.
Loudly trumpeted Big Spending, Redistribution, and Increased Taxes made
small business pull back investment leaving the field wide open for the
government to do such brilliant things as subsidize the absurdly
expensive Chevy Volt, create the wealth destroying and insanely comic
"cash for clunkers" program, discontinue deep water drilling in the
Gulf, continue its subsidized support of the mortgage market by the
Fed, Fannie Mae and Freddie Mac, and so on and so forth.
We need to get rid of as many of these people as possible in November.
