Krugman on Business Climate

Paul Krugman's lastest op-ed piece in the New York Times challenges the view that business is not spending because they see the Obama Administration as antibusiness. He claims there is no truth to the claims that business is not spending because of concerns over taxes, regulation, and budget deficits. As evidence, Krugman cites data like capacity utilization and surveys of business leaders that show that more of them cite the poor economy than political climate as the major problem. Hence, says Krugman, the government should ignore the alleged reports of business unease and pump up the economy. An improved economy will get business spending again.

There is a problem with Krugman's analysis though. He assumes an either/or situation when it can be a both/and situation. Yes, the economy is doing poorly and if we had a stronger and faster recovery, business would spend more and hire more workers. But, one of the reasons for the poor economy may be nervousness on the part of business, especially if it manifests itself in putting off hiring new workers due to uncertainty.

Uncertainty is a key concern that Krugman ignored in his piece. I agree with him that business people will always complain about taxes and regulation, just as most citizens complain about taxes as April 15th approaches each year. But business investment spending concerns the future, and when the future is more uncertain than normal, business leaders are more likely to be cautious. Given that some of the administration's policies affect the cost of hiring workers, the caution affects hiring decisions. A concern that the administration is antibusiness just feeds into the fear.

Finally, it appears to me that the Administration sees its problem with business as false perceptions. This may be due, in part, to a president and many leaders, who have no experience in or with business.

Can We Learn from the Financial Crisis Inquiry Commission?

Good article in the New York Times today about the work of the Financial Crisis Inquiry Commission. Joe Nocera describes the commission as seriously seeking answers to what went wrong--unlike the Congressional hearings. It is six months still before their report will be due. It should provide interesting reading once it is available.

According to the French, Google is a Monopoly

Article in the NY TImes today says that the French have declared Google a monopoly. The article goes on to say that Google dropped ads from a French firm that sells products enabling people to know where police are. Again, I wonder if Google was a French firm if the ruling would be the same. We will continue to see firms in the tech sector having "monopoly" positions because they are producing network goods--goods that are more valuable to a consumer when most other consumers use the good. Finally, the article notes that this could have an effect of Google's future creativity since antitrust lawyers will now have more influence on what they do.

Taylor on the Financial Overhaul Bill

Good op-ed piece in the WSJ today. Stanford economist John Taylor, known for the Taylor Rule that tracked well the Fed's interest rate setting until the mid-2000s, argues the financial overhaul bill will be ineffective in preventing another crisis because it doesn't address the causes of the crisis.

There may be good reasons for some of the changes in the bill. One needs to examine the details more closely, as well as the actual regulations developed after the bill is passed, to have an idea whether this is so. Even then, we may need experience with the regulations to have a better idea about the efficacy of the regulations. But we have better ideas today about the causes of the crisis and clearly the bill does not address them.

Financial Regulation Bill

The financial regulation bill has a finalized form from the reconciliation conference. (See WSJ article here.) It will take some time to read through the bill and evaluate it. At this point, I just want to note that the task force President Obama put together to determine the causes of the financial and economic crisis has not finished its work or put together a report. Yet, we get a bill to prevent anything like this from happening again (according to Sen. Dodd). Just what is the point of the task force then?

Does President Obama Understand Animal Spirits?

The recent Economist has an editorial about President Obama's handling of BP and the oil spill in the Gulf. The page entitled "Lexington" also discusses Obama's relationship with business. The claim that some on the right make that Obama is socialist is refuted. Of course, whether the refutation is correct or not depends on one's definition of socialism. Traditionally, socialism refers to government ownership of the means of production. By this definition, Obama is not a socialist. According to some political scientists, modern socialism refers to an enlarged welfare state and expanded social safety nets. By this definition, I would classify Obama as socialist, but I would also classify most in the Democratic Party as socialist then. My colleague in Hope's Political Science Department, Jeff Poulet, argues that the older definition should be adhered to, and I will do so.

The Lexington page made an interesting point though, and one with which I would concur. It said that Obama doesn't understand business. The same could probably be said of many politicians of both major parties. Academics who support business often have no actual experience in business, and may not understand business. A case could be made that Ayn Rand, who wrote so glowingly about the businessperson who stood firm to his or her beliefs and who was successful in spite of government didn't seem to realize how often business people seek government help in one way or another.

When I visit a business, especially a manufacturing concern, I am struck by the amount of capital equipment used to make the product. The equipment is costly and generates increased labor productivity and higher wages. To purchase the equipment, the firm must have raised funds from stockholders, or from savings of the entrepreneur, or through borrowing, or from profits. Yet, for many politicians, profit is almost a dirty word.

The optimistic faith of an entrepreneur who steps out and begins a business is courageous. Most new businesses fail. This is where the "animal spirits" mentioned by Keynes in his General Theory comes into play. Would anyone start a new business on the basis of mathematical expectation alone? Keynes argued no because the future is unknown. Instead, people often have a spontaneous urge to action rather than inaction.

I question whether Obama or many other politicians and even many academics appreciate the risk and courage it takes to start a business. And even for businesses that have been around awhile and have grown, there is still a huge risk in expanding and building new facilities. Hiring workers involves a great responsibility. I have also spoken with business owners who speak of lost sleep worrying about how they can keep employees employed. I admire people who are willing to step out, risk their savings, in order to create new products or services and employment for others.

Power Hungry

I just finished an excellent book on energy--POWER HUNGRY by Robert Bryce. The subtitle of the book is "The Myths of 'Green' Energy and the Real Fuels of the Future. His basic argument is that the popular "green" energies--wind and solar--can never replace hydrocarbons as the major source of power in the world. He notes that it is not energy that we want, but power. As he notes, "Energy is the ability to do work; power is the rate at which work gets done." (p. 13). It's power we want and we want it 24/7. He continues, "Renewable energy has little value unless it becomes renewable power, meaning power that can be dispatched at specific times of our choosing." (p. 39).

Bryce focuses on what he calls the Four Imperatives. These are: power density, energy density, cost, and scale. The renewables fail on these imperatives.

He also has some good one-liners:

"If you are anti-carbon dioxide and anti-nuclear, your are pro-blackout."

"All-electric cars are The Next Big Thing. And they always will be."

As Bruce says repeatedly, it is a matter of math and physics. He sees the solution to more use of natural gas and nuclear power.

The book can help clear the air of hype and sensationalism, which are often invoked by environemental activists.