Growthology

Blogger Survey Preview

The 3rd quarter Econ Blogger Survey is coming soon.  I just collected the responses over the weekend, and our designer is formatting the report.  I wanted to share the "word cloud" with you, which I refined this time by asking bloggers for five adjectives to describe the state of the U.S. economy.  It's quite a picture (thanks to Tagcedo.com):

 

Andy Grove is Anakin Skywalker

What did I think of Andy Grove's essay in Business Week?  Shocked, disappointed, betrayed, and a little hungry for revenge. I poke some fun at him in a response that Forbes just published.

Andy Grove, former entrepreneur and head of Intel, has gone over to the dark side. Once the greatest Jedi in all of the Republic of Entrepreneurship, he's become a Sith Lord, calling for state-planned investments at big companies.  ... more here

Repression of Entrepreneurs, Coyoto Blog edition

Typically taxation issues get a lot more attention than these regulatory issues in discussions of government drags on the economy. But these small regulations, licenses, and approvals consume management time, the most valuable commodity in small businesses that typically are driven by the energy and leadership of just one or two people.

That's from a Forbes essay by Warren Meyer, author of Coyoteblog.com.  Best line:

[W]e needed permission from the county to demolish the building the county had condemned--that cost us a couple hundred dollars and several forms.

UPDATE: Check out the follow-up post on Warren's own blog about the July 4 weekend sting on his campground.

My Failed Jobs Program ... from the archives of?

Guess who wrote the following article (quoted in part)?

(a) Brad DeLong
(b) George Will
(c) Michael Kinsley
(d) Amity Shlaes

The government makes it comically difficult for the honest citizen to hire a single employee -- and makes it virtually impossible to do it correctly. I'm fairly bright. My assistant is very bright. Between us we have spent many, many hours struggling over the forms. Yet it is inconceivable that we can have got it all right. Now, as a result of my rash attempt to create a job, neither one of us can ever become Attorney General.

Obeying the rules for a part-time household employee is fairly simple, once you get the hang of it. The government sends you a form every three months. You return it with an easy-to-compute check. Once a year, the government sends you a W-2 form, which you fill out in something like octuplicate.

But hiring a full-time business employee plunges you into an entirely new dimension of complexity. By my count (which undoubtedly is wrong), it takes a minimum of 37 different forms and 50 separate checks to hire a single employee for a year, even if she graciously agrees to be paid only once a month.

Forms. At the federal level, there is the employer-registration form, which gets you your employer number; the W-4, which counts the employee's deductions; the annual W-2, listing all income earned and taxes withheld; the W-3, summarizing all the W-2s (required, even when there is only one W-2); Form 941, "Employer's Quarterly Federal Tax Return"; plus forms with each check you write. The District of Columbia requires its own employer- registration form (with, of course, a different employer number); its own D-4 model of the federal W-4; and the ever-popular FR-900BO, "Annual Reconciliation and Report," plus forms with each check.

Checks. Once a month, one check goes to the employee, and another goes to pay for health insurance. One monthly check goes to the feds and another goes to the District of Columbia, reflecting federal income-tax withholding, federal Social Security and Medicare (employee's and employer's shares), and local income-tax withholding. Separate checks go to the feds and the District of Columbia -- only one a year each! -- for unemployment insurance. (The District of Columbia form is called "Quarterly" but needs to be filed annually. Or so I think.) The chance that all these checks are for the right amounts is slim.

***

Hiring an assistant is a wonderful way to keep an assistant busy -- and to keep busy yourself. It wasn't long after we started sending paperwork to the government before the government started firing paperwork back at us. The IRS wanted to know: Where was my Form 941 for the quarter before my employee was hired? We confidently batted that one right back again -- no Form 941 was due for that quarter, you idiots! -- and got the undaunted response, "We are taking no further action at this time, but we may need to contact you again if other tax issues arise." And indeed they have arisen.

You can find out the answer here, where the essay was originally published in 1994.  Or you can find the author's archives here. This is one of my favorite pundits, fyi, and the archives are a treasure.

This is Why Entrepreneurs are Repressed

This is a tale of two stories.  The Neocor story is about when my first company, Neocor Tech, decided to hire its first worker.  Robert Reich's story is about a hypothetical worker named George who is laid off then hired back in a new capacity.  Reich's story is what motivates the thousands of rules and regulations in America that are hostile to new firm formation.

First, consider Reich's story, which comes from his essay in the NY Times last month reacting to a new study showing higher rates of entrepreneurship in 2009:

[The Kauffman Foundation's] upbeat interpretation doesn’t include lots of people who don’t particularly relish becoming their own employers, like an acquaintance whom I’ll call George. George was an associate partner at one of the world’s largest technology and consulting firms until he lost his job last year in a wave of layoffs. For months, George knocked on doors but got nowhere because of the deep recession.

Finally, his old firm got some new projects that required George’s skills. But it didn’t hire George back. Instead, it brought him back through a “contingent workforce company,” essentially a temp agency, that’s now contracting with George to do the work. In return, the agency is taking a chunk of George’s hourly rate.

Technically, George is his own boss. But he’s doing exactly what he did before for less money, and he gets no benefits — no health care, no 401(k) match, no sick leave, no paid vacation. Worse still, his income and hours are unpredictable even though his monthly bills still arrive with frightening regularity.

The nation’s official rate of unemployment does not include George, nor anyone in this new wave of involuntary entrepreneurship. Yet to think of them as the innovative owners of startup businesses misses one of the most significant changes to have occurred in the American work force in many decades.

Wow.  Scary story, even if it lacks factual evidence.  It leaves the impression that George needs the protective hands of the state to police his employer.

My story isn't from last year, but I didn't start a company last year. I started Neocor with Jim Coyer in 1994, and this is the story of how a new firm hires its first worker.  We were joined by Ken Herskind in 1995 as a partners not an employee. We gave him some equity and a chunk of monthly revenues. I worked for free. Jim lived on the good graces of Mister Visa. In truth, we were terrified of hiring an employee because the process looked like it would involve a lot of legal stuff that we didn't have time to digest. The benefits of being an employer didn't outweight the costs until late in 1996 when we started bursting at the seams. 

I notified the state and federal authorities that Neocor wanted to be a registered employer.  Keep in mind this was three guys in an LLC, one (yours truly) a grad student, the others living hand to mouth. The company was really four computers and a T1 line piped into Jim's studio apartment, which lacked air conditioning, by the way.  Our desks were old doors on sawhorses.  So the government sends me back four or five reams of forms, printed regulations (fine print on newspaper, center-stapled), pamphlets, and on top, a short letter.  The letter said, "You are officially a U.S. employer, and a known oppressor of the working man. Congratulations!"  Sure, it didn't literally say that. But that was the message.

The fact is that American style capitalism is not the Wild West of freedom-worshipping cowboys that the media pretends it to be. Our laws assume all companies are potential exploiters, and regardless of size, treat them as if each one has a layer of lawyers and accountants that can handle the weight of the protective regulations. My favorite, to this day, is the tax Neocor had to start paying to help fund California's unemployment insurance program. But we were employing people!  We were solving the problem that they were taxing us, as if we had caused it. Only George Orwell could appreciate the irony: employers shall pay the unemployment tax.

Which story is true, mine or Reich's? Both are.  But which story is right? The economy naturally wants to create jobs for people, but in too many cases the government says those jobs are illegal.  The reigning philosophy says that workers need protected, wether or not they want to be protected.  If an individual wants to work 20 hours a week so they can be a part-time mom (or dad), the philosophy of Robert Reich assumes this choice is somehow involuntary.  Any trend towards greater flexibility must be bad, must be resisted.  A rise in independent contracts -- even if those are the only jobs to be found -- must be squelched.

Maybe Reich is right, but he can only be right if economics is wrong. The marginal product of labor must be a fiction. George must prefer unemployment to working as a contractor. Allowing workers to choose higher pay instead of government mandated protections must be a dangerous illusion of liberty. And if he's right, then hundreds of millions of pages of paternalism actually are necessary to trump the free will of 300 million Americans.  But don't kid yourself, cowboy, because regardless whether that story is right, it's the story that rules.

Startups Are Everything

My new study just released from the Kauffman Foundation, The Importance of Startups in Job Creation and Job Destruction, is available now. It's short and sweet (7 pages of text), with about as simple a talking point as can be: "New firms add an average of 3 million net jobs in their first year, while older companies combined lose 1 million net jobs annually."  The surprise for me, and I expect most economists/data geeks, is that aggregate gross job creation and destruction curves along the firm age axis are convex, not concave.

I don't have the individual charts in GIF format, but here's a raw one from my spreadsheet. Notice how gross job creation at startups dwarfs gross flows at other firms. For example, startups create 10x more jobs than 10-year old firms, gross, and infinitely more net.  How many economists even guess this is how the U.S. economy works?  I didn't until I saw the data.

 

  

Fight on the Right

Grab your popcorn: there's nothing better than a fight on the Right.  In one corner, there is Arthur Brooks, head of AEI and author of the recently published "The Battle: How the Fight between Free Enterprise and Big Government Will Shape America's Future." In the other corner is Brink Lindsey, a long-time CATO scholar and author of The Age of Abundance: How Prosperity Transformed America’s Politics and Culture. 

Normally, you would expect these two allies to be allied on the issue of a call for free markets in the USA, but in what I'll call the "Brink vs Brooks battle," Brooks is getting what must be unexpected friendly fire from Brink. Here's an excerpt from Lindsey's essay in American Prospect:

First, free markets. Is Brooks' distinction between all-American freedom and European-style statism a valid one? And here at home, do elites really support the state while everyone else supports the market? No and no. When it comes to establishing and maintaining open and competitive markets, the U.S. institutional and policy environment isn't really that exceptional at all. Meanwhile, elites are actually more likely to support free-market policies than is the American demos.

At heart, what Lindsey is really disturbed by is veiled racism.  So am I.  But I think Lindsey is off base here:

But Brooks doesn't want to use economic arguments. He counsels against "getting stuck in the old arguments over money." Instead, he wants to defend America's track record of more modest social spending on cultural grounds. And that is a really bad idea. Our tragic history of race relations may have inhibited spending, but we should be ashamed of that cultural heritage. We certainly shouldn't embrace it and brag about it. Brooks apparently doesn't realize what he's doing; he thinks he's touting good old Yankee self-reliance. But his argument is offensive even if he's oblivious to how offensive he's being.

Let's back up and consider the two substantive arguments: (a) that America doesn't have a distinct culture of economic freedom vis-a-vis the Europeans and (b) the American public isn't really more free market than elites (a point which Lindsey relies on Bryan Caplan's book, The Myth of the Rational Voter). 

On the first point, Lindsey's own words make a weak case: "Plenty of European countries have markets about as free as those in the land of the free."  Plenty?  He then cites the same countries Paul Krugman cites when comparing American capitalism to European socialism: the Nordics. And yes, on balance, these economies perform much better than Southern, Eastern, and Central European economies.  But they are still less free than the U.S. (at least according to the Heritage/WSJ Index), and their Euro siblings are downright tragedies.  Lindsey does make a valid distinction between regulatory freedom and fiscal freedom (tax burdens and redistributive spending), but there's no denying the size of the state is about more than the homogeneity of the populace. France, Denmark, Italy ... these are nations where government expenditure is more than half of the economy.  For any entrepreneur who instinctively feels there should be a limit to the state's claim on his profit, 50 percent is bright line symbolizing a kind of serfdom on the other side.

The second argument, however, seems very effective.  Caplan documents a number of irrational economic beliefs of the public, such as the hostility to free trade and a hostility to labor efficiency.  He also shows that educated people think more correctly (that is "rationally") like economists on these and other issues. But Lindsey muddies the waters when he conflates Caplan's educated group with Brooks' 30 percent group, and especially with media elites (shown elsewhere to have biases of various kinds).  More properly, and I've challenged Caplan on this, voter irrationality should not be overinterpreted.  It simply means that busy people don't bother with complex policy designs, a kind of policy agnosticism.  It does not mean they lack core policy convictions (e.g. for lower taxes and smaller government).  Nor does it mean they are agnostic about outcomes, which explains the strong relationship between unemployment rates and results at the ballot box. I've written a more complex assessment of Caplan's book here (for all you rational voters). 

What Brooks is ultimately arguing is that the fundamental direction of the country will be determined by a clash of values, not mathematical models. Lindsey wants to amend that argument to include front and center our newish values about racial equality, not just traditional values about freedom and federalism. Three cheers for that. Still, I think Brooks is ultimately correct. The statist argument has always been an emotional one, laden with appeals to sympathy, empathy, justice, and equality. For the anti-statist argument to rest on mathematical proofs and cold-hearted logic favoring efficiency is a loser. It's not enough to win the intellectual case for smaller government and entrepreneurial economies. The cause of entrepreneurial freedom needs to be made at an emotional level in the public arena.

Economic Pessimism, Reasons 1-5, with a Kicker

The short-term outlook continues to be bleak for the U.S. economy.  Though I'm not in the Krugman camp for policy reasons, I concur with his macro pessimism. I still haven't gotten the memo that the recovery has arrived.  My reasons:

1. Jim Hamilton (via Bill Gavin) adjusts the unemployment rate.

 
  
2. Jobless Claims have not cauterized. Anything above 400,000 new claims per week means the economy is bleeding out. This morning's weekly release is 472,000, the high level its been stuck at for ... years.  You can't hype how bad this is.

3. There's an analogy to oil bleeding out in the gulf. Maybe it's time to blow it up?

4.  Home prices will drop another 5-10%, says Calculated Risk.

5.  Policymakers are out of ammo (see my Depression Index, which hasn't changed much in the year since I described it).  But wait ... maybe this is good news!

I recommend John Tamny's essay in the WSJ today about postwar Germany's rejection of "spending Keynesianism" in favor of what I call "tax-cut Keynesianism."  Krugman's notion of big push stimulus has failed spectacularly, again, and it's time to respect the empirical outcome.

So, here's the good news.  Economies are dynamically stable, not dynamically unstable. Any economy naturally finds an equilibrium if only the masters of institutional policy will let it.  But the animal spirits need a sense of certainty, something sorely lacking in the U.S. right now. Without certainty, state policymakers will continue to make fantasy budgets. Without certainty in mortage tax credits, no one will know when home prices are real.  But once genuine commitments to fiscal stability and tax policy are made, the transition to real growth will be swift. Remember, the credibility story was validated regarding monetary policy in fighting inflation (see Volcker, Paul).  We need our policymakers to understand that credibility trumps stimulus in promoting growth.