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Sunday, February 6, 2011

Obama Does Not Understand Business

As a teacher of comparative economics and textbook author on the subject, I cannot refrain from commenting on President Obama’s unfortunate lack of understanding of business.

Obama’s last weekly address to the nation shows his profound misunderstanding, despite an international consensus as to what determines a good business climate. The various indexes that purport to measure it have one thing in common: A good business climate is one where the government gets out of the way of business. Overregulation, inconsistent application of the rule of law, a heavy tax burden, and insecure property rights reduce business formation, investment, and economic growth. The strong positive correlations between such measures of business climate and economic performance prove this basic fact.

Obama’s pronouncements suggest a quite different understanding: In his mind, a good business climate emanates from public and private alliances, subsidies of progressive business activity, industrial policy, state-directed investment, the “saintly” non-profit sector, and massive infrastructure campaigns. It should be noted that none of President Obama’s “good business climate” measures are included in the existing business climate indexes.

Obama’s stated goal is as American as apple pie: to “make America the best place to do business” In return, businesses should “set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That's their obligation." Contrary to Obama’s assertion, the real obligation of businesses is to make profits for their owners. In pursuing this goal, far sighted businesses will hire, invest and pay decent wages.

Three examples, among many, illustrate the President’s thinking:
The most recent is his vaunted “move to the center” in appointing the “pro business” Jeffrey Immult, the CEO of General Electric, as his chief economic advisor. Immelt and GE exemplify a business whose fortunes hinge on a cozy relationship with government -- aan American version of Crony Capitalism. Notably, he did not appoint a true self-made entrepreneur, who made it on his own without the government.

The second example was the notorious bullying of secured Chrysler creditors – an outright attack on contracts and property rights. The shoving of Chrysler’s creditors to the back of the line helps explain much of the current reluctance to lend.

The third example has been the Obama administration’s conclusion that it was the government’s responsibility to deal with “excessive” executive pay rather than leaving the matter up to shareholder owners, as has always been the case.

It will not be possible to make America the best place to do business in the world with such thinking, but there are few signs, other than some PR forays, that this message has been heard. If such misconceptions continue to shape government policy, the result will be a continued deterioration in the U.S. business climate.

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