What Really Worries American Business

The President's claim that we have a "crumbling" infrastructure is based on the World Economic Forum's rankings of factors that presumably affect international competitiveness. In reading their latest publication, I learned that their rankings are based on surveys of some 100 businesspersons/experts from each country. In other words, Ethiopians ranking of their infrastructure is compared with the rankings of U.S. businesspersons of U.S. infrastructure. This methodology yields all kinds of odd results, such as U.S. public trust in politicians being below Kazakhstan, Iran ranking better than the U.S. in favoritism of government officials, and so on.

Therefore, I suggest that in general the World Economic Forum's rankings are questionable, putting it  in the most favorable light. In some cases, it is better to ignore their results.

I did find one comparison that made sense and whose results are interesting. U.S. business persons are asked to select the most problematic factors in doing business.  Their answers show the real concerns of American business.  The results also make sense.

As the figure shows, the major concern is financing. Credit has dried up. No one is lending. We already know that; so this result makes sense.

The second greatest concern is bureaucracy. We suspected that, but here it is in numbers.

The next two concerns are tax rates and tax regulation. Again no great surprise. 

Although our inflation is low and the Fed tells us not to worry, concerns about inflation rank high, especially to those facing higher prices of materials.

The next two factors of concern are a poorly educated and motivated work force. 

Not surprisingly, businesses are worried about policy instability. They have been buffeted by too many changes in the last few years.

Two major policy issues -- health care and infrastructure concerns- rank among the lowest of concerns of American business persons.We spent the first three years of the Obama administration fighting about something the business community does not regard as a problem. We will begin a debate on a state infrastructure bank. The business community does not appear concerned about our "crumbling" infrastructure.

Studies such as these suggest we should not shoot from the hip in the upcoming political campaign. We should not assert concerns that are really not there.

Spoof Turns into Reality

I was thinking of writing a tongue in cheek post about granting S&P whistle blower protection after its downgrade.

Imagine my surprise when I saw the following on Drudge just now:

US Inquiry Eyes S&P Ratings of Mortgages

 

Yes, There Is No Mainstream or Consensus on Stimulus Spending

In its Sunday edition, the New York Times informed its readers that “a wide range of economists say the administration should call for a new round of stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth.”

In my post of August 11 Paul Gregory Forbes I rejected the notion of a  consensus and pointed out that  the seven Nobel Prizes  went to economists who cast doubt on the Keynesian model and zero to  economists for advancing the Keynesian agenda. The Nobel prize committee itself has cast serious doubt on the characterization of Keynesian economics as “mainstream.”

In his “No Near-Consensus Among Economists for Another Stimulus Package” John Taylorwrites “there are plenty of economists who think that gradually reducing spending and not increasing taxes is better for job creation.  In June, for example, 150 economists (including me) wrote that a debt deal ‘that is not accompanied by significant spending cuts and budget reforms would harm private-sector job growth.’”

Disagreement among economists on Keynesian stabilization policy is not new. Two researchers  analyzed a randomized survey of one thousand members of the American Economic Association from 2003. AEA members were asked their views on a wide range of issues, including a set of questions on the economic role of government. The results of this study were published in 2006.

The key question for our purpose is the degree of support for “tuning the economy by fiscal policy.”  Some fifty percent supported strongly or mildly and thirty percent opposed as of 2003. The rest had mixed feelings. Of the eight questions on the role of government, the Keynesian fiscal policy question had the greatest variance – that is the greatest amount of disagreement. Note that this question is not ideal. It was asked at a time of rapid economic growth and low unemployment and did not address the question of a stimulus as huge as we have recently seen.

Note that AEA members were last surveyed in 2003. If there is a consensus about the last three years, I would imagine it would be that the massive Obama stimulus failed. For this reason, the same survey today should yield even larger percentages of Keynesian skeptics

The professional competence of the average economist to answer questions on macroeconomic stabilization has diminished over the past two decades. The high growth and low unemployment starting in the early 1980s diverted attention of economists from the business cycle. Accordingly, relatively few economists know the modern stabilization literature. We do not have a survey of economists who specialize in the business cycle. The results of such a survey would be informative.

A final note: As of 2003, democratic-voting economists outnumbered republican-voting economists by almost three-to-one. The vast majority of those answering the fiscal tuning  question voted democratic..

Personally, I do not see the mainstream consensus that the New York Times does. Perhaps I am too dense.

The authors of the survey report an interesting fact about the answers of the surveyed economists:  “Economists have something of a reputation for favoring free-market principles, yet we see that economists on average are supportive of most economic interventions, mixed on a few interventions, and opposed only on immigration (weakly opposed to tighter restrictions), government ownership of industry, and tariffs. It seems that most economists in fact stand in the  middle of the road or even on the interventionist side. Why, then, do they have a reputation for being free-market supporters?”

Daniel Klein and Charlotta Stern, Economists’ Policy Views and Voting,” Public Choice (2006) 126: 331–342, 2006

The Government Kills a Bank, Small Business, and Jobs

In my introductory economics classes, I teach that a well-run bank spends its time getting to know it customers and then makes loans to those who are credit worthy. I point out that the most important employees of banks are its loan officers, whose job it is to know its customers.

With creation of the mega-bank, much of this wisdom has been lost. Mega banks lend money to customers they do not know. They buy syndicated mortgage derivatives they do not understand, and they are surprised when they are left holding the bag with worthless paper. Once bitten, they fear making loans and sit on he cash reserves.

Main Street Bank of Kingwood Texas, was one of the traditional banks I teach about in my class. It got to know its local customers. It made loans primarily to small local businesses – the very ones who provide jobs for the local community. Man Street Bank was profitable, and its portfolio of bad loans was well below the national average.

Enter the federal regulators.  In July of 2010, Federal regulators ordered the bank to boost its capital and bring in a new top executive. More tellingly, it ordered the bank to shrink its lending to small businesses. It ordered that small business loans be dropped from 90 percent to 25 percent – there were too many eggs in one basket.

On Wednesday August 10, Main Street Bank surrendered its bank charter and sold its four branches. We lost a bank that was doing exactly what the economy needs – a  bank that actually makes loans to small business customers whom it knows well.

This intrusive regulation is part of the federal program to identify excessive risk and prevent bank meltdowns. As you can see, the Feds are using a one-size-fits-all approach. Regulation of this type is scheduled to get even worse with the looming Dobb-Frank Act.

Do we wonder why there is so little lending and so few jobs? Do we really need Washington bureaucrats telling small banks how to run their business? Do we really think that a Washington bureaucrat can foresee risks that private companies that are risking their own money cannot see?

Tea Party Understands Economics Better Than Obama Or Bill Maher

Liberal commentators and comedians appear to accept Keynesian economics as such an evident truth that non-believers must be stupid. Keynesian economics has become a liberal dogma, not subject to challenge by reasonable people.

Consider comedian Bill Maher’s quip to a former Obama advisor on Aug. 6, 2011:
“Keynesian economists and climate scientists both know real things, but the stupid people who don’t know things get an equal vote. Isn’t that frustrating?” (Laughter from the audience.)

Video: A Lesson From Keynes
 

Liberals target the Tea Party as their favorite nominee for the “stupidity” prize. Tea Party members are not only dunces. They are irresponsible hostage takers who do not care if they bring the country down with them.
Here is a shocker for Obama, Maher and Tea-Party haters: Since the Nobel Prize in economics was established, seven Nobel Prizes have been awarded to economists who cast serious doubt on Keynesian economics. Not one Nobel Prize has been awarded to an economist who advanced the Keynesian agenda. New York Times liberal columnist, Paul Krugman, won his Nobel Prize for trade theory, not for macroeconomics.

Maher’s “stupid people” who reject Keynesian economics, it seems, are in rather distinguished intellectual company.

Let me go down the list of Nobel-laureate Keynesian skeptics:

1) Permanent or life-cycle income (Milton Friedman, Franco Modigliani)
This theory says that consumers are forward looking. They base their consumption decisions on income they expect to earn over a longer period of time, not what they earn now. They change their spending only in response to changes in long-term income, not in current income.

to read more go to Forbes.com

If the UN Wants to be Useful: Build Villas for Dictators

Egypt is prosecuting Mubarak in a hospital bed inside a cage. He faces the death penalty. An international court has indicted Kaddafi.  If his Libyan enemies get their hands on him first, he will be killed. Pinochet was hounded to the end of his life despite a grant of immunity after he turned over power following a democratic election.

What signals do these three cases send out? They tell dictators to fight on, to the bitter end if necessary.  In the meantime, NATO warplanes must be deployed, national treasure lost, and thousands of innocent civilians killed. In many cases, the dictator will prevail and continue in office. Nothing has been gained. The costs have been high.

If the UN wanted to make itself useful, it should have a protection program for dictators who negotiate to leave office. The compound should be heavily guarded, have all the latest luxuries, and the staff must be attentive and deferential. A deserted island might do the trick or a scenic down-on-its-luck country may want the business.

Those countries that want to extract revenge from fallen dictators would find this a tough proposition to accept. They are already rid of their dictator. Why should they help other countries get rid of theirs? But from a cost-benefit perspective, the UN-sponsored retirement community makes a lot of sense. This is one case where we need an “international community” to persuade reluctant members to do what is best.

I can imagine such a dictator-retirement community. Robert Mugabe takes a leisurely stroll, chatting with Mohammar Kaddafi and Bahsar Assad as Raul and Fidel Castro nap on  chaise lounges at the pool. Their mistresses would be welcome as well. What a sight!