Business and Economics: May 2011 Archives

As I read this Professor Stephen L. Carter piece about the uncertainties of government regulation and its effects on businesses and hiring, the more I nodded my head in agreement. Everything I read reflects what I've heard from a number of business owners here in the Lakes Region of New Hampshire: Without knowing exactly what government is going to throw at us in the way of ever more overreaching (and expensive) regulations, there's no way we're going to hire anyone new. Period.

A lot of middling and small businesses have seen their margins shrink, leaving them very little in the way of wiggle room when new government regulations and requirements hit them. How is any business going to plan for the future when government "regulation" is now such a big unknown? With most of the new regulations having absolutely nothing to do with safety, environmental issues, or pay, but more often financial matters, all they do is add unneeded costs to businesses. Sometimes those new rules and regulations turn an otherwise profitable business into an unprofitable one, and when that happens far too many of them close.

All of these regulations do nothing but provide more employment for government workers, not workers actually producing goods and services our economy depends upon. How is this supposed to help our economic recovery?

(H/T Instapundit)
On Wednesday an important vote takes place in the New Hampshire House, one that may well change the course the Granite State been following the previous 4 years.

Some time tomorrow the House is supposed to vote on overriding Governor John Lynch's veto of House Bill 474, the Right To Work bill. The bill originally passed in both the House and the Senate with overwhelming majorities, though the original House vote was just 14 votes shy of a veto-proof majority.

However, House Majority leader William O'Brien may delay Wednesday's vote long enough to lock in the last votes he'll need to override the veto.

HB 474 supporters say the state will see a burst of job growth if the bill becomes law, and point to other right-to-work states as proof. Critics say right-to-work brings lower-paying jobs with fewer benefits, and that it sticks the nose of government into contract talks between labor and management.

If HB 474 becomes law, New Hampshire would be the 23rd state, and the first in the Northeast, to adopt the principle.

A lot of pro-union folks point to the "lower-paying jobs with fewer benefits" canard as if that explains everything and no further discussion is required. However, most of the 22 Right To Work states have a lower cost of living, so unless that factor is taken into account, which union supporters choose to ignore, the comparison is meaningless. As I've mentioned before, a perfect example of this factor can be seen in the battle between the NLRB and the state of South Carolina and Boeing.

The unions in Washington State claim Boeing's new plant is denying the working men and women a living wage. While the pay for those employees in South Carolina is less than the pay of the union workers in Washington, the cost of living in South Carolina is also lower (as is the cost of doing business), which implies that taken as a whole, the workers in South Carolina are receiving comparable pay to those in Washington State.

And so it might be here in New Hampshire as well. If it helps lower the cost of doing business, then Right To Work will help lure more businesses from high cost states like Massachusetts, New York, Connecticut, and Rhode Island, just to name a few. (It doesn't hurt that New Hampshire also has no sales or income tax.)

The days of forced financial support of unions by those not wishing to do so must come to an end. As the reasons for the existence of unions no longer exist, maybe it's time for them to fade away into history.
In a post by Matt Patterson, he tries to make the case for jobs that have been lost during this deep recession never returning. While it may be true that some types jobs may be gone forever, it is not inevitable that the total number of jobs will decline from here on out. Through the process of "creative destruction", one kind of job was replaced by a different one. But as Patterson writes, at least one economist thinks this pattern will no longer be true.

In his penetrating new book The Great Stagnation, economist Tyler Cowen warns that this may have been a temporary and anomalous phenomenon. Cowen calls the period from roughly the early 19th to the mid-20th centuries the era of "low hanging fruit." According to Cowen, technological advances in this period were relatively easy to produce and exploit, resulting in a staggering explosion of living standards.

But by around 1970, most of this low hanging fruit had been plucked and growth rates began to slow. Indeed, growth rates are "lower today than before 1973, no matter what exact numbers you settle on for the absolute living standard." Cowen sees this fact directly tied to the innovation plateau that was reached around the same time: "The United States produced more patents in 1966 (54,600) than in 1993 (53,200)," he notes. "Meaningful innovation has become harder, and so we must spend more money to accomplish real innovations, which means a lower and declining rate of return on technology."

--snip--

This digital depressant trickles all the way down to old fashioned companies. McDonald's recently announced it will do away with cashiers in many of its European restaurants, replacing them with touch-screen ordering systems. This innovation may (or may not) make ordering your Big Mac a faster experience, but it will definitely eliminate countless opportunities for young and low-skilled workers.

On his last point, couldn't it be the cost of labor in Europe is artificially high due to government mandates and labor laws that replacing expensive humans with less expensive technology makes economic sense? When government and labor laws make it more expensive to hire people for what would otherwise be minimum wage jobs, then how can it be a surprise to anyone that businesses like McDonald's won't hire them? (It's not all that different than what we see happening here every time the Leftists in Congress beholden to the labor unions raise the minimum wage. Each time that happens, joblessness among those seeking entry level jobs goes up because small businesses have a tougher time justifying the added expense, particularly during times of economic hardship.)

One commenter hit the nail on the head, detailing why Cowen's claim about the decline of the American economy is inevitable is absurd.

We are inventing more things, faster than ever before. The past innovations "destroyed jobs" -- and made society wealthier and created new jobs, different jobs, to replace those that had gone before. This is nothing but the song of the Luddites.

HOWEVER...

For that process of creative destruction to work, it is necessary to ALLOW the new jobs and new industries to be created. And THAT, not some illusory "low hanging fruit", is what has been changing over the last generation or two. The regulatory burden on new industries has climbed ever higher.

Right now, in laboratories around the U.S. people are working on fusion power, cheap space travel, synthetic fuel from algae, sensors for automated medical diagnosis, and so on, and on, and on.

And if we lived in a free country, sooner than you think, some of those would be part of our everyday lives. The decision to decline is a CHOICE -- not a fate.

Unfortunately our fate is in the hands of people within government who really don't like America all that much and are working as hard as they can to cripple its innovative and robust economy in an effort to make it more egalitarian (at least by their definition). Unfortunately we've seen the results of such socio-economic experiments before, and they've always turned out poorly for everyone involved...except the ruling class, of course. (And even then, some have seen their fiefdoms crumble away and leave them as destitute as the rest of their fellow countrymen.)

Unless we can break the government imposed malaise on our economy, we will indeed see those jobs lost over the past few years gone for good, with no new jobs to replace them, and we will indeed decline as a nation.

Ignorance By Choice

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One of the conclusions I must draw from observations made over a number of yeas is that far too many of the Left are ignorant. I'm not talking about the kind of ignorance that comes from not being exposed to ideas, facts, or events outside one's experience, but willful ignorance, ignorance by choice.

Reading the comments of pro-union readers of South Carolina governor Nikki Haley's opinion piece in the WSJ about the NLRB's suit against Boeing were telling, showing (to me) how much of their thinking was pure indoctrination, not backed by fact or evidence. Their hatred of businesses in general and Boeing in particular was out in the open. If such reactions revealed anything, it was their willful ignorance about how the economy operates, how businesses function, where money actually comes from, and how unions have changed and are not the organizations they once were.

Many of the positive views of the unions expressed by the pro-union commenters were right out of the 1930's. Far too many of them seem to think that if it weren't for the unions "protecting" the working man today we'd all be working for slave wages and child labor laws would be struck down and all our kids would be working in the textile mills again. They truly believe only a union can provide fair wages, benefits, and working conditions that otherwise would be unavailable to anyone. That may have been true back 100 years ago, but not today. With all of the labor and employment laws on the books (many brought about by the work of the unions decades ago), the need for unions for that kind of protection no longer exists. But to read what some of the pro-union have put forth, you'd think we were only a day or two away from going back to those bad old days.

And then there's this bit of willful ignorance in which far too many of them indulge: money, and where it actually comes from.

Do they truly believe the money is all just piled in bank vaults, "meant to be shared equally amongst Americans"? To listen to some of them, the answer is yes. But it overlooks one principle that so many of the rest of us recognize as being a fundamental truth: Money isn't owed to anyone, it is earned. And that money isn't just sitting in piles in bank vaults where it does no one, even the rich, any good. It has to be used, has to circulate to be of any good to anyone. Otherwise it's just piles of paper with pictures of dead presidents printed on them.

One of the other falsehoods that many of the Left believe at a gut level appears to be that wealth is a zero sum game, and that for someone to become wealthy someone else has to become poor. They either don't realize or care that the size of the proverbial "pie" they want to portion out to everyone is not static. It grows and shrinks with the economy. And of those who do understand the size of the pie changes, far too many of them believe only the wealthy benefit when the economy grows, and only the middle class and poor see their share of the pie shrink when the economy shrinks. The truth is everyone gains and everyone suffers as the pie grows and shrinks. Everyone.

But why confuse them with the facts? They aren't interested in any case.
I am about to write one of the terms most hated by businesses in America these days:

SarbOx.

This refers to the Sarbanes-Oxley bill that came in the aftermath of the Enron debacle. While the intent of SarbOx was to help prevent another Enron and the economic damage that went with it, it has in itself created all kinds of harm to businesses because of its draconian requirements.

Accounting and reporting requirements have added to business costs with nothing to show for it. SarbOx fixed nothing. Even if it had been in force before the Enron debacle, it wouldn't have prevented it.

Some of the side effects of SarbOx:
A decline in IPOs (Initial Public Offerings). This is how private companies go public, offering stock to the public as a means to raise capital for expansion. Without this mechanism, many businesses can't expand as they might have planned, which means fewer jobs are created and less money can be made.

An increase in mergers and acquisitions because IPOs have fallen out of favor due to the requirements of SarbOx.

An increase in number of public companies going private. Some of this may be driven by the burden placed upon public companies by SarbOx. Going private removed much of this burden, but also made it more difficult to raise capital. Apparently they saw this as less encumbering than having to deal with SarbOx.

It slows down speedy financial disclosure, something the SEC requires. With the convoluted requirements of SarbOx, such disclosure is darn near impossible.

Costs of compliance are quite high. The SEC had estimated it would cost companies required to report under SarbOx only $91,000 per year to do so. The actual costs are closer to $7.8 million per year (this is a 2008 figure). Accounting costs have doubled due to the reporting requirements. Other than accountants and attorneys, how has this benefited anyone?

So it all boils down to this: SarbOx costs businesses billions in compliance costs, delays up-to-date financial reporting, has squeezed out investment capital, and cost jobs (except those of accountants). Yet with all it was supposed to do it hasn't prevented much of anything that existing SEC rules and regulations already covered. It wasn't that there weren't sufficient laws on the books to deal with things like the Enron scam. It was that what laws that were already on the books weren't being properly enforced. How does piling on even more laws, rules, and regulations fix that?

Unfortunately we're all paying the price for that lack of oversight and enforcement.
OK, so I misspoke about what Part 2 would be about. Originally I was going to cover energy, but thoughts and righteous indignation about the EPA overrode that plan.

********************

One of the government agencies that has most recently caused FUD (Fear, Uncertainty, and Doubt) among business, and indirectly the people, is the EPA.

While it is the EPA's purview to help safeguard the environment, lately it has been going outside its mandate and trying to regulate economic activities it sees as affecting the environment. This is particularly vexing considering both Congress and the courts have told the EPA they do not have power to do so.

One of the EPA's latest 'crusades' involves energy. In this case making sure it is less available and far more costly. In particular they're trying to impose stricter regulations on the electric utilities and oil companies, bypassing the usual means of doing so and imposing them without the consent of Congress.

Jeff Holmstead, who directed the EPA's air and radiation office from 2001 to 2005 during the Republican President George W. Bush's administration, told the commission the new rules will quickly change policies that have been stable for 40 years. He called the new regulations an "unprecedented" amount of change for power companies.

Part of the problem is that some of the EPA's new rules overlap and contradict many existing rules, both its own and those of other governmental agencies and departments overseeing the energy industry. This leaves the power companies and oil exploration and drilling firms in a bind, making it impossible for them to be in compliance with all the rules and regulations imposed upon them. The EPA also ignores state rules and regulators rather than working with them, which only adds to the confusion.

This is a government agency that has gone rogue and believes it doesn't have to answer to anybody. It ignores the law, ignores the courts, ignores Congress, and ignores the Constitution. It believes it is above the law. It hands down edicts and expects everyone to follow them without question or dissent regardless of the effects on the economy or the environment.

Don't believe me? Then how about the EPA's efforts to 'clean up' the upper Hudson River in an attempt to remove polychlorinated biphenyls (PCBs) embedded in the silt at the bottom of the river? Their clean up has done far more harm than if they'd left things alone.

By ordering a dredging operation along 40 miles of the Hudson, the EPA has created a disaster of governmental proportions in this quiet upstate community. For six months in 2009, floating clamshell diggers shoveled day and night, pulling sludge from the river bottom around Fort Edward and depositing it onto barges. Six days a week, 24 hours a day, these barges, containing a total of 286,000 cubic yards of sediment mixed with old PCBs, were offloaded into that massive dewatering facility. There the soggy material was treated and squeezed in giant presses. The cakes of compacted sludge were then moved by truck onto 81-car trains, parked on a new spur of the Canadian Pacific Railway extending into the site. Five of these trains were in constant rotation, circulating the 4,400-mile round trip between the facility and the final dump site in Texas.

It was a Herculean attempt at remediation but one that actually increased PCB levels in the Hudson for a time; it also wreaked havoc on locals' lives and imposed huge costs on General Electric. And all this work was only "Phase I" of the EPA's plans. The government is now compelling GE to spend billions of dollars on Phase II, an even larger and longer operation. Dredging will recommence this spring.

And once they start dredging again the PCB levels will rise dramatically and stay that way as long as they continue removing all that silt on the river bottom. That doesn't even take into account the huge amounts of energy expended or pollution generated to clean up the river. They would have been better off to leave it where it was. It wasn't going to go anywhere. Instead, they've made things worse all in the name of "Saving The Environment." It's yet another example of the Law of Unintended Consequences coming into play. Government agencies are pretty good at invoking it.

Maybe it's time to rein in the EPA, to remind them that they work for us and not the other way around. Better yet, to ensure they get the message it might be worthwhile to slash their funding to zero for year. Then refund it the following year after an exhaustive review of the EPA's overreach and implementation of proper controls upon the agency.
Two bits of news aren't helping the economic situation here in New Hampshire.

First, state revenues for the month of April were below projections by about $30 million. That's certainly not going to help with the budget deficit, making this fiscal year's shortfall about $47 million for this fiscal year. That's on top of the existing $800 million deficit from the previous fiscal year. Needless to say, state legislators aren't happy.

"The governor had an opportunity to use responsible and realistic revenue figures like the House budget used, but instead he chose to use numbers that were nearly $300 million higher to hide his greater spending," said Republican State Committee Chairman Jack Kimball.

Over the past four years the governor and the then Democrat majority legislature went on a spending spree, increasing state spending by over 30% over that time, using inflated revenue projections to justify the high spending levels. When revenues fell well below the overly optimistic projections, the governor and legislature failed to address the expenditure problems, instead focusing on trying to increase fees and taxes at a time when most businesses and individuals were struggling to make ends meet. Even with the increases, the state revenues failed to meet projections.

At least the budget for the next two fiscal years are likely to be in balance as the GOP in both the House and Senate cut the proposed 2-year budget by over $700 million, basing it on far more conservative (and realistic) revenue projections.

The second bit of bad news concerns hiring, with over half the businesses in the state planning not to hire any new employees either this year or next year. That doesn't sound like an economic recovery to me.

A number of factors are driving this trend. One New Hampshire businessman explained why he's holding off.

At a meeting attended by about two dozen businessmen and women at the 1st District Congressman's Manchester District Office off Lowell Street, Gary Brown of Raymond-based www.WebPageDesignUSA.com and The Image Factory said he can't afford to hire any more staff and is fighting to keep his current 12 employees working.

"I'm at tipping point, where if I hire any more folks, I will have to pay for national health care," Brown said.

"How an I going to survive? I'm not going to hire," he said.

This is yet another of the unintended consequences of ObamaCare affecting employment, not just here in New Hampshire, but across the nation.

Other businesses will make do with their present staffing levels, even if work does pick up, preferring to pay for overtime rather than benefits for new hires, or hiring temps on those occasions where they need the extra help.

Other factors influencing hiring include energy prices, something some businesses cannot easily pass on to their customers. So to keep their costs low they won't add staff, offsetting their higher energy costs.

Neither bodes well for the employment picture in New Hampshire. I have a feeling this is also true for many other states as well.

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