Not All Businessmen Are Smart, You Know

Stephen Carter, a professor at the Yale Law School and an accomplished novelist, wrote a Bloomberg column based on a conversation with a medium-sized business owner he met on a plane. The gist of the column is that the businessman isn’t hiring more workers because he’s worried about the regulations changing on him. From this, Carter draws a general lesson about business and government:

“For medium-sized firms like his, however, there is little wiggle room to absorb the costs of regulatory change. Because he possesses neither lobbyists nor clout, he says, Washington doesn’t care whether he hires more workers or closes up shop. . . .

“Recessions have complex causes, but, as the man on the aisle reminded me, we do nothing to make things better when the companies on which we rely see Washington as adversary rather than partner.”

Jim Henley (hat tip Brad DeLong) has already pointed out the silliest thing about this column: anyone who has a growing business and isn’t hiring more people, and isn’t hiring them because he’s not sure about future regulatory changes, is making a mistake (or perhaps is in a very unusual business that is heavily exposed to some very particular and very concrete regulatory risk).

Since Henley concludes, “The article reminds me of the criticism that intellectuals tend to lack real-world business experience,” and since I am also going to be a law professor, I’ll point out that I worked at McKinsey for three years and later co-founded a software company where I worked for seven years. It’s not a terribly long business career, but it’s longer than that of most academics and pundits. And at no point in any context did the concept of regulatory risk ever arise as a significant factor. When real businesses think about whether or not to enter new markets, build new factories, hire more people, etc., their overriding question is: will people buy enough of the stuff I’m selling? That is question number one, two, and three, and everything else is relegated to the “other factors” at the end. (And for real businesses today, the biggest “regulatory risk” is that the government will fail to solve the health care problem, since growing health care costs are the biggest cost that businesses don’t have control over.)

I have two additional points to make. The first is that Mr. Business Owner’s complaint is really a futile complaint about the fact that the world changes. He doesn’t hire workers because the regulations can change. He can’t decide what to invest in because Washington created “a climate of uncertainty.” More tellingly, he can’t plan to sell his company because “he doesn’t even know from one year to the next what the capital gains rate is going to be.” Do you know what you call a political system where regulations and tax rates can change? I was going to say, “democracy,” but really it’s any political system. The closest thing you can have to long-term certainty is a country with a dictator who is powerful, secure, and mentally stable. In a democracy, when a new party takes power, policy can change. Most of us think that’s a good thing. Calling the government an adversary because of a fundamental principle of democratic government seems, well, a bit un-American.

Oh, and that capital gains tax rate? It was 28 percent from the Tax Reform Act of 1986 until 1997; then it was 20 percent until the second Bush tax cut of 2003; and it’s been 15 percent since. It might go back up to 20 percent if the Bush tax cuts expire in 2012. If that’s too much uncertainty for him to deal with, then he needs to get into another line of work.

Second, Carter makes the mistake — one perhaps common to academics — of ascribing too much importance to what a real businessman says. Objectively speaking, regulatory uncertainty has never been a particularly important business consideration, and it is not unusually high now. (Quick, name five regulations proposed by the Obama administration that will significantly increase the cost of labor.*) Yet I am sure that there are many businesspeople just like Carter’s seatmate, who are failing to hire and are blaming their decision on regulatory uncertainty.

Why? Because they watch Fox News, too. If you watch enough people telling you that the Obama administration is raising the cost of doing business, you start to believe it, just like if you watch enough people telling you that Obama was not born in the United States, you start to believe that, or if you watch enough people telling you that Iraq has weapons of mass destruction, you start to believe that. And once you believe that the Obama administration is raising the cost of doing business, and you believe that this is creating a lot of uncertainty, you slow down your hiring. But in that case, the uncertainty wasn’t created by Washington; it was created by Fox News.

The counter-argument is: that couldn’t happen, because Mr. Business Owner is putting his money where his mouth is; since he’s making business decisions, he must be acting rationally, ergo there must be regulatory uncertainty.

Does this argument even need a response? As Larry Summers once said, “There are idiots. Look around.” People make stupid decisions all the time when making decisions that affect the bottom line, and companies are no different. Because of competition, successful businessmen might make slightly fewer stupid decisions than other businessmen, but it’s only a few. There are so many factors that go into building a successful business, many of them uncontrollable, that there’s no reason to assume that someone who has done moderately well is any better at judging the impact of government policy on future profitability than you are. (Secret for all those other law professors out there: there are smart businesspeople, and there are dumb ones, just like in every other occupation.)

I’m not doubting that Mr. Business Owner really believes that regulatory uncertainty makes it too risky to hire more people. But his saying so doesn’t make it so. Well, one might say, the fact that he believes it is the problem, and so the government needs to do a better job convincing business that it’s on their side. But I’m not buying that either. The problem is that the conservative media have been trumpeting the talking point that the anti-business Obama administration is creating regulatory uncertainty, and they’ve been doing it so loudly and for so long that lots of people actually believe it. And if businesspeople aren’t hiring because of that belief, then it’s the conservative media — and people who repeat their talking points — that are to blame.**

* One area where firms might legitimately be worried about new regulation is in consumer financial services, since there there is a whole new regulatory agency to worry about. But while those regulations may affect what services may be offered and at what price, they are unlikely to affect labor costs, which are what Mr. Business Owner was worried about.

** After writing this last paragraph I realized that Will Wilkinson (hat tip Kevin Drum) beat me to it.

This post originally appeared at The Baseline Scenario and is reproduced here with permission.

3 Responses to "Not All Businessmen Are Smart, You Know"

  1. JohnCardillo   June 8, 2011 at 11:54 am

    I wonder, why do businesses that avoid hiring in a secure stable democratic country like the US, because of "regulatory uncertainty", have no problem investing and hiring in contries like China, knowing full well they have to give up a controlling interest while giving away their intellectual property?

  2. BreezyOhio   June 10, 2011 at 8:56 am

    We're in an age where business "leadership" has been and is all about reducing risk and preserving market share. It's the cornerstone of business decision making today, and frankly it's all about educating businessmen into middle managers and as far as possible from being entrepreneurs.

    Result? So much of what CEOs, etc do is based on knee jerk reactions to preserve what the business has instead of looking ahead to where the business or it's market should be in even just 5years, much less a decade.

    How many current CEOs would have ever started Google or Amazon without a near guaranteed payback in place? Nearly none. They all think like Jack Welch .. erode the core to reduce costs to make the current shell profitable. It's all middle manager thinking, magnified.