Not All Businessmen Are Smart, You Know

By James Kwak

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, its a mistake to ascribe 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.

54 thoughts on “Not All Businessmen Are Smart, You Know

  1. I pretty much agree, its nonsense. Business owners are not in the game to create jobs. They only create them when they can’t deliver products or services on a schedule their customers demand. They would love to be able to get rich without hiring anyone. Regulatory and tax uncertainty is like the boogey man. Everyone wants an excuse that can’t be refuted empirically.

    They are genetically and culturally endowed with a distrust for any President who does not have a lot of rich people pulling the strings , ones who put him in office. Although Obama has his share of rich old farts they seem to prefer to remain obscure.

    I doubt if his predecessor have had to turn in a resume and actually compete for any of the little corner office jobs he occupied.

  2. Yes, of course. The solution to the disappointing recovery is to shut down all right-wing media outlets because they’re terrifying business with their doomsday predictions. The exact same argument could be made the other way around – all those leftist outlets reporting on how Republicans are going to force the US into default by refusing to raise the debt cap, etc etc.

    There is absolutely zero evidence that one of these views is more correct than the other. I suspect both of them are wrong, though. I am much more confident saying this is possibly the worst and most senselessly partisan post that has appeared here yet, though.

  3. One regulation that will affect large businesses is the change in CAFE standards. However, it is something that has been debated for years, is known to be necessary, and was a change that US automakers were voluntarily making – what are Ford’s newest flagship products? Not the Explorer anymore – the Focus and Fusion.

    The other thing about competition is, if there is real business in this market (definitely not sure, look at home building), someone will fill the niche and meet the demand, regardless of regulatory uncertainty. If the goal is to strengthen entrenched businesses, then regulatory uncertainty might hurt. Who cares if it is an old business or a new business that creates the jobs and meets the demand (besides the owner of the old business)?

    I would also delve into the guy’s politics. He might say that he doesn’t care which party is making the changes, but I would imagine he is pretty hard-core right-wing. When someone goes out of their way to say ‘it’s not about X’, what they are really saying is, ‘it’s about X, but I don’t want to say that.’

  4. If the biggest problem these whiners have is regulatory flux then they don’t have enough competition.

  5. If having a Republican president helps job growth and a Democratic president hurts it, the data from 1992-2008 would be reversed. Job growth was phenomenal under Clinton and terrible under Bush. That is the fact.

  6. Overall I like this column (can I call it a column??? Although modern journalism/commentary in newspapers often disappoints*, I still find the word column more dignified). I like the message that the reason why there isn’t more business investment is NOT because of “fear or uncertainty”. “Fear and uncertainty” here are the new Republican code words for taxes on the rich.

    James Kwak is a blogging hero/idol of mine, and I guess you could say a writing hero. Not that his prose is that slick, but Kwak is usually dead zero on target on a particular issue that at the moment he writes about, direly needs to be addressed or exposed. And James’ occasional wry humor that will having me smiling for an hour. SO my point is here, it’s not easy for me to criticize Kwak, but….

    I think even addressing this particular issue (other than the useful translation of the true Republican meaning of “fear and uncertainty” for business being Republican code for “we can’t tax the rich”) put Democrats in the very position Republicans want them, back on their Michael Dukakis 5 inch heels.

    Also, I wouldn’t be quoting Will Wilkinson if I was James. Will Wilkinson is a just a modern version of William Buckley in that he is well educated and can spin a good argument, but in the end still unconditionally gets on his knees to worship the image of Reagan. And here I quote the referenced Wilkinson article:

    “But it might remain that, holding policy constant, we’d be better off economically with a Republican president. There’s a maddeningly unfair ‘heads I win, tails you lose’ quality to this possibility, but it seems to me a real one and well worth considering.”

    No, Will, we are not better with “Spend, don’t tax” “Spend, don’t tax” “Spend, don’t tax” policies. “Spend, don’t tax” policies is what got us in this Fu*ked-up hole now, where we have the choice of no social net or the abyss. These were Reagan/Bush policies, see here:

    and here:

    *See 100% of Peggy Noonan, 90% David Brooks (Brooks writes some good ones, but it’s like crawling through a 2 mile cow patch looking for a rose. Noonan is going through the cow patch, to and fro, and never finding the rose)

  7. There are also, evidently, law professors at Yale who are so incredibly stupid that they cannot recognize another idiot in their midst.

  8. “[The capital gains tax rate] 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.”

    Your best line in a good post, James.

    I checked out Carter’s Bloomberg column. “Mr. Business Owner” (as you call him) goes on to gild the lily of his complaint. He says he doesn’t trust the stock market and can’t invest in small companies because nowadays there’s no “certainty”. As if there was or ever will be!

  9. I can tell you having been an employment lawyer for 8 years now that this is not an uncommon type of complaint. Many business owners simply feel put upon that they can’t run everything exactly the way they want.

    In reality, compliance with most regulations is not that hard if you want to comply. The truth is, most people want to cut corners.

    What this guy is really saying is not that regulations will change and that’s a problem, but that enforcement might change and he might get caught. Put another way, this guy is saying that he drives fast and is pissed there are more traffic cops. It’s not that they lowered the speed limit. When you put it that way, people have a lot less sympathy. Somehow, everyone’s response to that is “well, it’s the law.” But when it comes to, you know, not poisoning groundwater or something, it’s just such a burden.

    I sympathize a bit because enforcement can be selective and unfair and less deserving people can get hit, but anyway, I run a business too and I don’t whine about all the regulations I have to comply with. I just do it.

  10. 1) If uncertainty were a problem, rather than lack of demand being the problem, businesses would be working existing employees more hours and hiring temps. Neither is happening in sufficient number.

    2) The Republicans, who have been whining about uncertainty harming the economy, are now saying they might cause the US to default. That creates a massive amount of uncertainty that. If you take them at their word, they are intentionally harming the economy by creating the very uncertainty they say is harming the economy.

  11. I worked for years as a lender to middle market businesses. The
    owners tend to be obsessed with what a struggle it is to
    succeed, and they are probably not wrong about that. They
    do tend to overstate some of their problems, however.That’s what we have, I think, in Carter’s column. What is notable is the
    viciousness of Kwak’s post and the comments that follow. No
    wonder some people don’t like Democrats.

  12. Seems specious that Carter based his article on one interview with one whiny business owner. Too much whining…not enough problem solving. Everybody wants to get rich without providing value. Sure, times are tough–and a little scary–but these are the times that demand courage. Sitting around criticizing what the government “might” do just won’t help.

  13. Robt Wilmers of M&T Bank address to stockholders re 2010:
    “In all the current discussion about increased regulatory oversight regarding the prevention of future crises, too little attention has been paid to downstream effects, namely the economic burden borne by traditional commercial banks like M&T, and in turn the customers we serve. In this context, readers of this Message know that I have, for some time, been concerned about the extent of banking regulation and the cost of complying with it.

    In 2007, for instance, I noted that fully $71 million of M&T’s expenses, or 7.4 percent of pre-tax income, were the result of regulatory compliance, including our obligations to report to such authorities as the Federal Reserve, the Office of the Comptroller of the Currency, U.S. Department of Housing and Urban Development, Financial Industry Regulatory Authority, U.S. Securities and Exchange Commission and state banking examiners. Since then, these costs have increased substantially; our latest analysis indicates that they have grown some 25.6 percent and now total $89.7 million.

    In addition, M&T has had to absorb a new, larger set of costs imposed in the wake of and as a result of the financial crisis. Notably, M&T’s assessment paid to the FDIC — responsible for protecting depositors in the wake of bank failures — has grown from just $6.7 million in 2008 to $79.3 million for 2010.

    We have also seen the development of post-crisis limitations on previously significant sources of revenue — the result of the undifferentiating public and legislative backlash against “banks,” whether on Wall Street or on Main Street. For example, the imposition of new regulations regarding overdraft fees (Regulation E) will result in a reduction in revenue of some $75 million on an annualized basis. Had they been fully effective during 2010, added together, these compliance and new regulatory developments would have amounted to over $244 million and represented 22.3 percent of our 2010 pre-tax income. Other pending actions, such as the so-called Durbin amendment with its price controls on debit card interchange fees, are difficult to quantify at this point in time.

    However, this combination of increased costs and foregone revenues, coupled with undoubtedly higher capital and liquidity requirements which will result from the Basel III international banking standards, will lead inevitably to a higher cost of credit for bank customers. In fact, the recent proposal to designate all U.S. bank holding companies with more than $50 billion in assets as “Systemically Important” and the implication that they should be subject to higher capital standards regardless of the riskiness of the underlying activities in which they engage has likely already led to increases in our cost of extending credit. In other words, those who will pay for the sins that sparked the financial crisis will be the small business owners, entrepreneurs, innovators, and individuals who rely on Main Street banks like M&T.

    When framed this way, one would hope that neither the White House nor the Congress would endorse such a policy — yet this is the net effect of regulations and costs imposed on traditional credit intermediaries in the wake of the financial crisis.”

  14. One point I’d like to pull from your column:

    Why do businesses not push HARD for Medicare-for-all as a national health care program? I get the idea that business owners are largely conservative, and that conservatives are against government control in general, but for the government to provide Medicare for all would be a HUGE boost to American businesses, to get that expense off their books.

  15. “Main Street banks like M&T”

    No wonder all the satirists are unemployed.

  16. uhhh… blithered, “The exact same argument could be made the other way around – all those leftist outlets reporting on how Republicans are going to force the US into default by refusing to raise the debt cap, etc etc.”

    Uhh…actually, leftist outlets are claiming that the economy is going nowhere fast because of lack of aggregate demand.

  17. Mark McCutchan wrote, “Why do businesses not push HARD for Medicare-for-all as a national health care program?”

    That’s a really good question. AFAICT the only explanation that fits is that their anti-government ideology trumps their desire for higher profits.

  18. Most small businesses are not engaged in the purchase and sale of assets. As capital gains only applies to asset sales, I wonder what small businesses are concerned about capital gains. The major complaint I hear from small business is the lack of customer demand. Demand falls because of un/underemployment and the inability to earn enough to afford the inflated cost of living. Simple, no?

  19. As David St. Hubbins once quipped, “there is such a fine line between very clever and very stupid.”

    Case in point: big business that can lobby, lower its taxes, and reap huge profits, only to find that by not paying taxes they have spoiled their own market. Oops…it was going so well, why did the ride have to end?

    Ending scenarios are (1) stepping back from the precipice enabled by regressive taxation, (2) total collapse, demonstrations, riots, anarchy, revolution.

    My money is one (2), but it may take a while, and tv will serve to distract the masses from their plight.

    The revolution will not be televised:

  20. “Second, Carter makes the mistake — one perhaps common to academics — of ascribing too much importance to what a real businessman says.”

    To the contrary – I think the mistake is reading Carter and BELIEVING that a “real businessman” said this. It’s just far too convenient that *one* guy happens to spout EVERY right-wing talking point – I’d put this in the “Bobo’s Applebee’s salad bar” category.

  21. uhhh wrote: “There is absolutely zero evidence that one of these views is more correct than the other.”

    I am pleased to report that Mr. Kwak is correct, and Mr. uhhh is a lying liar who likes lies and hates truth.

    Survey data here:

    And here:

  22. The so called business man, in this particular case, is advancing a political agenda, not a business model…. He knows it, I know it and he knows that I know it…. The reason why I’m not hiring more employees is because the Virgin Mary told me not to…. She advised me that the Obama administration’s economic policies would diminish the demand for black and white, analog television sets…. I’m just going to wait until I have more certainty on this matter… :-)

  23. Very entertaining. Your are an entertainer aren’t you. The man was in what business? Oh, not important. Is that because you were in the software business for a short time and naturally that is a proxy for all other small businesses? I won’t tell you what I think of your reasoning, I’ll quote John Kenneth Galbraith: “As John Kenneth Galbraith observed: “Between human beings there is a type of intercourse which proceeds not from knowledge, or even lack of knowledge, but from failure to know what isn’t known. This is true of much of the discourse on the market.”
    Take a course in statistics and rethink your hypothesis. BTW, Larry Summers proves the statement that idiots exist.

  24. Just to make clear just how completely phony the whole “uncertainty” argument is, it’s interesting to note that may of the people claiming Obama’s policies are causing them to hesitate because of lack of perceived financial stability are simultaneously supporting the idea of defaulting on US Treasury obligations by failing to raise the debt limit.

  25. Sorry, kids, but I’ve got bad news. Stephen Carter’s businessman is a hoax. The character is made up, and the story is fiction.

    The clue is, yes, “Not All Businessmen Are Smart, You Know”, but the fact of the matter is that no one in business is dumb just like that. A venture capitalist who’s afraid of “uncertainty”? Give me a break! And did you notice that this bloke is “stupid” in EXACTLY the words used by the Chamber of Commerce? What did he do? Memorize them in case he got into a conversation with a stranger on a plane?

    No, there’s no way this character (or story) is real, and so sure am I of that, I even wrote the story’s editor to complain of the fraud.

  26. I would bet that the businessman he met on the plane wasn’t really a businessman. More like a Joe The Plumber wannabe, just regurgitating talking points from his favorite right wing media outlet. Business is fundamentally an uncertain venture – people who want certainty buy short term Treasuries or FDIC-insured CDs, they don’t run businesses. Real businessmen concern themselves with what their customers want and how to provide it at a profit, they don’t obsess over minor changes to the tax code or regulatory structure.

  27. Great post, as usual.

    I consult to small business and run a small business, and the absolute driver of investment & hiring decisions is demand. If people want to buy more of your product then you will make more. Any concern about regulation is way down on the list of priorities. As for taxation, you make your investment decisions pre-tax anyway (see link below).

    Of course some businessmen are not so swift. Much like some politicians, some professors and some bloggers. The cult of the businessman as final arbiter of policy is crazy.

  28. RE: ” M&T Bank address to stockholders…”

    “…those who will pay for the sins that sparked the financial crisis will be the small business owners, entrepreneurs, innovators, and individuals who rely on Main Street banks like M&T.”

    This is the stock response and it is repeated over and over. In each case it may or may not be true that regulation costs will be passed along to consumer. However, we all should pay for a regulatory environment that promotes equal opportunity in markets and prevents ‘uncertainty’ from an unstable economic environment. The sick and disgusting thing about this argument is that it’s asking us to accept the corruption because it will cost us too much.

  29. There’s an old joke about a businessman who goes on a hunting trip with three of his advisers, one of which is an economist. They stay in a cabin located across the river from where they park their car. One night the bridge washes out. The business owner and the two non-economists are brainstorming how to get back to the other side when one asks the economist for his input. His answer: “Well, assume there is a bridge”. I can’t believe the dialogue on this topic. I am a CPA with 40 years experience. I have been self-employed for over 35 of those years. I have first hand experience from the standpoint of my clients and from my own personal perspective as a small business owner. Look at this article carefully. There are probably over 100 assumptions about the theoretical “small businessman” (one being whether or not he exists) What is the point of this exercise other than to demonstrate the complete lack of rigor and discipline in the writings of at least the author and most of his readers. I particularly like the name dropping. That’s real professional. How do we know that businessmen are sometimes idiots. Well, none other than Larry Summers says so. (This reminds me of Frederick Mishkin’s answer in the movie Inside Job when he is asked how he could give Iceland’s economy praise and high marks when shortly thereafter it imploded. Mishkin’s answer was essentially, Well, everyone knew they it was in fine shape when I wrote it. Wow! Everyone knew.. To top that off, we just “assume” a theoretical businessman. We assume precisely what he said, we assume what business he is in, we assume (using our own experience) precisely what kind of regulation he refers to (from my own experience, it’s possible his margins are so thin that a payroll tax increase could make expansion infeasible). So,. all we need to do is keep on assuming and checking with everyone (or someone really special if everyone is busy) and we might get the people who have had their world trashed back on their feet. One final thought, as a CPA and businessman I can say one thing with certainty, and if you disagree, you will only demonstrate your own ignorance. You cannot have responsibility without accountability. It is a law of the universe. People designed and engineered our financial system and it crashed. Millions of people have been subjected to serious hardship because of it. Yet no one has been held accountable, and the establishment pretends it’s because no one was. Bullshit!. Economists who continue to huddle together and defend those who were responsible, will eventually be identified and the world has a way of getting even. For now, I will just say we already have determined what you are. Now were haggling about the price. It’s time to choose sides.

  30. Per Benedict@Large, I would think the natural assumption here is that the businessman in question is simply fictitious, a device to advance the writer’s viewpoint? To paraphrase Nietzsche, “how Spinoza clad his philosophy–really the love of *his* wisdom”.

  31. little boy you are so right
    One would think that a few economists, say some overpaid tenured ivy leaguers, would get a few underpaid grad students and interns to go out and actually do some work, and ,,,gasp….interview small biz people at length
    but no, that would be real science. doing real experiments and getting real data, rather then spouting off about anecdotal plane rides…

  32. Mr.Anonymous — You should think of changing your blog name to Catch-22. You must be smart because you chose to use the name Anonymous. But only someone stupid could make a statement that there is “an natural assumption”. Who was it that said that, when you assume you make an ass out of u and me? (Hint — It was certainly not an economist)
    BTW — If you’d like a second opinion, I think your nuts.

  33. @ “the Viking”

    who wrote, “They are genetically and culturally endowed with a distrust for any President who does not have a lot of rich people pulling the strings , ones who put him in office.”

    Gee, what do you figure as advisors and funders of Obama: Penny Pritizker, billionaire, Steven Rattner, centimillionaire, Larry Summers, multimillionaire, nitwit?

  34. For some time now, Republican spokespeople have been suggesting that regulatory-risk has played, and continues to play a major role in preventing businesses from hiring and in suppressing econonic growth in general. Yet these same spokespeople seemingly threaten not to increase the US debt limit.

    So, with regards to its economic impact, a vague and nonspecific possible increase in regulatory-risk trumps a real, Republican-imposed, completely avoidable default-risk?

    Perhaps someone can explain this to me.

  35. Approaching my seventh decade of planet-ship here on Mother Earth, it is a truism that being smart often inversely correlates with positions of power, influence, or wealth.

    I was aghast to see a report this morning, on USA military personnel returning to the States from the wars, only to be hit with exorbitant airline charges for excess-weight bags. A fine how-do-you-do, regardless of how you personally feel about these foreign entanglements.

    Talk about NOT SMART!!

  36. I had a hard time swallowing this. I mean if the guy NEEDS employees to grow output and revenue why wouldn’t he hire? So am i to understand that he is forgoing growth because he is waiting on some regulation/policy that may or may not be enacted? Not so sure this “business man” is a businesman at all.

  37. @ kc

    “So with regards to its economic impact, a vague and nonspecific possible increase in regulatory-risk trumps a real, Republican-imposed, completely avoidable default risk?”

    Ironically, it was less than two-months ago that the Senate cut $38.5 Billion from the budget with slaps on the backs of both parties as a job well done. Hooray for US [?]… they shouted aloud to their political constituents with bi-partisan accolades!
    Here’s the facts for now, and what is soon to come after the Kabuki Theater sunsets? (JMHO)

    Ref: Sweeney Report – “Only in Washington is a $38.5 Billion cut a $3.3 Billion increase” (4/15/11)

    Ref: Google Only – “U.S. Political Madness: $38 Billion in Cuts? Make that $353 Million, Page 1

    This is our savings? Now if we do the math and raise the debt ceiling approximately $I.0 Trillion (obviously they’ll want more, but I’m using a round-out figure for simplicity) – multiplying the past savings from above as a benchmark [?] by a factor of “26x” ($38.5 bn. goes into $1.0 tn. ~ 26 times) we come up with an increase of approximately $86 Billion (26 x -$3.3bn)!
    This is how our government balances its checkbook, which adds another approx. $3 Thousand (k) of personal debt on every (309 million /2010 US Census) individual U.S. Citizen. How sweet it is,….?

  38. Mr. Kwak:

    Excellent article on a subject (risk vs. uncertainty) that I believe is one of the more important societal issues.

    The gravamen of the problem is the lack of definitional precision relative to a one-size-fits-all (OSFA) regulatory regime. As systems mature, they become more complex. If there is complexity, there is uncertainty. Question: how do you govern uncertainty with an OSFA regulatory regime with deterministic metrics?

    Conflating of risk and uncertainty resulted in a troubling trend of larger and more frequent boom-bust cycles. The Crash of 1987 experienced a $1trillion decline of wealth. Fourteen years later, in 2001, the Dot-com Crash witnessed a decline of wealth of $4 trillion. Seven years later, in 2008, the Subprime Crash saw an $8 trillion decline of wealth (see Financial Storm Hunters ).You can allocate a lot of regulatory costs with that type of growing “bogey.”

    Why is this problem growing? Conflating business “risk” with entrepreneurial “uncertainty” produces the unintended consequences of contingent and unforeseeable liabilities for market practitioners where failure equates with fraud. This jeopardizes market effectiveness. Holding market participants who deal in uncertainty to the condition of determinism conveys regulatory rights without attendant regulatory responsibilities (the liabilities are unbounded). Such regulation imposes sanctions on unforeseeable events that stifle free market innovation and adaptability. (see: Engine of Economic Growth ).

    Businesses’ problem is not with regulation as defined as being codified best practices in support of industry standards (i.e., financial industry’s FLITE Model of Fairness, Liquidity, Integration, Transparency and Efficiency), but with negative net benefit rule-writing—the proscriptive description of an undesirable situation. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying “don’t do this.”

    Unfortunately, describing is not solving; rule-writing enables bad SOX-type rules grow into even worse Dodd-Frank rules. Rule-writing in the form of one-size-fits-all (OSFA) deterministic regulatory metrics were mischaracterized as a proxy for stability. Policymakers were blind to attendant opportunities for ever smarter game-playing in the regulatory machinery. The failure to do so led to a catastrophic valuation uncoupling of the real goods and services sector of the economy from the financial sector of the economy that initially foiled, and eventually froze the pricing mechanism causing systemic failure (See: Parallel Paper Economy ). Therefore, unless and until randomness is segmented into predictable, risky, and uncertain underlying economic domains (see Beyond Rumsfeld ) errors of conflation will continue to result in noncorrelative information that will thwart capital formation .

  39. n2, way to pick up the football and run with it. how good is your crystal ball without the jugglers?

  40. You do not need a crystal ball, just look for the inflection point in the non sequitur curve. The idea that we can perturb the economy with small incremental changes where the emergent behavior itself will be proportionately small is mistaken (see: butterfly effect, see Financial Storm Hunters ). The introduction of an uncertain product, NINJA (No Income, No Job or Assets) Mortgage Backed Securities (MBSs), converted a risky corporation, Fannie Mae, into an uncertain one.

    Uncertain investments like NINJA MBSs that consisted of no-money down, liar-loan mortgages gave property rights to renters, thus creating unintended consequences in the form of perverse incentives relative to foreclosures. NINJA MBSs had unknown cash flow and product demand. Could MBSs have been securitized with an AAA-rating if they were deemed uncertain?

    Subprime difficulties arose when risk was conflated with uncertainty under deterministic, one-size-fits-all governance metrics that frustrated the market’s price-discovery function. Uncertainty is different from not a higher form of risk. Bounding uncertainty gives no understanding whatsoever about the possibility for a random domain transition as economic agents will react differently to change.

  41. I knew 3 years ago the sub-prime was dead, your MBS’s were eventually backed by the American taxpayer. Once auctioned off, the mkt will balance itself. The demand came from greed based speculaters who have yet to relize their losses, so they hold on to uncertainty because the only other option is to lose principal. Which is why bonds are under pressure. As for giving property right to renters, they are closer to bankruptcy than they are to renters. And could MBS have been securitized without AAA-rating, no, which is why they had to lie.

  42. “If you repeat the same thing often enough, people will believe a thing is true even when it’s obvious that it’s not. This is how you ‘win the war’. . . A lie is as good as any truth if the lie gets you to the top faster than everyone else.
    Business is ‘war’. If you have to resort to dirty deeds in order to be ‘successful’ (get the money), then so be it. All’s fair in love and war.
    Life is ‘war’, too, and if some innocent gets hurt, well . . . they were total ‘losers’, anyway. Winners don’t care about losers.
    People are stupid and need to be told what to do.
    I wouldn’t trust any jury because those people aren’t my peers, they’re all idiots. Just look at them!
    You can’t count on others knowing what is best for them, you have to lead the way, because most people are morons who just don’t understand the way things should be.
    I don’t have to be right, I’m rich. The man with the Gold rules.
    Rules are for little people.”

    I overheard or was told these things by a former friend and one-time business partner over a period of many years. During that time, he was actively breaking laws and cheating others, including his own partners. I didn’t know . . . until I did.

    He is an extremely wealthy and high-profile businessman with many high-powered friends. He is very active and committed in political circles. His voice is heard and his opinions “respected” (backed by his dirty money) in politics.

    He is so “successful” that the majority of his days are spent working very hard to get “his people” in place at the top of the political heap, any way he can make it happen.

    He is a staunch Republican.

  43. Jack Welch, formerly of GE, was on CNN this week singing the same BS idea. Since when businesses have regulatory certainty?

  44. Unless and until randomness is segmented into predictable, risky, and uncertain governance domains, errors of conflation from a one-size-fits-all governance regime results in mistakes of mischaracterization, misdiagnosis, and/or misapplication. See:

    “Beyond Rumsfeld”

    “Parallel Paper Economy”

  45. there is a couple of types of regulatory uncertainty I would like to trade for regulatory certainty. 1. When a mining company such as Massey Energy kills its miners the CEO is tried for murder. Ditto for oil companies and any other business that ignores the safety of its workers. 2. When the CEO of a company commits fraud against Medicare and the taxpayers they go to jail for a very long time. This would no doubt save medicare a lot of money and save say the citizens of Florida from having to endure rick scott

  46. I’ve never commented on a website, but this piece was so disgusting on so many levels…. You really reinforce all the negative stereotypes that people have of academics.

    1) This guy in the story is real, and his concerns are real, and people like him existed way before the advent of “conservative media”. You should really, really get your face out of the warm bosom of the Ivory Towers — no your experience at McKinsey, your software firm, and your PhD in French intellectual history do not count!

    2) Government regulations come in many forms and while each separately appear modest many of them together create real headaches. Moreover, regulatory burden varies drastically between industries and can be particularly onerous for non-McKinsey style firms. Changes in regulation, especially anything related to H/C or hiring/firing can create substantial costs for firms.

    Let’s take what we know from the story about this business guy. (1) His business covers several states and (2) he has low margins.

    He probably has employees in several states. Each state, especially in regards to health care, hiring/firing, and benefits has it’s own set of laws. Moreover, since he works in a low margin business (maybe food or other commodities) he probably employs a diversity of employees (low education vs high education). In NJ for instance you can’t offer health insurance to just your managers — you have to offer it to EVERYONE and some very high percentage must agree to the plan. In return for this, the health insurers must offer health insurance to the small biz but it vastly increases the costs of doing business! But if the number of employees drop below a certain amount then your H/C insurance can be suspended — for all employees (and you can’t employ good managers w/o health insurance!). In order to prevent this, you need to subsidize the poor workers who may not want health insurance! Essentially you need to give it to them for free! $$$$ Just so that you can keep your top talent who wouldn’t work there if you couldn’t offer H/C. Any changes in regulatory requirements can create real costs!

    Moreover, if this guy deals with chemicals, importing/exporting, food/alcohol then he is probably subject to a whole plethora of additional federal regulations that are subject to change at whim. And make no mistake about it, if he mistakenly pisses off an employee or gets into a fight with a competitor, then you can expect Uncle Sam to come investigate the reported “irregularities”….. In my own experience 100k worth of Iranian pistachios were locked up over night because the government wanted to punish Iran. 100k Gone! Poof! One day it was legal, then next it wasn’t! Bye bye employees….

    In sum, the regulatory burden for businesses, especially small businesses can be very substantial and can vary drastically across industries. Small changes can create HUGE burdens.

    Your attitude that this business person is stupid only belies your lack of business experience outside the elite businesses you’ve dealt with that represent a small, tiny fraction of the diversity of businesses in this country. Make no mistake about it — Fox News succeeds exactly because people like you exist! (unfortunately!)

  47. @ Roberto Vasquez

    Your argument is flawed, period! You seem very biased and subjective to begin with regarding Gov’t Regulation – especially when it comes to healthcare. There are plenty of small business hardship special-situation exemption programs available… for all financial guideline criteria – there are parameters (safety nets to prevent little guys like yourself from falling through the cracks) – the gov’t just didn’t leave you out there to dry.
    Why are you doing business with Iran in the first place? What’s wrong with California’s great pistachios – plus there grown right here in America!
    PS. Jobs! Jobs! Jobs!

  48. @Roberto Vasquez

    Without regard to your general thesis, your point about the costs imposed by conflicting regulations in different states regarding health insurance coverage offered by employers merely serves to point out how idiotic it is to have health insurance coverage be employment-based in the first place.

    Getting rid of this stupidity is one of the many opportunities missed when the “health reform” law was enacted, reforming nothing at all.

  49. I really do not like your site. Bad design, there is little information, people, virtually none. Disgusting! Administrator, do something!
    If you do not respond to my request, I never log onto your site! And do not try to criticize me!
    I’ll be back soon and check it out.

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