The Invisible Hand Slaps the Invisible Forehead
On Google Reader, I got into a discussion about Stephen L. Carter’s very bad Bloomberg column, “Economic Stagnation Explained, at 30,000 Feet,” that might be worth recapping here. On Carter’s account, he had a single conversation with a dude on a plane about the business the guy owns. Carter doesn’t specify the business. It would be perfect if he ran a cab company, but there’s a reference to a factory, “somewhere in the Dakotas.” He tells Carter his business is successful and demand is up but he won’t hire because regulatory uncertainty means “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?” Nor can he sell, because “it’s impossible to make a sensible decision about winding down his firm when he doesn’t even know from one year to the next what the capital gains rate is going to be.” So he is stuck – stuck! – running a profitable business and living the sort of lifestyle where he gets to fly around the country and talk to law professors.
I think that, as with the death of Little Nell, only someone with a heart of stone can read this sad tale without laughing. It’s especially hard to read it without laughing at Stephen L. Carter.
Kevin Drum is skeptical too. I don’t want to put words in Kevin’s mouth, but it’s possible our doubts stem from similar sources. We’ve worked for more than one business; we’ve studied multiple GLs and balance sheets; seen good and bad executive teams operate “in the wild”; we know the typical share-of-revenue that incremental labor expense takes across various business lines. and we have a lived understanding of all the uncertainties and risks attending pretty much any business. Comparing this last bundle of risks and uncertainties to the possible impact of regulatory change on additional incremental labor, we’re left with a set of reasonable possibilities Carter fails to reckon with:
* The guy is telling the truth, but his business is unusual enough to present no general lessons
* The guy is a blowhard whose business is doing worse than he says
* The guy is a moron or coward who is leaving money on the table a better businessperson would sieze, possibly because he’s reading the WSJ editorial page instead of the good parts
* The guy is a prophet who should liquidate his business immediately! Because any regulatory risk that applies to new workers he might hire that’s big enough to keep him from hiring more also applies to the workers he currently has on his payroll….
Any of these seems more plausible than Carter’s conclusion that this man’s story holds lessons for us all. It’s certainly suggestive that Carter describes his business as “low margin” but with demand picking up. If demand is picking up and he isn’t ramping production then either demand was really weak and is only getting back to normal, one or more of his competitors beat him to the punch on cranking up the volume, or nobody here knows how to play this game.
The article reminds me of the criticism that intellectuals tend to lack real-world business experience. This can be true, and be a problem, but a problem in more than one direction. It’s not just true of liberal intellectuals (including, at least nominally, Carter) – I don’t think there’s a lot of real-world business experience among the scholars and pundits of conservative and libertarian organizations either. Certainly Carter presents us with a piece of “pro-business” advocacy that suffers from apparent unfamiliarity with business.
Comment by Sherri —
June 5, 2011 @ 3:27 pm
I can’t buy a computer because computers might be better and cheaper tomorrow! I can’t buy a house because housing prices might drop tomorrow! I can’t borrow money because interest rates might drop! How can I make a sensible decision about the future when I don’t know the future!?!?
Comment by Thoreau —
June 5, 2011 @ 4:58 pm
I can think of scenarios in which this blowhard on the plane actually is running a successful business:
1) When he’s unwinding in a bull session with a stranger he says stupid things that he would never actually enter into the equation when he’s making an important decision. Lesson: Don’t draw general lessons on Life, The Universe, and Everything from a businessman having an after hours conversation.
2) He doesn’t understand his own success half as well as he thinks he does. Though I’m not in the business world, life seems to be full of blowhards who don’t fully comprehend their own situations.
Lesson: Being successful doesn’t automatically confer general insights on how to be successful.
3) The success of his business is the result of a talented second-in-command who saves the blowhard from his own mistakes.
Lesson: Being at the helm of a successful operation does not necessarily mean you’re responsible for success.
Comment by Happy Jack —
June 5, 2011 @ 5:33 pm
Maybe the guy will have the good fortune to sit next to an accounting or finance prof on the flight back.
He seems to be ignorant of overtime and temp agencies. And if absolute certainty was required to make business decisions, no one would go bankrupt in a risk-free world.
As someone in the construction biz, most people I know are focused on just surviving the year, rather than worrying about some law that kicks in in 2014.
Comment by Whammer —
June 5, 2011 @ 6:27 pm
It goes to show how powerful the supply side nonsense still is in the minds of a lot of people. In their thinking, businesses hire people so they can make more stuff to be sold to a willing set of buyers.
When there is uncertainty, they won’t expand their businesses and hire more people and drive the economy forward.
What actually happens in the real world is that the “uncertainty” is all around demand. When demand picks up, or when you see an opportunity to capture demand, you expand your business.
I suspect it is that last little bit about “seeing an opportunity” that gets people wrapped around the axel. In their minds, they are all business geniuses who are innovating every day. In fact they are mainly car dealers and quarry operators who mainly react to situations.
Comment by Thoreau —
June 6, 2011 @ 1:49 am
One interesting point here is that those of us who dismiss this idiot as unrepresentative (and, for the record, I consider it highly unlikely that this idiot is representative of business owners) are implicitly assuming a significant amount of rationality in the marketplace. Not perfect rationality, of course, but significant rationality.
On the other hand, those who assume that this idiot is representative are asserting significant irrationality in the marketplace. Yes, there are conservative and libertarian think-tankers who would probably argue that he is in fact being rational, but they are ignoring a host of factors identified by Jim and the commenters here.
So, this strikes me as an interesting situation in that the knee-jerk libertarian stance assumes significant irrationality in the marketplace. Generally, the knee-jerk libertarian stance assumes near-perfect rationality in the marketplace, and (when arguing against environmental and safety regulations) significant amounts of enlightened self-interest.
Comment by Kevin Carson —
June 6, 2011 @ 2:53 am
I have the same reaction to the ubiquitous GOP talking point that the cure for the recession is more money in the hands of businessmen so they can invest it in putting people back to work.
Jesus Christ, there’s no shortage of investment capital — just the opposite! That was the reason for the fucking bubble economy, for God’s sake. Even when things were “good,” there was insufficient demand to keep all the existing industrial capacity fully employed, let alone utilize additional capacity if investors had — suicidally — put money into expanding production. So instead they invested in Ponzi schemes. God almighty, who’s gonna invest money in hiring people to expand production when the main problems are excess capacity, a capital glut and a demand shortfall?
It’s like everything Boehner & Co. know about economics is on an index from one of Reagan’s speeches ca. 1976.
Comment by chris y —
June 6, 2011 @ 3:10 am
It’s like everything Boehner & Co. know about economics is on an index from one of Reagan’s speeches ca. 1976.
It isn’t?
Pingback by Not All Businessmen Are Smart, You Know « The Baseline Scenario —
June 6, 2011 @ 10:23 pm
[...] 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). [...]
Comment by thoughtbasket —
June 7, 2011 @ 2:24 pm
So either the businessman is not so bright and is repeating his Fox talking points, or Carter made up an apocryphal businessman so that HE could repeat Fox talking points. And Carter, despite being a successful author, knows nothing about business. Either way, this “conversation” at 30,000 feet has no basis in reality, and no businessperson I know would make these complaints.
Comment by Killing in the Lame of —
June 12, 2011 @ 7:01 pm
This Carter is just a New Jack wannabe. The Mustache of Mystery Tom Friedman and the pretty pretty princess Megan Mc Cardle pull things like Li’l Stevie out of their stool.