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Shutting Down Startups

lemonade-stand

Perhaps nothing reflects the descent of the Yeomanry better than the fading role of the ten million small businesses with under 20 employees, which currently employ upwards of forty million Americans. Long a key source of new jobs, small business startups have declined as a portion of all business growth from 50 percent in the early 1980s to 35 percent in 2010. Indeed, a 2014 Brookings report revealed that small business “dynamism,” measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter century.

This decline in entrepreneurial activity marks a historic turnaround. In 1977, Small Business Administration figures show, Americans started 563,325 businesses with employees. In 2009, they launched barely 400,000 business startups, long a key source of new jobs, which have declined as a portion of all businesses from 50 percent in the early 1980s to 35 percent in 2010.

There are many explanations for this decline, including the impact of offshoring, globalization, and technology. But in part it reflects the impact of the ever more powerful Clerical regime, whose expansive regulatory power undermines small firms. Indeed, according to a 2010 report by the Small Business Administration, federal regulations cost firms with less than 20 employees over $10,000 each year per employee, while bigger firms paid roughly $7,500 per employee. The biggest hit to small business comes in the form of environmental regulations, which cost 364 percent more per employee for small firms than for large ones. Small companies spend $4,101 per employee, compared to $1,294 at medium- sized companies (20 to 499 employees) and $883 at the largest companies, to meet these requirements. 20 The nature of federal policy in regard to finance further worsened the situation for the small- scale entrepreneur. The large “too big to fail” banks received huge bailouts, yet they have remained reluctant to loan to small business. The rapid decline of community banks, for example, down by half since 1990, particularly hurts small businesspeople who have depended historically on loans from these institutions.

From The New Class Conflict by Joel Kotkin

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Keynes and Stable Prices

Economist John Maynard Keynes

from the biography John Maynard Keynes by Robert Skidelsky;

Keynes was unusual in his stress on the ‘stickiness of social and business arrangements’ and the need it created for completely stable prices if capitalism was to be consistent with social stability. Inflation, he says, inflicts most injury by altering the distribution of wealth; deflation by retarding the production of wealth. In the first case, businessmen gain at the expense of savers and most workers whose incomes are fixed (in the short run), while their value falls. This is good for business, but undermines capitalism in the long run, by turning entrepreneurs into profiteers and drying up the supply of savings.  Falling prices on the other hand injure output and employment by imposing windfall losses on businessmen, whose major costs of production (including wage costs) remain fixed in the short run, while the selling prices of their products fall. In the deflationary case, ‘the fact of falling prices injures entrepreneurs; consequently the fear of falling prices causes them to protect themselves by curtailing their operations’.  Thus ‘a comparable weak initial impulse may be adequate to produce a considerable fluctuation.’

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HKO

I would add that in addition to stable prices, there is also a need for stability in regulation. Constantly changing rules and tax rates and the expectation that this will persist kills the stable environment needed for long term capital investment and economic growth.

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Downton Abbey America

Downton Abby

Indeed as the Yeomanry have struggled, the lower parts of the economic spectrum have expanded. In the five years following the Great Recession, the percentage of people living in poverty rose to 15 percent, the highest level in 20 years, although it was significantly higher in 1960. Equally troubling, the ability of less- skilled workers to break into high- wage work has slowed, trapping many in a kind of permanent status as working poor. Increasingly these workers are older and better educated than low- wage workers in the past. Some 43 percent of non- college- educated whites now complain they are downwardly mobile.

Particularly hard hit are many minorities, notably African Americans and Latinos, whose income has also dropped more than most and whose unemployment has remained stubbornly higher. Despite the election of the nation’s first African American president, in itself a considerable achievement, the gap between Anglo incomes on the one side and those of blacks and Hispanics has doubled since the recession. The black unemployment rate remains more than double the white jobless rate and reaches 40 percent among youths.

Sadly, the vast majority of progressives generally offer little that would allow for greater upward mobility, relying instead largely on redistribution as the answer to social ills. Progressive theorists often write off the industries that have long driven private- sector middle- class incomes, in part for environmental reasons. They also, sometimes for the same reasons, denigrate any potential rise in typically better paying blue- collar jobs in such fields as energy, manufacturing, construction, or logistics. Since the 1970s, concerns about environmental constraints, noted Christopher Lasch, undermined the notion for the rising “new class” that their definition of the “good life” could be “made universally available.” Thus ends the romance between upward mobility and the progressive idea. Rather than be helped in the new economic order, the once independent Yeoman class is expected to accept its new role as home care providers, hairdressers, dog walkers, and toenail painters for the “innovative class.” Walter Russell Mead aptly describes this perspective as a “ Downton Abbey vision of the American future.”

from The New Class Conflict by Joel Kotkin

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Why Government is not the Answer

University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist.  Read Why and how we care about inequality in its entirety.  It is about 6 pages long.

excerpts:

The answer is always the same – confiscatory wealth taxation and expansion of the state. The question, the “problem” this answer is supposed to solve keeps changing. When an actual economic problem is adduced – excessive spending by the poor, inadequate spending by the rich, political instability — they don’t advocate the problem’s natural solution. These “problems” are being thought up afterwards to justify the desired answer. And amazing, novel and undocumented cause-and-effect assertions about public policy are dreamed up and passed around like internet cat videos.

n the end, most of these authors are pretty clear the real problem they see: money and politics. They worry that too much money is corrupting politics, and they want to take away the money to purify the politics.

That explains the obsessive focus on the income and wealth of the top 1%. Consumption may be flatter, but income and wealth buy political connections. And all of our concern about the status of the poor, the returns to skill, awful education, the effects of widespread incarceration, all this is irrelevant to the money and politics nexus.

Now, the critique of an increasingly rent-seeking society echoes from both the left and the libertarians. Rent-seeking is a big problem. Cronyism is a big problem. Stigler finds a lot to agree with in Stiglitz. As do Friedman, Buchanan, and so forth.

But now comes the most astounding lack of logic of all. If the central problem is rent-seeking, abuse of the power of the state, to deliver economic goods to the wealthy and politically powerful, how in the world is more government the answer? 

If we increase the statutory maximum Federal income tax rate 70% , on top of state and local taxes, estate taxes, payroll taxes, corporate taxes, sales taxes and on and on — at a Becker conference, always add up all the taxes, not just the one you want to raise and pretend the others are zero -– will that not simply dramatically increase the demand for tax lawyers, lobbyists and loopholes?

If you believe cronyism is the problem, why is the first item on your agenda not to repeal the Dodd Frank act and Obamacare, surely two of the biggest invitations to cronyism of our lifetimes? And move on to the rotten energy section of the corporate tax code.

They don’t, and here I think lies the important and resolvable difference. Stiglitz wrote that “wealth is a main determinant of power.” Stigler might answer, no, power is a main determinant of wealth. To Stiglitz, if the state grabs all the wealth, even if that wealth is fairly won, then the state can ignore rent-seeking and benevolently exercise its power on behalf of the common man. Stigler would say that government power inevitably invites rent-seeking. His solution to cronyism is to limit the government’s ability to hand out goodies in the first place. We want a simple, transparent, fair, flat and low tax system.

HKO

Just as progressive ideology justifies any means including lies and abuse of power to justify the ends, their economic policies seek problems to justify their so called solutions.  They are a solution in search of a problem.

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A Caged Eagle

from John Taylor in The Wall Street Journal, A Recovery Waiting to Be Liberated

Were it not for the unusual drop in the labor force, the unemployment rate would be three percentage points higher, according to work by economists Chris Erceg of the Federal Reserve Board and Andrew Levin of the International Monetary Fund. They found in an October study that the slow recovery accounts for the “bulk of the recent decline in the labor-force participation rate.” Faster growth, they argue, would reverse the decline.

The U.S. economy is not a turtle, but a caged eagle ready to soar if released from the captivity of bad government policy. By putting the right policies in place—particularly personal and business tax reform with marginal rate cuts—the U.S. can turn the economy around quickly.