In a debate posted on YouTube between Connecticut Senate candidates Richard Blumenthal and Linda McMahon circulating on many conservative blogs and sites, Blumenthal falls for the trap set by his opponent when she asks him “how do you create a job?”  He gives a long clumsy answer involving a lot of government involvement.  Linda responds simply (paraphrased) “when a company can sell a product or service for more than it costs  a job is created.”

Linda’s response is so simple and so obvious that it seems brilliant. We have descended into a climate made so unnecessarily complicated by well meaning but incredibly ignorant bureaucrats that stating the obvious has become a sign of superior intelligence.

In Newsweek economic columnist Robert Samuelson in The Real Jobs Machine notes that  the problem is not just that we are not hiring but that startups are very weak.  A lot of businesses die for a lot of reasons and we need a steady supply of startups just to replace the ones that close or fail.  Most startups are not glamorous high tech sporting brilliant new items like iPads; most startups are electrical contractors,  pest control services, the guys that comes and inspects our trucks, welders, restaurants, dry cleaners, health foods stores, and just about any other common business we see daily but pay little attention to.

While credit is important,  many of these people are able to start with little credit.  They often start with just their reputation and a few solid customers that are willing to give them a chance. They keep their expenses low and grow as they are able. Most people outside of the business world are shocked to find out how small the net profit margins are with such businesses. They delicately balance their expenses with their sales and manage to eke out a living.  If they get new business and earn more profits they create more jobs. Linda McMahon has it exactly right.

These entrepreneurs do not need tax credits for R&D and those that think that will create jobs just show how ignorant they are of the real small business people. But mandated expenses such as the health care bill requires, and higher regulatory costs stops these businesses in their tracks. Many who started small business ignorant of these costs quickly throw in the towel, but many who would otherwise have made the leap of faith every entrepreneur makes decides they would be better off keeping the job they have or taking another job elsewhere. Most of the time this is a wise decision.

I see auction notices of businesses closing come across my desk every week.  I have seen a wave of businesses close their doors that have been doing business successfully for decades. They just do not see any light at the end of the tunnel.

By comparison the Reagan revolution was built on small businesses and entrepreneurs. They grew like wildfire.  Low taxes, less regulation, and most of all sound money made small businesses flourish. This drove unemployment way down. We are experiencing the opposite policies and we are getting the opposite outcomes.

This administration has less understanding of American entrepreneurship than any in memory. They have fewer people by far from the private sector than any president in a hundred years. They truly believe that the government can create consumer demand and that they can create jobs.

They should listen to Linda McMahon.

I have been a fan of Fareed Zakaria,l read and enjoyed his Post American World, and I like the depth of his interviews on the TV show GPS.

His recent article in Newsweek (“Obama’s CEO Problem”- 7/12/20101 print edition), however,   showed a detachment from the world most of us function in and an analysis that seemed outright foolish.   He correctly sees a problem of American corporations sitting on top on $1.8 trillion in cash yet is blind to the fact that the reason they are paralyzed in cash is that the very president he has supported created policies that are as anti-business as any seen in 100 years.  He somehow thinks the elitist CEOs in New York he interacts with some how represent the core of American business.

My retort to Zakaria’s analysis is in the July 14, 2010 American Thinker in “Fareed Zakaria Thinks the Problem is the Solution“.

excerpt:

The stimuli enacted so far have not worked and doubling down on a failed policy is not a case for success.  As Arthur Laffer wrote recently in the Wall Street Journal (“Unemployment Benefits Are Not Stimulus” July 8, 2010),  if the dollars spent on the failed stimulus policies had instead been directed at an 18 month tax holiday for everyone we would have spent less money and unemployment would be near 2.5%.

Fareed, like so many, mistakes eloquence for competence.  Some of our worst policies have been enacted by some of our smartest leaders.  Smart people can rationalize some of the worst ideas.

It doesn’t take the smartest to enact wise polices.  It takes an open mind free of blind adherence to bad ideology and free of the hubris that discounts experience and common sense.

It takes a leader other than the one we have.

Studying the financial bubbles we can see several common characteristics.

During the bubble inflation we see markets taken to an extreme by financial greed, but as Walter Sowell so appropriately metaphored on the housing bubble, “blaming the crash on greed is like blaming an airplane crash on gravity”; it is accurate but not very useful. We have had greed with us since the Garden of Eden.  Why does it only seem to rear its head to an extreme only every few years?

We see common sense dissolved in ‘new paradigms’, ‘permanently high plateaus’, ‘irreversible trends’, and ‘progressive thinking.’  Motivated by financial gain we believe whatever will support our belief in the unsupportable.

During the dot.com bubble we accepted billion dollar valuations of companies with no customers, no available products and only promising markets.  As 25 year old entrepreneurs became billionaires we believed that they were smart. There is this common aspect of bubbles that equates wealth with intelligence.  We want to believe that our new wealth is a reflection of our superior insight rather than mere luck.

When these bubbles burst and reality restores common sense we do not want to accept our own foolishness for buying into the speculative fever, we want to blame someone.  The geniuses who adorned the magazine covers as the faces of the bubbles either become villains or fade to obscurity.

In the distant past bubbles were fueled by individual greed buying into bad ideas, or at least good ideas taken to an extreme. But more recently bubbles have been enlarged by government policy.  Beyond just misguided monetary policy, the recent housing bubble was fueled by government policy that added to the demand for housing by pushing programs to help people buy homes who could not afford them.  By eliminating down payments and guaranteeing otherwise obviously risky loans the Government through Fannie Mae and Freddie Mac created one of the biggest bubbles seen to date.

The cover of Newsweek with the picture of Al Gore as “The Thinking Man’s Thinking Man” strikes me as a sign of a new bubble inflating. The subtitle “Al Gore’s new plan for the planet” is the hubris of bubbles.

We never seem to recognize bubbles when we are in the middle of them. They only seem visible when they burst.  Yet the new green industrial complex is growing with massive investments that seem guided more by wishful thinking and paranoia than common sense and reason.

From the administration’s stated belief that green energy will provide the jobs that will lift us out of massive unemployment and recession to the policies that will create the drive to capitalize on the new government direction, we now see massive investment into irrational markets.

Al Gore is the chairman of Generation Investment Management, an investment firm making capital investments in firms with potential to capitalize on the green movement and policies. He is also founder and chairman of the Alliance for Climate Protection, an outfit promoting the green economy. With money from people interested in promoting the public interest of environmentalism, the Alliance for Climate Protection is spending $300 million to promote the lifestyle that will benefit the investments of Al’s firm.

To be sure others besides Al Gore are on Capitol Hill promoting climate bills that will financially benefit their own interests.  Members of the Bush administration were chastised for their oil interests and criticized for letting it influence their policy decisions.  But we are assured that those now promoting their financial interests in their preferred energy sector are altruistic.

Gore is the face of the green industrial complex, but there are many seeking to profit from their foresight and concern to help save the planet. Gore is a genius for getting public policy firms to advertise heavily to support the market for his investments. The best entrepreneurs from the previous bubbles were never able to get $175,000 to make speeches promoting their industry. Gore may be the first green billionaire.

As in previous bubbles skeptics are marginalized, often demonized. As in so many previous bubbles delusional certainty is hurled at skepticism and reason more like an offensive than a defensive weapon . Gore boldly claims, “The debate is over.”

Believers who do not know which end of the test tube the cork goes into post scientific articles to confirm their belief. Confirmation, not information, is the object of their reading.

As I read about the genius of Al Gore on the cover of Newsweek,  I recall the prophetic words of John Kenneth Galbraith in his book , “A Short History of Financial Bubbles,” .

“Genius is before the fall.”

Fareed Zakaria’s first idea towards  “Defusing the Debt Crisis”  in the March 8 Newsweek was to institute a value added tax.  While I supported his other two ideas (see previous two posts), I am at best uncertain on a value added tax.

Just because it is common in many other countries does not mean it will be acceptable here. It would seem an effective means to avoid underground workers, which may be less of a problem here than many other comparable economies.

Adding another layer of tax to existing taxes also misses a critical point: after a point the damage is less from the means of collecting the taxes than the percent and amount of the economy the government controls.  Any dollar extracted from the private sector for control by the government sector, limits economic growth and real job creation. Government capital requirements will squeeze out private sector needs.

While I agree with Fareed’s other two proposals which serve more to restore some sense of balance and fairness and to reduce social tinkering, they are also revenue enhancers.

But the value added tax is much more complicated and does not address the real problem which is the relative size of the government, and its risk at smothering the wealth creation machine that made America the most prosperous country in the world in a very short period of time.

Fareed Zakaria wrote in the March 8^th Newsweek, “Defusing the Debt Crisis.”  I addressed one of his ideas yesterday in the post, “End the Market Distorting Subsidies.”

Another idea of Fareed’s  I support is to get realistic on the entitlements.  Regardless of many promises made decades ago, and many were more assumed that made, we simply cannot afford to give generous entitlements to voters who do not need them.  It seems inevitable that Social Security and Medicare will be means tested. Otherwise the share of these bills will drive the taxes on the young so high they will refuse to pay them.

What Social Security is doing with participants is little different than what Bernie Madoff did with his investors; he paid off current withdrawals with other people’s money. But the irresponsible management of Social Security does not hide the fact that these entitlements are killing us.  We must do what we need to do and take the medicine.

At the same time we should encourage the young to save more and younger to relieve further dependency by giving more generous deductions and credits for their own retirement savings. New accounts should be segregated and the Madoff type fraud should cease.

The retirement age must be raised, gradually but substantially, and the benefits must be means tested. It will be a bitter pill for many, but it is inevitable.