This is the start of my final guest post in Glenn Greenwald’s slot at Salon:
If you read the business and even the political press, you’ve doubtless encountered the claim that the economy is a mess because the threat to reregulate in the wake of a global-economy-wrecking financial crisis is creating “uncertainty.” That is touted as the reason why corporations are sitting on their hands and not doing much in the way of hiring and investing.
This is propaganda that needs to be laughed out of the room.
I approach this issue as as a business practitioner. I have spent decades advising major financial institutions, private equity and hedge funds, and very wealthy individuals (Forbes 400 level) on enterprises they own. I’ve run a profit center in a major financial firm and have have also operated a consulting business for over 20 years. So I’ve had extensive exposure to the dysfunction I am about to describe.
Commerce is all about making decisions and committing resources with the hope of earning profit when the managers cannot know the future. “Uncertainty” is used casually by the media, but when trying to confront the vagaries of what might happen, analysts distinguish risk from “uncertainty”, which for them has a very specific meaning. “Risk” is what Donald Rumsfeld characterized as a known unknown. You can still estimate the range of likely outcomes and make a good stab at estimating probabilities within that range. For instance, if you open an ice cream store in a resort area, you can make a very good estimate of what the fixed costs and the margins on sales will be. It is much harder to predict how much ice cream you will actually sell. That is turn depends largely on foot traffic which in turn is largely a function of the weather (and you can look at past weather patterns to get a rough idea) and how many people visit that town (which is likely a function of the economy and how that particular resort area does in a weak economy).
The post continues here. Hope you enjoy it!
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Political hegemony has its business counterpart, a sure thing or the lack of uncertainty that comes with overwhelming pricing power for wages, goods and services and of course, taxes or rather the certainty of no taxes. I would suggest another media notion, fungibility. Which seems to contradict the uncertainty dread. Everytime a tax increase on oil or cigarettes is introduced, the argument against is that this will simply be passed onto the customers. Well, won’t all the things they are unsure about, if they do indeed rear their ugly head, be passed onto to the customer in the form of higher prices?
And the final big question about uncertainty: if we live in an unplanned economy with no synoptic view of the whole complexity of too many to measure transactions, how does certainty play into the general working out of the market, not controlled by anyone, and with competitors going into business to take business away from you or put you out of business all together? Doesn’t competition mean that you can ‘t be sure of outcomes as well? Is the Business RoundTable and the Republican Party just confused or lying? Are their lips moving…
I remember in the good old days we used to subscribe to Government Magazine and it had 5 years of forward news and data on everything and we had no uncertainty in business back then.
This is propaganda that needs to be laughed out of the room.
Well, yes and no. It all depends on whether your business is part of an industry that requires state intervention to maintain the illusion of perpetual exponential growth in profits.
On the one hand, if your business is a member of the FIRE sector, which is all about government-sponsored cartels, reregulation matters. The illusion of growth in your business depends entirely on the benificence of the state (see, e.g., the individual mandate for health insurance; no collective bargaining for drug prices for Medicare; ZIRP, QE1, QE2, etc.).
On the other hand, if your business is a member of the real, productive economy, government regulation is at best a tertiary consideration. Your primary consideration is demand.
Maybe what is going on here is dog whistle messaging for the growth fetishists in Congress. When the growth of the FIRE sector dictates the growth of your economy, why wouldn’t you take that propaganda seriously? It seems to be just a lighter version of what led to TARP . . .
The productive sector is being pushed abroad… by regulation, loopholes and lobbying. It’s the only way to make the FIRE Ponzi last a little longer.
Bull-oney. The productive sector goes where there is the cheapest cost of production. They are not pushed there, rather they are not being discouraged from going there. Consequently, we are losing the middle class and manufacturing capacity at the same time. We are devolving into a nation of low income wage slaves and leaving a legacy of lower standard of living to our children.
Thank you for another great rebuttal to the “Uncertainty is the Problem” lie pervading the mainstream media. Given how cogent your arguments are and given the volume of data indicating that the problem is demand pure and simple, I just about dropped my teeth this morning while watching Fareed Zakaria’s GPS. Rogoff, at this late point in the debate and with all the studies and surveys that have been published STILL was non compos mentis enough to claim “Businesses . . . are worried of where the government is going, where taxes are going.” At least Krugman was there to jump in with “There’s not a hint of that in the data.”
If supposedly big brained people like Rogoff are able to make these claims in public and not be eviscerated by their peers, what hope is there that we will ever develop the sufficiently complete and honest understanding of the problem needed to drive policy which will actually be effective?
Ummm…lets see, passel of wars…,war on everyone except US $colonization of the willing$ ex terrorists thingy…GOM – Fuchmeshima…100+ years weather cycles…people (Polies and Judiciary)_stayed_paid…all resources are increasingly harder to extract (+legacy costs) etc, etc.
Skippy…Business Certainty…yep that’s a problem alright. I wonder what my RI (ranger instructor) would have said if whilst on patrol, that the enemy, weather, terrain, ***HE*** were acting with uncertainty, there by diminishing my patrol plan…the pain, the pain, would have been epic[!], being shot would have be better.
PS. dedicated customers or fold tent thingy.
Its about the dedicated customer thing.
If you own the country with all the nukes and have a military presence in ??? how many countries? then it just a matter of the right sort of focused killing and threat of genocide to keep all but Americans in dedicated mode…or is that deadicated?
It will be interesting to see if Europe and the US will willing continue down the Shock Doctrine event path of austerity/slavery to the global inherited rich.
Will a potential push back go as far as laughing the global inherited rich out of control of our society and through some sort of processing at the Hague?
I think it should but there is a lot of ignorance and fear out there.
So short of the culture shift I am advocating, what sort of abomination of supplication to the global inherited rich will we have and what will it be called?
Now see, expectations of a future of the jack boot of oppression coming down on our faces, under a new brand, are quite certain. No hesitancy here, we are quite clear about the facts on the ground, quite clear about the direction these events are going to lead. What is the matter with business, a little too much for of war?
Mr Tioxon;
Considering the amply documented ‘short termerism’ rampant in todays business community, thinking that far ahead in any form, conspirational or not, is at best questionable. Better to ask: Whos’ tools are these ‘businessmen?’
Well ambrit, here is a good place to start:
Who rules America? by William Domhoff
http://www.gp.org/index.php
Also,
The New Class Society: Goodbye to The American Dream by Perrucci and Wysong
http://www.amazon.com/New-Class-Society-Goodbye-American/dp/0742519384
There is no great movement to structurally change our nation. Obama is a personality for most people, part of the institutional reform tradition of the Democrats from the New Deal to the Great Society, along with a few more ameliorating reforms for the environment passed during the Nixon administration. But there is no one who is trying to accomplish what was done during the French and Russian revolutions. The change and hope that Obama offered has been blunted by the overwhelming domination of the military and the financial interests of the wealthiest families and and the well compensated upper 20% of society that is needed to run the largest military machine that occupies the world and its oceans and orbital space.
There are roughly 2 camps among the powerful elites. They are in conflict after almost a century of liberal consensus. The minute power sharing and distribution of wealth, Fordism, built well fed, well housed, well educated and generally well care for citizenry under the watchful eye of the liberal welfare state. The opposing view, the conservatives, know for a fact that most people just don’t know what to do with themselves or all the money they have had thrown at them, and have risen entirely too far above their lot in life, until class traitors like FDR, among others, capitulated with a level of appeasement in the form of wage largesse, socialized programs paid for with tax money, some of which, gaulingly, they have had to part with, and against their will by virtue of the police power of the state. I am not sure if the conservatives hate falling profits more than democracy, but this is the current reigning ideology, the capitalist market revolution of the late 20th century as outlined in the far right triumphal history: The Commanding Heights, the Battle for the World Economy by Daniel Yergin and Joseph Stanislaw.
http://www.amazon.com/Commanding-Heights-Battle-World-Economy/dp/068483569X/ref=sr_1_1?s=books&ie=UTF8&qid=1313436180&sr=1-1
So, if you want to know who are the tools, the paid agents of the wealthy are, look no further than Yergin and co which has been produced as a 5 hour long PBS special on what happened to state planning, the welfare state and the goodness of Milton Friedman’s Nobel Prize.
If you want to know what some people are doing about it here is the World Social Forum which the antidote du jour to Davos. I guess Davos would be in the tool category as well.
http://en.wikipedia.org/wiki/World_Social_Forum
If you are trying to vet me for intellectual boni fides that permit me to make pronouncements without warning labels, let me know, I have had many influences in my life.
Mr. Tioxon;
I would not presume to vet you in any wise. Your arguements and supporting evidence are more than enough for me to take you seriously. Thank you for the links. I didn’t give Yergen that much credit before. I’ve got a lot of catch up reading to do.
Be of good cheer.
Rogoff’s “Businesses . . . are worried of where the government is going, where taxes are going” is nothing but a smoke screen. He and business know with absolute certainty that even if the government will make changes, they will small and confined. Actually, Rogoff knows extremely well that as long as Obama is president business will get what it wants. An identical argument applies to taxes.
The bottom line is that (a) the uncertainty argument is baseless no matter what and (b) Obama guarantees certainty and profits to business.
Rogoff must think that we are complete morons or is running for something.
Yves,
Nice post, the “uncertainty” buzz word has been a nice catch-all and very annoying as of late. Nice to see someone spell it out for what it is.
Nice one Yves.
One thing I’d point out is that in the way most of the current businesses are run there’s no uncertainity as far as managers are concerned. Not even risk, really. Both of those words imply possibility of negative as well as positive results – but for a large part, the most interested parties are exposed only to the upside (yes, I know, it’d be hard to lose that 10m a year job, and live on hand-to-mouth 100k a year instead).
Re the cost-cutting. It’s easier to cut costs (any idiot can do that) than to really improve efficiency. You’d be efficient in the first place though (but it’s oh so easy not to do so, and throw more money at problems – just ask one Gordon B). But, even efficiency is ultimately a tragedy of commons – for lots of efficiency can be had from automation.
Dear vlade;
You forgot the one ‘occupation’ that can’t be really automated: The Military. As the neo-cons discovered to their dismay in Iraq, you need lots of ‘boots on the ground’ to consolidate your ‘automated’ gains.
Yves, can you do a take down on “stifling innovation” next?
Wow. Another great article. I would love to see this become a weekly thing somewhere, where you tear down often repeated, but clearly incorrect, maxims, in a somewhat broader forum.
Speaking as a small business guy:
You should distinguish between volatility and uncertainty.
Volatility would represent the natural progression of a business cycle -where supply and demand fluctuate depending upon an anticipated group of factors.
Farming is a great illustration of volatility – A farmer has to identify which crop will produce the greatest profit from a particular field, bearing in mind the soil’s current condition, anticipated rainfall, expected demand for various products (i.e. is there an oversupply of some crops already in the warehouse, what are other farmers planting, etc).
Businesses are quite capable of managing volatility.
Uncertainty is where the “ground rules” for conducting business are not at all certain.
Government intervention, political instability, and technological innovation are factors which can create uncertainty.
Power availability and water availability are huge arenas where uncertainty could appear.
Why invest in solar power if lobbyists succeed in persuading the federal gov’t to subsidize corn based ethanol to the point where it is cheaper than solar power?
Why switch from legacy coal power plants to natural gas if environmental regulations are going to restrict use of available water supplies to conduct fracking for gas extraction?
And for the corn ethanol guy, he lives in uncertainty b/c every election means he has to fear his subsidy (and hence his business) are going to evaporate?
On top of all this, the smaller a business is, the greater the level of expense for regulatory compliance. Businesses must modify their procedures and software whenever new regulations affecting them are released. The actual cost of compliance for a given regulation is relatively flat regardless of business size (within certain scales – e.g. all QuickBooks customers pay the same, all mid market pay about the same, all enterprise level pay roughly the same).
The effect is magnified on the smallest businesses within the scale. A $10 mill company and a $100 mill company might face the same expense in complying with a regulation, but as a percentage of gross revenue – the $10 mill company gets hammered while the $100 mill company just gets a tap.
Regardless of the particular merits of a given regulation, the cumulative effect of government regulations is hammering the smaller businesses.
But on the upside CPAs and computer programmers keep their jobs because they are rewriting and relearning procedures they have already written and learned. What a deal. I guess that’s an upside, to somebody.
olddeadmeat,
Your example of volatility is an unfortunate one. Farmers are one of the most coddled industry groups in this country. They have crop insurance, they have had price supports, they have programs to buy excess production for school lunches, have a gigantic federal bureaucracy and 50 state level bureaucracies dedicated to promoting and protecting their interests, and have a nationwide network of land grant universities complete with entire programs (i.e. Extension) dedicated to helping them plan, manage and market their business. The government even does research for them Farmers do whatever they can to eliminate volatility, and when they can’t, they have a long history of getting favors from their elected representatives. They are part of the welfare class, they just want it delivered under different names, like price stability programs.
In fact, your example of ethanol is a direct result of farm welfare, with price supports creating corn surpluses for many years. Ethanol was originally seen as a good way to get rid of the surpluses. Ethanol producers should not be pitied about government policy uncertainties–they only exist because of government programs as it is. If an industry can only exist with the benefit of government programs, it should expect unceertainty, and it deserves uncertainty. It is not operating on market-based merits, just political based favors. In fact, part of the reason their subsidies are threatened is because they now can actually support themselves, particularly in light of the rules at the federal and state levels mandating blending of ethanol. So, the government set them up in business, and gave them a market. They shouldn’t be pitied.
Regarding fracking–yes, government reguations can threaten an activity like that, and for GOOD REASON. how would you like to be drinking water contaminated by the chemicals used in fracking? Don’t other businesses who depend on that same groundwater deserve the certainty of knowing some other business isn’t going to ruin them by polluting an important resource they need? And do you really think that a company that does something as invasive as fracking is CLUELESS as to the regulations they are going to be faced with? They know full well they are putting the environment in danger, and that they will face regulations. If not, they are too stupid to be in business.
I grew up in a family with a small business. I have operated my own small business, and my husband and I have a small business right now. Regulations are a pain. They can be burdensome and expensive. But mostly, they protect businesses and their customers. Protecting customers helps to support the industry by instilling trust. Regulations on businesses save business people from themselves.
And taxes give us a whole infrastructure of police, roads and highways, schools, and a justice system that allows us to function as businesses in a civilized society.
The business community in this country needs to get a grip, stop whining, and accept that it isn’t easy. but that is capitalism. And capitalism needs a strong government to keep it in line, or it will destroy itself, as it appears to be doing now.
Economon:
Thank you for the courtesy of reading my admittedly disjointed comment.
My point was to distinguish between volatility and uncertainty.
If you think farmers are coddled, fine, let’s use restaurants, or the fashion industry, or whatever.
Where some industries are subject to the vagaries of rainfall, others are subject to the whims of fashion. Silk is in, cotton is out. Hoodies are in, penny loafers are out. Burgers are in, fish is out.
The folks that go into that field learn to deal with those unpredictabilities, or they go under. And if they go under, they can point to the factors that they could anticipate, they can identify their mistakes and perhaps do better next time.
Uncertainty is a different kettle of fish.
Try this definition: business uncertainty exists where you have a plan to deal with the variables inherent in the business. You can execute your plan perfectly, handle the known variables, do everything right but still lose.
Technological innovation is the prime illustrator on non-governmental uncertainty. Ex: wristwatch repair is not a growth industry – why? Because of tech innovation, every Tom-Tom, PDA, gidget, gizmo and smartphone offers more time management and awareness features than a watch can offer. So watches are now a niche product, just like oil lamps, horse shoes and lye soap.
Tech innovation, meteor strikes and other acts of deity are not predictable. Bang! You lose. That’s life.
We’ll never eliminate those risks, obviously.
But the creation of uncertainty by gov’t regulation and political instability are predictable and to a significant degree preventable.
If you object to coddling, you are objecting to government intervention in the business cycle, which is precisely my concern. It’s not a factor inherent in farming. It’s not evenly spread across all farmers and all crops. It tilts the field to favor certain farmers over others, but not because those farmers are superior farmers. It’s capricious, it’s unreliable, it’s subject to the changes of political fortune.
All other factors being equal, a fair market, a level playing field, rewards businesses based on merit – either in efficiency or in quality or in some other value delivered.
To the extent that gov’t regulation rewards businesses for anything other than merit, that is destructive uncertainty. Skill, preparation, talent, and hard work are punished in these situations by definition. As uncertainty rises, the risk-reward calculation of the entrepreneurs is distorted.
Note, a failure to appropriately regulate can also create uncertainty. Small banks and credit unions are being punished to bail out the large zombie banks. The rewards are going not to the meritorious, but to the guilty. This is a huge distortion and discourages the formation of new sources of capital, which in turn distorts other portions of the economy.
So I would say back in relation to Yves’ point – what Yves referred to as risk I would call volatility. To the extent that current economic environment raises the probability of more well-intended but ill-considered gov’t regulations that magnify distortions in already distorted markets, then why is anyone surprised that money and entrepreneurial energy stay on the sidelines, or worse, follow speculative plays that do nothing to create growth but merely siphon wealth from one pocket to another? Don’t we have enough of that already?
Fairly enforce the rules we already have, level the playing field, have some perp walks. Reward merit, not size or seniority or political affiliation (I’m looking at all of those corporate Democratic contributors that are taking healthcare waivers, and everyone whose resume has Goldman Sachs on it).
Then you might see some growth.
Pinch-hitting for Glenn Greenwald is quite an honor.
To Yves’ list of certainties, Greenwald probably would add the certainty of ever-deteriorating civil liberties.
Another reason not to bet a plugged nickel on the future of a nation which styles itself as a ‘Homeland,’ using Nazi-derived fatherland terminology.
I did, thanks.
OK: Not perpetual growth by extraction anymore; only growth by addition. This article was so classic. Yves said, “Indeed the trigger problem they (Business) face is that they have played their cost-focused business paradigm out.”
Yves’ last 2 paragraphs are gospel to me. I would only comment that our business model’s demand for certainty stems from our inherent distrust of each other: because our distrust is the thing that demands that if we put up the money and the energy to create a going concern that we are not obliged somehow to good will and society as a whole – unless we can extract our expected “profits.” Therein lies the present abusurdity. Our point in time is the most critical factor because we now know that perpetual extraction by perpetual growth is nuts. Perpetual growth itself has become the new risk.
Good regulation is the best source of long term certainty and stability.
Bad regulation is a source of certain scams and theft, it makes problems grow with ceartainty. This is what we have now.
I guess we are dealing with calls for certainty of the second kind.
Regulation creates certainty. One could take a risk and manufacture something that creates a very nasty externality – like tobacco or DDT. You might know of the externality (in this instance, health issues), but unless the product it regulated, you could not know how that externality would affect your bottom line. Hence, you and you alone bear the risk of that externality biting you (say, from lawsuits). But once gov’t regulates it, the risk of suit goes way down, assuming you comply with the regs. So, regulation provides certainty.
On the other hand, given the behavior of the markets over the past two weeks, wholly unregulated markets can become so volatile that the only folks interested in playing are folks playing with other people’s money – and those other people are either silly rich, or scared to death. Isn’t capitalism grand?