Confidence Killers

By Alex Biles, University of Michigan

With constant reminders of our nation’s economic woes, one might wonder the role pessimism plays in prolonging the malaise. Economies run on confidence, and if one’s view of markets can be swayed by related factors – say, political – there exists a possibility that other people can be influenced to think along the same lines.

In a Bloomberg column, Stephen L. Carter describes a recent airborne encounter with the owner of a medium-sized business who we will call Mr. Jones.

Jones refuses to hire new employees, even though demand for his product is up. He cites the fact that he has no idea how the next series of regulatory changes will affect his business. Jones explains that without certainty about future costs of regulation, he can’t take the risk of losing what little profit he’s currently making.

Jones makes it clear that he’s not anti-government or anti-regulation. He just wishes government would work to assist his efforts to hire more employees, rather than control and complicate them. “Big businesses don’t face the same problem. They have lots of customers to spread costs over. They have installed base,” he explains. Since Jones has neither lobbyists nor clout at his disposal, he believes that Washington doesn’t care about his business.

Assuming other entrepreneurs think along the same lines as Mr. Jones, there exists a strain of business owners out there who question the friendliness of the federal government toward small- and medium-sized enterprise. The uncertainty they face regarding regulatory policy could dictate hiring practices. If the number of frustrated owners is large enough, then surely it can create a ripple on unemployment figures.

Over at The Economist, Will Wilkinson gives this view a nod while expanding on Carter’s anecdote about Mr. Jones. Citing Andrew Gelman’s data on political identity and occupation, Wilkinson notices that, “managers and administrators as well as owners and proprietors, the groups that do most of the hiring, are significantly and increasingly more likely than average to vote Republican.”

This sets up two scenarios, as Wilkinson explains in an argument for what he calls “partisan regime uncertainty.” It’s possible that Democrats in power provide legitimate justification for contempt from certain business owners, or perhaps it’s merely the thought of Democrats in power that makes entrepreneurial skin crawl.

Regardless of the scenario, the result is partisan regime uncertainty. This raises the possibility of Republican-voting business types creating their own self-fulfilling prophecies. By not hiring for underlying political reasons, owners, administrators, and proprietors perpetuate a cycle of economic malaise. They are in effect, their own confidence killers.

This suggests an interesting prospect, where blind partisanship can be beneficial for the American economy – regardless of the policy enacted by those in power. A Republican president may be better in restoring economic confidence simply because of the “R” by his or her name, even if their administration imposes more regulation than Democrats.

It also may provide some of the explanation for the current economic stagnation under Democrat Barack Obama.

Yet, the White House has done little to assuage Republican-voting business types of their concerns. This past week, at a National Association of Manufacturers summit, hundreds of business owners described their nightmare dealings with bloated federal regulatory agencies to White House chief of staff Bill Daley. Not surprisingly, Daley seemed to tiptoe around demands and sidestepped any substantial commitment from the government to small- and medium-sized enterprise.

And back in December 2010, the White House sponsored a public relations matinee, where President Obama met with several corporate leaders in a supposed extension of the olive branch to the business community.

Among those present was General Electric chief executive Jeffrey Immelt, a political ally of the president and head of a company that not only paid zero in income taxes for 2010, but claimed $3.2 billion in tax benefits, according to The New York Times.

Even if we could prove that Democrats in power are less threatening to the economy than irrational Republican businesspeople engaging in self-fulfilling prophesying, it’s irrelevant at the present. Confidence killers encompass both sides of the coin.

The White House has not made any significant attempt to restore economic confidence in hiring among small businesses by loosening burdensome regulations. Nor has it done anything to change its perception as a haven for corporate welfare.

This does nothing to curry favor among the chief job creators in this country, for reasons legitimate or not.

As it has done for the past year, the White House can continue to tout minimal job creation and its quest to out-innovate, out-build, and out-compete the rest of the world. Back at his factory in the Dakotas, Mr. Jones remains unconvinced.



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