- Cafe Hayek - http://cafehayek.com -

Finally, some evidence from Krugman

Posted By Russ Roberts On September 16, 2010 @ 12:14 am In Stimulus,Uncategorized | Comments Disabled

Paul Krugman (HT: Brad Delong [1], who cheers Krugman on) has been beating the drum for more government spending for a long time. And now he finally has the evidence [2] that proves his point. The problem facing our economy isn’t regime uncertainty or the dysfunctional housing market or the financial sector or government, generally. Nope. It’s aggregate demand, the Achilles heel of capitalism:

I’ve said this before, but Catherine Rampell [3] has a very nice chart making the point: if you ask businesses — as opposed to their lobbyists — what their problem is, you find no hint of the stories the usual suspects are telling you about government interference, political uncertainty, etc.. Businesses aren’t hiring because of poor sales, period, end of story:

[4]

He concludes, like the good Keynesian that he is:

“And the best thing government could do to help business would be to spend more, increasing demand. The fact that it’s not going to happen doesn’t change the fact that it’s the simple truth.”

[End of Krugman quote]

Ah, the simple truth. The chart shows the answer to a survey question asked of small businesses (I think businesses with fewer than 50 employees). The survey asks small businesses to list their biggest problem. (The chart says “Most Important Problem” but in the report of the recent data at least, it’s worded as “Biggest Problem.) And in August of 2010, the most common answer for the biggest problem is “Sales.”

Maybe I’m missing something but I don’t exactly see it as a revelation that during a major recession, the worst economic downturn in 70 years, that businesses find their sales to be a major problem, even their biggest problem. But what does that mean?

Krugman’s reading of these data is a beautiful sleight of hand–”Businesses aren’t hiring because of poor sales, period, end of story.” This conclusion doesn’t follow from the survey result. There’s nothing in the survey about why firms aren’t hiring. There’s no implication that if sales did improve, small businesses would start hiring.

It’s also worth pointing out that “biggest problem” doesn’t mean that the second or third problems aren’t important or aren’t really close to as important as the biggest. In fact, if you look at just the latest data from the NFIB [5] rather than the distracting previous three decades, you see this:

Yes, 31% of respondents do say that sales are their “biggest problem.” That number hasn’t budged much over the last year. But two numbers have changed a bit more than that–21% of respondents list taxes as their biggest problem up from 18% a year ago. And 15% list government regulations and red tape as their biggest problem, up from 11%. In fact, if there had been one category called “Taxes and Government Regulations” it might have been seen as the biggest problem, listed by 36% of respondents, up from 29% in the year before and surpassing sales as the biggest problem.

BTW, here is the same chart from January 2010, eight months before the chart above, and one year into the stimulus package. Here is what small businesses said was their biggest problem in January 2010 [6]:

[7]You’ll notice that in January 2010, 31% of small businesses list poor sales as their biggest problem. The number is up from January 2009. But wait a minute. The stimulus started in 2009. So when the stimulus was put in place, 28% of small businesses cited sales as their biggest problem. A year into the stimulus, somehow, the proportion citing sales had climbed to 31%. And today, 18 months or so into the stimulus, the number is still 31%. So somehow, during the first part of the stimulus, during all that government spending,  a greater proportion of small businesses found sales to be to their biggest problem. But the sum of taxes and government regulations went from 30% to 36%.

So if you use this silly metric of the biggest problem facing one part of the business landscape–small businesses— one conclusion you can draw is that the impact of the stimulus package on small businesses’ biggest problem has been exactly zero. Or that it would have gotten even worse if it weren’t for the stimulus package. Or that the stimulus wasn’t big enough. Or none of the above, which is the right answer. It’s a silly metric.

I think a simpler truth is that businesses are increasingly worried about government. That may be discouraging hiring. Could be, couldn’t it?

The title of Krugman’s blog post is “It’s Demand, Stupid.” I guess I’m stupid. I still don’t see it.

Be Sociable, Share!
  • [8]
  • [9]
  • [10]
  • [11]
  • [12]

Comments

comments


Article printed from Cafe Hayek: http://cafehayek.com

URL to article: http://cafehayek.com/2010/09/finally-some-evidence-from-krugman.html

URLs in this post:

[1] Brad Delong: http://delong.typepad.com/sdj/2010/09/it-is-the-aggregate-demand-stupid.html

[2] he finally has the evidence: http://krugman.blogs.nytimes.com/2010/09/15/its-demand-stupid/

[3] Catherine Rampell: http://economix.blogs.nytimes.com/2010/09/14/whats-holding-back-small-businesses/

[4] Image: http://cafehayek.com/site/wp-content/uploads/2010/09/BiggestProblem2.jpg

[5] the latest data from the NFIB: http://www.nfib.com/Portals/0/PDF/sbet/sbet201009.pdf

[6] their biggest problem in January 2010: http://www.nfib.com/Portals/0/PDF/sbet/sbet201001.pdf

[7] Image: http://cafehayek.com/site/wp-content/uploads/2010/09/BiggestProblemJan2010.jpg

[8]

  • : http://twitter.com/intent/tweet?text=Finally%2C%20some%20evidence%20from%20Krugman%20-%20http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html%20

    [9]

  • : https://mail.google.com/mail/?view=cm&fs=1&to&su=Finally%2C%20some%20evidence%20from%20Krugman&body=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&ui=2&tf=1&shva=1

    [10]

  • : http://www.stumbleupon.com/submit?url=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&title=Finally%2C%20some%20evidence%20from%20Krugman

    [11]

  • : http://www.google.com/reader/link?url=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&title=Finally%2C%20some%20evidence%20from%20Krugman&srcURL=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&srcTitle=Cafe+Hayek+where+orders+emerge

    [12] Image: http://www.blinklist.com/index.php?Action=Blink/addblink.php&Url=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&Title=Finally%2C%20some%20evidence%20from%20Krugman

    [13]

  • : http://www.myspace.com/Modules/PostTo/Pages/?u=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&t=Finally%2C%20some%20evidence%20from%20Krugman

    [14]

  • : http://reddit.com/submit?url=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&title=Finally%2C%20some%20evidence%20from%20Krugman

    [15]

  • : http://news.ycombinator.com/submitlink?u=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html&t=Finally%2C%20some%20evidence%20from%20Krugman

    [16]

  • : http://sphinn.com/index.php?c=post&m=submit&link=http%3A%2F%2Fcafehayek.com%2F2010%2F09%2Ffinally-some-evidence-from-krugman.html

    [17] Tweet: https://twitter.com/share

  • Copyright © 2011 CafeHayek.com. All rights reserved.