Poor Sales

by Russ Roberts on October 9, 2011

in Uncategorized

Invictus over at The Big Picture wants Charlie Rose to ask this question of the GOP candidates:

“We repeatedly hear about taxes, regulations, and uncertainty standing in the way of job creation. However, the National Federation of Independent Business (“The Voice of Small Business”) surveys its members every month as to their “Single Biggest Problem.” Among the possible answers are both taxes and regulations, yet “Poor Sales” has, in fact, dominated for the past three years.  Additionally, as we see in the chart, “Poor Sales” and the Unemployment Rate correlate very strongly, at about 0.87.

Given these facts, is it disputable that our problem is one of aggregate demand and that, if we could improve demand we could lower the unemployment rate notwithstanding the tax or regulatory environment?”

Is it disputable? Of course it is.

Saying that poor sales is the biggest problem facing small business is like saying that the biggest problem facing the economy is that it’s not doing very well. It has no content. It tells you nothing about an amorphous concept called “aggregate demand” and even if it did, it does not tell you how to increase aggregate demand.

Of course businesses are worried about current and future sales. The challenge is to improve prospects for sales and profitability.  We’re not very good at that.

Does the government spending borrowed money increase the sales of the businesses who receive the money? Sure. Does it increase them permanently? No. That reduces the incentives to hire even when your sales increase. Does borrowing money reduce the sales of other businesses? Probably. Does the expansion of the firms that receive the money increase the prices of inputs that they demand and thereby crowd out other firms? Almost certainly. These are empirical questions that we don’t have good information about.

Finally, I would note that while the survey that Invictus cites does indeed list “Poor Sales” as the single most important problem (25% in the September survey (scroll down to “Single Most Important Problem), taxes are listed as the single most important problem by 18% and government regulations and red tape is listed by 19%. So the two combine to 37%. They also happen to be two factors that government can actually control.

BTW, while I believe that regulatory uncertainty, particularly in the health care sector ia discouraging hiring, I concede that any precise evidence on its importance is just speculation (mixed with some bias of course).

UPDATE: Krugman made a similar claim to Invictus’s a while back.  My comments are here. I find it interesting how we all use data to confirm our biases. It’s too bad that facts don’t speak for themselves. We speak for them and in doing so, we color them using our own lenses.


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