Uncertain About Uncertainty

June 15, 2011
Posted by Jay Livingston

Listen to the Republicans, and you're certain to hear about uncertainty. What’s keeping unemployment high and stalling economic recovery? Uncertainty. Specifically, uncertainty about government regulation.

Now, here’s the evidence for it – Stephen L. Carter’s recent article “Economic Stagnation Explained, at 30,000 Feet”
The man in the aisle seat is trying to tell me why he refuses to hire anybody. His business is successful, he says, as the 737 cruises smoothly eastward. Demand for his product is up. But he still won’t hire.
“Why not?”
“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”
He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.
It’s anecdotal evidence, useful as an illustration. But we don’t know if it describes what’s going on with most other businesses. In fact, Carter’s seatmate might not even be accurate about his own firm. As Will Wilkinson and Ezra Klein suggest, the guy might be repeating the Republican line just because he’s a Republican.

A lot of people who do the hiring (or decide not to hire) are Republicans.

If companies aren’t hiring, the real problem, I suspect, is not lack of certainty but lack of customers. A NFIB report last fall, “Small Business Economic Trends,” asked small businesses what their “single most important problem” was. Unfortunately, “uncertainty about regulation” was not one of the choices, but the survey did offer “regulation”
(Click on the image for larger view.)

The big winner is lack of demand. Three years ago, fewer than 10% rated it as the most important problem. In the current recession, that has risen to over 30%.

The NYT had a very pretty graph of the longitudinal data.*

The Poor Sales section (white in the graph) suggests that when demand is high (good sales), as it was in the 90s, business have the luxury of worrying about regulation (orange). In good times, when employment is high, businesses may have trouble finding enough qualified workers (blue). But the problem today is not too much regulation or too few workers. It’s lack of demand.

I am not in business, but if demand is really up, as Carter’s seatmate claims, and if you don’t hire more workers, there are only two options:
  • Get more out of your current workers – better technology or more hours.
  • Ignore the demand.
The Times reported recently (here) that while businesses have been slow to hire more workers, they have been buying more machines and software. The Times story does not say how much of this investment in technology was coming from small businesses and how much from large firms that may be sitting on large amounts of cash and may as well invest it now.

But there are limits what newly-bought technology can do to increase production in the short run, and there are limits to how much employees can or will work.

As for option two – ignoring the demand – if the guy on the plane is letting orders go unfilled because he doesn’t want to hire workers, he is leaving money on the table. As I say, I’m not an MBA, but I suspect that not many “business models” (as we say today) call for turning away customers.

The point is that neither of these responses has anything to do with uncertainty about regulation. If businesses are not hiring, it’s probably because they are uncertain of how much of their product they can sell.

* The trouble with this data is that each year the percents must add up to 100% no matter how numerous or few the problems are.


Philip Cohen said...

I guess a third option is to raise prices in the face of higher demand. But that doesn't work if you have viable competition.

I heard a caller to Stand Up with Pete Dominick say he ran a small business with just under 50 workers, and he would never go over 50 because then he'd have to provide health care. Pete tried to explain that in fact he would only have to pay the penalty on the number of workers over 50, not all of them -- so the decision about growth was a simple calculation rather than an existential crisis for the business. The guy was not having it.

Bob S. said...


As for option two – ignoring the demand – if the guy on the plane is letting orders go unfilled because he doesn’t want to hire workers, he is leaving money on the table. As I say, I’m not an MBA, but I suspect that not many “business models” (as we say today) call for turning away customers.

As someone in the business field, I'll say you are right and you are wrong.

It is true that not many business models call for turning away customers.

What is true is that some business models call for turning away some customers.

Let's use a company that does business in California and Texas as an example.

There are sales associates that cover both states, the company sells something simple like a round plastic washer.

If the laws in California require "post consumer content", "certified diversity reports", charge a higher sales tax -- then unless the profit margin is greater than those added costs; the company is going to turn away California customers.

Why shouldn't the business focus on Texas where the costs are lower -- not turning away customers from that state?

Does that make sense?

Jay Livingston said...

Bob-- Right. You turn away business if you aren't going to make a profit. (My father refused to do business in certain parts of the country, and there are probably companies that have similar policies regarding doing business abroad - with some countries, it just doesn't pay.)

But that's different from turning down orders today because of what might happen in the future regarding regulation. I can see where that might be a consideration since a new hire is an investment beyond the immediate sales. But as I said, I'm skeptical about its importance.

Bob S. said...


I'm not skeptical.

Consider that many companies have long lead times (length of time between order placement and order fulfillment), long contract time lines and long development time frames.

It is entirely feasible that people are looking at 3 months to 2 year lead times (longer in the case of some products like Aviation or Automotive) and deciding that not knowing what the law will require when the product is delivered, not when it is made, will reject an order.

Similarly, why invest in a project that may take 6 to 9 months of development if you think that the legislative body is going require extensive refit or pass requirements that reduce your profit. Wouldn't it make sense to concentrate on states where business friendly governments are in place and the risk is less?