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Idiomics and the Obama Administration

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Posted on August 11 2010 10:00 am

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One half of all private sector jobs are provided by small business, defined as companies with less than 500 employees. More importantly, 64% of all net new jobs are created by small businesses. The word “net” is small but dense with meaning. “Net” means the sum of all people hired minus all people fired/quit/retired. The gross numbers hired and eliminated are multiples more. Each year approximately 600,000 new companies start up and 600,000 companies close down. Our economy is one gigantic pool of “business experiments” where extraordinary competition results in only the most effective and efficient surviving. How does any intelligent person believe that government, i.e., non business bureaucrats choosing who should receive the people’s dollars, can possible create better outcomes than our competitive system? Does one really need a degree in economics to perceive this? Imagine if the government chose who got to play football for Notre Dame or who got drafted by the NFL? Or, for that matter, which sport or music Americans should prefer? Its obvious in these examples, but when applied to “economics” our eyes glaze over. Yet, under the Obama administration all marginal increases in “investment” has come from the federal government.

Small business as a whole is successful despite the fact that our government’s policies favor big business explicitly. This has always been true, but has reached new heights under the Obama administration. As Fleischer showed in his WSJ article, small business is especially burdened by regulation. On average it costs &15,000 to comply per worker versus large firms $10,000 per employee. This data is from 2005. Compliance, or feared future compliance, with the new health care mandate, potential CO2 mandates, potential increases in SS taxes, and higher marginal tax rates all lead to the lack of investment Romer predicted in her study and Fleischer sees in his business. But the Zandi’s, Krugman’s and Obama’s of the world just say lets do even more of what has not worked.

The Federal Reserve produces a quarterly report called Flow of Funds – Z.1. Page 2 tells a remarkable story. Our average annual growth rate in total debt outstanding (public and private together) has been the lowest during the last 5 quarters than any of the last 10 years. But government debt growth has been the highest since WWII for such a sustained period. Business has had negative growth. Debt can be seen as a proxy for investment. Small Business in particular has declined approximately 9% while the government has increased over 20%–(see page 16). That is an enormous swing from the productive private sector to the self-evidently unproductive public sector.

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