A defining phrase, to be sure. Almost as good as “irrational exuberance.” Also just as likely to result in effective policy action by the Fed.
In response to Egor’s question (no relation to Eeyore, except perhaps in a shared opinion of the other animals in the woods), I was thinking again about the virtual hiring freeze we’ve seen since the financial crisis took hold.
Nearly everyone says that private businesses aren’t hiring because of uncertainty.
That’s true, but the commentators then contort the facts to support a political explanation of what drives that uncertainty. The real reason is much simpler, and much more powerful than marginal tax rates, or even the cost of health insurance.
The single factor that prevents long term planning is lack of financing, especially for businesses with fewer than 500 employees.
I know the pundits would have us believe that the potential of returning to 1990’s tax rates are keeping small businesses from hiring, but this chart from the Wall Street Journal (Tax Foundation data) shows us that a business owner with no children taking out $500,000 per year in income after every business tax break and deduction will be facing a whopping $6,442 increase in taxes.
That difference in after-tax income just can’t be the kind of disincentive to hiring that the corporate and business press make it out to be. And let’s face it, there are far more small businesses whose owners take out $150K in profit than ones with $500K in personal income passed on to the business owner. For them, renewing the Bush tax rates raises their taxes by several percent.
Even sillier is the argument that health insurance reform mandates that apply in 2014 somehow keep people from hiring today, since small businesses get a benefit from the reform that actually lowers their cost per covered employee.
The elephant in the small business room is lack of financing for every aspect of their business.
The ABCP (Asset-Backed Commercial Paper) market used to provide very affordable financing for everything from receivables to raw materials, inventory and equipment. The CMBS market provided the financing for small commercial buildings.
The ABCP market has shrunk to less than a third of what it was, removing more than a trillion dollars of five to seven year financing capacity that banks could originate and sell into securitizations. The market for small commercial building loans is basically nonexistent.
Since banks fund themselves through deposits and CDs, they can’t take the risk of holding longer-dated debt issued to companies that don’t (and can’t support) investment-grade public ratings. Until the securitization market offered an affordable alternative, small business owners could apply for SBA loans (giving the banks a government guarantee), pledge their homes or other real estate, or simply wait until they had enough savings to make new commitments to plant, equipment, inventory, or employees.
Planning for a small business today consists of staffing and buying raw materials sufficient to handle the orders that are in hand. Unfortunately, the capital market crisis destroyed the source of funding for longer term investments and planning.
It’s beyond silly to think that minor changes in future taxes or health insurance costs can outweigh the reality that a business owner simply can’t get multi-year credit to expand or maintain their business.
We need to see the return of non-government securitization before the economy can return to a growth path robust enough to absorb the unemployed and the new workers coming into the market.
That applies to commercial property financing, and to new equipment, inventory and receivables. Without knowing you can depend on five years or more to make new investments pay, no one will be making new investments, including hiring.