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From July 30 WSJ

Paul H. Rubin —  8 August 2012

Wall Street Journal

‘A Climate That Helps Us Grow’


President Obama’s riff on small business—”If you’ve got a business, you didn’t build that, somebody else made that happen”—has become a major controversy. The Romney campaign has made this quote the subject of several speeches and ads, and there have been rallies all over the country of business people with signs saying that “I did build this business.”

Mr. Obama is now claiming that his words, delivered at a campaign stop in Roanoke, Va., on July 13, were taken out of context. “Of course Americans build their own businesses,” he said in a campaign ad last week. What he meant was simply that government sets the stage for business creation. In his speech, and again in his campaign ad, the example Mr. Obama pointed to was “roads and bridges.”

The context of the speech indicates the president really did mean that “you didn’t build that.” But let’s give him the benefit of the doubt; let’s assume he merely meant that business is impossible without government institutions that create the infrastructure for the economy to operate. As Mr. Obama’s deputy campaign chief Stephanie Cutter said, in clarifying his original remarks on July 24, “We build our businesses through hard work and initiative, with the public and private sectors working together to create a climate that helps us grow. President Obama knows that.”

But business is certainly not getting “a climate that helps us grow” from the current administration. That administration has instead created a hostile climate through its regulatory policies.

The news media report almost daily about new regulatory burdens. More generally, according to an analysis in March by the Heritage Foundation, “Red Tape Rising,” the Obama administration in its first three years adopted 106 major regulations (those with costs over $100 million), compared with 28 such regulations in the George W. Bush administration. Heritage notes that there are 144 more such major regulations in the pipeline.

Consider a major example of government investment—roads and bridges. A transportation system needs roads, but it also needs gasoline. This administration’s policies—its refusal to allow a private company to build the Keystone XL pipeline, its reduction in permits for offshore drilling and increased EPA regulation of pollutants—retard the production of gasoline. If transportation is an important input from government to creating a favorable climate for business, shouldn’t we be encouraging, not discouraging, gasoline production?

Other inputs needed by business are capital and labor. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed by Mr. Obama and enforced by his appointees, makes raising capital and investing more difficult. Since many regulations needed to implement this law have not even been written, business cannot know how to adapt to them. This increases uncertainty and so reduces incentives for investment.

The increased minimum wage, passed and signed in the early days of the administration, discourages hiring of entry-level workers. ObamaCare has increased uncertainty regarding future labor costs and so hindered business in hiring and expanding. The pro-union decisions by Obama appointees at the National Labor Relations Board do not create a climate to help the economy grow.

There are many other burdens placed on business. Example: The Americans With Disabilities Act is being interpreted by the Justice Department to require all hotel-based swimming pools to provide increased access to disabled persons. This will come at a high cost per pool. Many hotels and motels are small, family-run enterprises. This requirement will either lead to an increase in prices or to a decision not to have pools at all.

Either policy will induce patrons to shift to larger chain motels. Interestingly, the application of this rule has been delayed for existing pools until Jan. 31, 2013, after the election. Families vacationing this summer will not notice the new requirement.

If we accept the plain meaning of Mr. Obama’s speech, it indicates that he does not believe in the importance of entrepreneurs in creating businesses. But if we accept the reinterpretation of his speech in light of his administration’s deeds, it indicates a belief that a hostile regulatory climate poses no danger to economic growth. Either interpretation means that this administration is not good for business.

Mr. Rubin is professor of economics at Emory University and president-elect of the Southern Economic Association.

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Our greatly lamented colleague Lary Ribstein was a movie buff. Some time ago he wrote an encyclopedic article on business in the movies, “Wall Street and Vine: Hollywood’s View of
Business.”  At the time of his death, he and I were in discussions about publishing this article in the journal I edit, Managerial and Decison Economics.  After his tragic death, I contacted his widow, Ann, and received permission to publish the article.  It is now published in the June issue of MDE.  (If your library does not subscribe to MDE, the article is still available on SSRN.)  Anyone with any interest in the movies and their perception of business must read this article. Given the volume of Larry’s scholarship, it is amazing that he had time to see as many movies as he discusses in this article.

President Eisenhower appointed Earl Warren to the Supreme Court thinking that Warren was a conservative.  Of course,Warren turned out to be a very liberal Justice.  Eisenhower later said that appointing Warren was the biggest mistake of his presidency.

Is John Roberts the Earl Warren of this century?

In today’s New York Times David Leonhardt has a pretty amazing article.  He tells us that “polls suggest that Mitt Romney will win a landslide among the over-65 crowd and that President Obama will do likewise among those under 40.” He links to the Gallup Poll for this evidence. ( I generally don’t follow polls; I get my political forecasts from Intrade).

Without drawing any conclusions, the articled itself explains why this is amazing.  First, under this administration, as Leonhardt indicates  “the young are generally losing out to the old.”  With respect to Federal spending (where President Obama clearly favors more and Governor Romney less)  “more than 50 percent of federal benefits flow to the 13 percent of the population over 65″, largely through Social Security and Medicare.  Thus, the polling results are not driven by economics; they seem entirely driven by social issues such as gay marriage and immigration (which is of course actually an economic issue.)  Mankiw cites Niall Ferguson on the way in which the current generation is living at the expense of the young.

Many years ago James Kau and I wrote s series of articles showing that ideology was a major determinant of voting. (We actually measured ideology of Congress, rather than of individual voters.)  If one believes as I do that Romney’s policies will lead to more robust long term growth than Obama’s policies,then the Gallup results are a strong demonstration of the power of ideology over self interest.  But social policies can be changed; lost output cannot be recovered, and a lower growth rate will haunt current younger voters through their entire lives.

Mayor Michael Bloomberg of New York is being justly criticized for his rather silly idea of banning sales of sugar drinks in sizes larger than 16 ounces in various public venues.  Most of the critics focus on the paternalism (updated to be now called  nannyism) of this ban.  However,  aside from being paternalistic, it is also useless.  As Jon Klick and Eric Helland have shown, there is no scientific basis for thinking that limiting consumption of sugared drinks will have any effect on obesity.

But on another front Mayor Bloomberg is on the right side.  One of the less pleasant aspects of New York is the difficulty of getting a cab — especially during the evening rush hour.  Cab drivers all change shifts at about 5 PM, so when demand is greatest there are no cabs.  They are all in Queens changing drivers.  This is because of the inefficient pricing structure imposed on cabs.  But in addition the number of cabs (medallions) is severely limited.  There are 13,237 licensed cabs in New York. In the 1930s, before the medallion system was created, there were as many as 30,000. If there were more cabs, the problem of access would be at least be alleviated.

Enter Mayor Bloomberg’s plan to increase the number of cabs in two ways.  One prong is to authorize “livery ” cabs to answer street hails in boroughs other than Manhattan.  The second prong is to create 2000 new yellow cab medallions in Manhattan.  Unfortunately, as a result of a suit brought by the taxi industry, a Supreme Court judge has just stopped this plan. The city may appeal, in part because it was depending on the revenue from the sale of the new licenses.

Why is the Mayor taking a strong pro-market position with respect to taxis but an anti market position with respect to soft drinks (and other aspects of food, such as salt content)?  Mayor Bloomberg is a very smart man, but he seems to lack a coherent theory of markets.  As a result, his actions sometimes facilitate the functioning of markets and sometimes hinder them, depending on his intuition about what will improve consumer welfare.  It would be better if he were always right, but being half right is better than some politicians.

In criticizing Governor Romney’s involvement with Bain Capital, President Obama commented both on private equity and on profit maximization.  Most of the comments I have seen dealt with the private equity.  I thought a comment on profit maximization was important as well.

  • Updated May 23, 2012, 7:51 p.m. ET

A Tutorial for the President on ‘Profit Maximization’

Profits provide the incentive for firms to do what consumers want.


In justifying his attacks on Bain Capital, President Obama argues that “profit maximization” might be an appropriate goal for a private-equity firm, but not for more general public policy. This argument ignores one of the most basic premises of economics.

We economists assume that firms always maximize profits, and that profit maximization by firms (all firms, not just private-equity ones) is a very good thing. But this is not because profits are in themselves good. Rather, profit maximization is good because it leads directly to maximum benefits for consumers. Profits provide the incentive for firms to do what consumers want.

Consider what contributes to profit maximization. In simple terms, profit maximization means producing the products earning the highest returns, and producing these products at the lowest possible cost. Both are socially useful behaviors that benefit consumers.

Which products produce the highest returns? The answer is the products that consumers want and are currently underproduced. If there are excess returns (profits) to be earned in some market, that is because consumers are willing to pay more for those products than the current cost of production.

Profits are earned by producing more of these products—that is, by satisfying unmet consumer demands. Profit maximization means doing the best job of satisfying these unmet demands, and so providing benefits to consumers. If the unmet demand is for a currently nonexistent product that consumers will value when it is produced (Facebook, the iPhone, Google search), then of course even more profits can be earned.

A firm such as Bain that is involved in investing capital can only make money if it succeeds in satisfying consumer demands. Of course, its goal in deciding where to invest is to maximize returns for its investors, but that is a detail. It will only succeed in this goal if it does a good job of identifying and satisfying consumer demands for products.

The second trick to maximizing profits is to reduce costs as much as possible. This may involve eliminating some unneeded resources, which may translate into unemployment in the short run. It may involve recombining resources into more productive configurations, or restructuring governance of the firm.

The immediate purpose of reducing costs is to increase the profits of investors, but the ultimate result is to benefit consumers. In the textbook ideal of a purely competitive economy, cost reductions will immediately translate into lower prices for consumers. But in any market structure—competition, monopoly or oligopoly—profit-maximizing behavior translates reduced costs into reduced prices for consumers.

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against “profit maximization” is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy. Consumers are of course also workers and voters. Contrary to President Obama’s claim, skill at profit maximization does translate directly into skill at governing the economy. Failure to understand this simplest and most basic point is probably itself enough to disqualify someone from the presidency when economic issues are paramount.

Mr. Rubin is a professor of economics at Emory University and president elect of the Southern Economic Association.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved



Last week the New York Times ran an article, “Building the Next Facebook a Tough Task in Europe“, by Eric Pfanner, discussing the lack of major high tech innovation in Europe.  Eric Pfanner discusses the importance of such investment, and then speculates on the reason for the lack of such innovation.  The ultimate conclusion is that there is a lack of venture capital in Europe for various cultural and historical reasons.  This explanation of course makes no sense.  Capital is geographically mobile and if European tech start ups were a profitable investment that Europeans were afraid to bankroll, American investors would be on the next plane.

Here is a better explanation.  In the name of “privacy,” the EU greatly restricts the use of consumer online  information.  Josh Lerner has a recent paper, “The Impact of Privacy Policy Changes on Venture Capital Investment in Online Advertising Companies” (based in part on the work of Avi Goldfarb and Catherine E. Tucker, “Privacy Regulation and Online Advertising“) finding that this restriction on the use of information is a large part of the explanation for the lack of tech investment in Europe.  Tom Lenard and I have written extensively about the costs of privacy regulation (for example, here) and this is just another example of these costs, although the costs are much greater in Europe than they are here (so far.)

Hating Capitalism

Paul H. Rubin —  13 May 2012

One topic that has long interested me is the source of dislike or hatred of capitalism; my Southern Economics Journal article “Folk Economics” (ungated version)  dealt in part with this topic. Today’s New York Times has an op-ed, “Capitalists and Other Psychopaths” by William Deresiewicz, who has taught English at Yale and Columbia, that both illustrates and explains this hatred.  What is interesting about this column is that it is entirely about the character and behavior of “the rich” including entrepreneurs.  The job creating function of business is briefly mentioned but most of the article focuses on “fraud, tax evasion, toxic dumping, product safety violations, bid rigging, overbilling, perjury.”

What is nowhere mentioned is anything to do with the goods and services produced by business.  This is a common attitude of critics of capitalism.  In many cases, capitalists may suffer the same personality defects as the rest of us.  And, as Mr. Deresiewicz points out, scientists, artists and scholars may also be hard working and smart.  But capitalism does not reward moral worth or hard work.  Capitalism rewards providing stuff  that other people are willing to pay for.  While is is easy to point out the stupidity of the critique (Mr. Deresiewicz has written and seems proud of his book, published by a capitalist publisher and available from various capitalist booksellers) that is not my point.  Rather, this column is interesting in that it is a pristine example of a totally irrelevant critique of capitalism, written by what is a smart person.  He does cite Adam Smith, but seems to misunderstand the basic functioning of markets.  Markets reward what one does, not what one is.

In today’s New York Times, Richard Thaler argues that the Constitutional “slippery slope” argument in the Obamacare case (“Today health care, tomorrow broccoli”) is misguided.  This is a strange argument in this particular case.  We must remember that all of today’s commerce clause jurisprudence (which everyone agrees has greatly expanded the power of the Federal government to regulate economic activity) rests on Wickard v. Filburn, a 1942 case involving a small wheat and chicken farmer in Ohio.  If ever there was a slippery slope, this is it, and it seems rational to fear another in the same Constitutional line.

Romney’s Money

Paul H. Rubin —  30 March 2012

Mitt Romney made a lot of money at Bain Capital.  The press seems to view this as a negative; even the Wall Street Journal is piling on, and the Obama Campaign is paying attention. 

This is misguided.  The lesson to take away from Romney’s high earnings is that he is more dedicated than most politicians; he has actually given up a chance to earn vast sums in order to serve.  This is not an option for most politicians.  For example, Obama was a community organizer and his income from book sales was enhanced by his political career.  Gingrich was a professor and his income has also  been enhanced by his political career. Santorum was a lawyer but did not practice much before entering politics.  Other politicians (e.g., Cheney) have been wealthy, but their wealth came after their political careers.  So the Romney campaign should spin his earning power as a sign of his dedication, rather than trying to finesse it.