The current buzz is all about why the economy (and job growth) is not recovering. The answer is not so simple. One theme that seems to emerge is that the “government intervention” approach used in the past couple of years is just not working.
No one has predicted the recovery (or lack thereof) accurately because there are far too many, complex factors, not the least of which is how businesses will react to events and decide what to do next.
Many years ago I found a little story that describes how downturns can begin and then feed on themselves. I want to share it in hopes it will serve as a “cautionary tale":
The scene is a bistro on the Champs Élysées in Paris. A young painter goes into the bistro and asks the waiter for a bottle of their finest wine to celebrate his greatest ever commission for a painting to go in the home of a rich businessman. As he awaits the wine, he notices a paper lying on a chair at the next table. The headline reads, "Hard Times Are Coming--All will suffer from downturn"
Alarmed, he calls the waiter and asks if he has opened the wine. Finding that the expensive wine is unopened, the artist asks the waiter to bring him a much lower priced wine instead. The waiter asks why he wishes to change--is he less excited about his good fortune? "No," replies the painter, "but see that headline," "Hard Times Are Coming--All will suffer from downturn," I think I should be cautious.
The waiter goes to exchange the wine and meets the owner of the bistro who asks why he is not opening the fine wine. The waiter relates the painter's story and tells the bistro owner of the headline "Hard Times Are Coming--All will suffer from downturn." The bistro owner continues to his office and as he does, he ponders the wine order he just placed for his bistro. He has ordered the finest wines and cheeses, and all the trimmings--in part fueled by today’s order of fine wine by the painter.
He picks up the phone and calls his supplier, asking to reduce the size of his order, and downscale the assortment of food and wine. The supplier inquires why and the bistro owner cites the headline "Hard Times Are Coming--All will suffer from downturn." The supplier, himself a small businessman, calls his largest supplier, and cuts his future orders orders—"just in case." When the large company who supplies him sees the order from one of his best customers reduced sharply, the owner is notified. The owner is concerned, especially when is manager relates the reason---the headline "Hard Times Are Coming--All will suffer from downturn."
The owner of the large business decides he should cut down on his extravagance and calls the young painter, canceling the painting he commissioned! The young painter returns to the bistro that evening, and asks for a bottle of their cheapest wine. The waiter is surprised to hear that he has lost the commission for a painting, and wants to drown his sorrows.
As the painter awaits his bottle of cheap wine, he reaches over and picks up the newspaper still lying on the chair next to him. The date on it is two years ago.
Many times we suffer the effects of self-fulfilling prophecies like this little story describes.
The fear, uncertainty and doubt that exist in the minds of consumers cause them to buy less and more cautiously, and to save more. Lower demand leads to lower production and hiring, and fewer jobs. This in turn reinforces the fear, uncertainty and doubt in the minds of consumers about their future job prospects. And the negative cycle repeats itself.
This describes what is happening in the economy this year, and could easily spill over into the next year. The perceived “anti-business” attitude of the federal government—especially the bureaucratically controlled agencies (EPA, NLRB, et. al.) have created a negative downward cycle.
Breaking out of this kind of cycle means reversing the self-fulfilling prophecy principle from the story about the painter. Imagine if the newspaper headline had said, “Boom times are coming; Capitalize on them and succeed.” How would the young painter have behaved, and how would things have proceeded differently at each step of the story?
Decisions about whether to expand, invest and hire are driven by demand—but also by expectations—both of consumers and of businesses. No amount of government “jaw-boning” will convince businesses to invest the huge capital they are holding on their balance sheets. Positive expectations might.
What might convince both consumers and businesses to reverse the down cycle is to create a “pro-business,” and “pro-growth” environment, with fewer regulations, lower taxes and less government intervention. Then consumers will slowly begin to spend and that demand will lead to investment and job creation, leading to more consumers spending.
The upward cycle will also feed on itself—unless onerous new “headwinds” like new tax increases, the impact of Obamacare and unknown fears about the Dodd-Frank Act continue to loom over American business. It’s hard to look for the silver lining of sunshine when dark clouds loom overhead—and the headline of the two-year-old newspaper in the story seems to fit. I wonder which path America will choose?