Tuesday, August 30, 2011


Via PEG, FLG learns that Matt Yglesias has discovered, praise the Lord, that regulatory uncertainty increases risk for entrepreneurs:
Walking around Washington, DC it’s difficult not to notice that there are a lot of vacant storefronts in the non-downtown portions of the city. There are also a lot of unemployed working class people, even as the college educated professionals in town enjoy one of the strongest labor markets in the country. It’s a bit of a puzzling situation. Why don’t markets clear? Surely these idle resources—vacant retail spaces, unemployed workers—should be mobilized to some purpose? In most of the country, I think these kind of problems can be attributed primarily to a shortfall of demand. That’s not the case in DC. There’s plenty of demand for bars and restaurants. There’s plenty of space where bars and restaurants could open. There are plenty of people who need jobs. What’s more, there are plenty of people who could use the increased social services that higher tax revenue would provide. Instead, we’re doing this. Not just one restaurant shut down, but a sign to would-be entrepreneurs everywhere that their potential investments are much riskier than a superficial read of market conditions would suggest.

Is it so far a leap to say that uncertainty about what precisely the Obama Administration meant/means to do about taxes, health care, and regulation might just have adverse effects on a national scale? If FLG remembers correctly, Matt felt this was entirely suspect.

This isn't to say that insufficient aggregate demand isn't a problem, or even the primary problem, but it seems clear that the many of the same dynamics that apply to liquor licenses also apply to a variety of government interventions in the economy broadly.


Jacob T. Levy said...

I've never understood this claim at all. Uncertainty about political outcomes is endemic to politics. There's never a fixed point of tax policy or regulation policy, and anyone whose business model depends on there being no changes in the tax or regulatory environment ever doesn't actually have a business model. The next relevant election is never more than two years away; there's *always* uncertainty.

As happy as I am to have sticks with which to beat high taxes or overregulation, I just can't see that it's the case that there's any asymmetry with respect to uncertainty. If I'm investing under a low-tax low-regulation president, I'm uncertain whether those conditions will still hold two years out-- not to mention being uncertain whether the normal meat grinder of politics will result in my rivals getting a tax subsidy or protectionism cutting off my supply chain or, or, or. Your ostensibly low-tax president might or might not decide that he's going to buy re-election with an unfunded prescription drug entitlement; who knows? It might or might not pass; who knows?

High taxes and lots of regulation might be (in my view generally are) bad. But having a president who wants to increase both doesn't increase *uncertainty* any more than having a president who wants to decrease both. It's having politics at all that throws us into that uncertain world.

Jeff said...

I see Matt Yglesias's attitude all the time here in Cleveland Park, where fully-employed professionals loudly pine for one of our empty storefronts to become a bike shop, a diner, a florist, etc...but none of those people ever quits a high-paying, benefits-rich job as, say, an attorney for the FTC to risk starting one of these beloved neighborhood businesses. No, local amenities just drop out of the sky. For the most part, D.C.'s "college-educated professionals" aren't entrepreneurial by nature; if they were, they wouldn't have been drawn here by the promise of working in large bureaucracies.

For those who do decide to take a chance, the city bureaucracy is brutal and baffling. A friend recently incorporated a tiny nonprofit. He needed to pay the city for the privilege of incorporating, but he couldn't ask his colleagues for money, because that would be charitable solicitation, which would be illegal, since the organization wasn't incorporated and didn't have a charitable solicitation license. It got even more Catch-22-like from there. Two lawyers tried to untangle the mess. The end result? A "please excuse Epstein from class" letter from a city official to keep on file in case some bureaucratic underling ever raises questions about their legitimacy.

Add that anecdote to the pile of stories I've heard about what it's like to start a restaurant--the new seafood joint on my block waited nine months for city approval on a space that sat empty for seven years--and I don't wonder at all why we have empty storefronts, vacant retail, unemployed workers, and too few bars and restaurants for urban pundits who can't imagine other forms of job creation.

Withywindle said...

How about, "increasing regulation effectively equals increasing uncertainty"?

Anonymous said...

For some reason, you jogged a memory of something John Derbyshire penned over at National Review back in -07:

"...By way of an answer, let me introduce you to my friend Zhang (not his real name). Zhang came here from China after the 1989 Tiananmen massacre. An energetic and clever young man, he worked at odd jobs around New York City while looking for an opportunity to make his fortune. The opportunity soon arrived. He happened upon a business opportunity — a new method of engraving on stone, the patent held by a fellow-exile with whom he had struck up a friendship. The two of them were sure they’d be rich in no time. They struggled for a couple of years to bring the thing to market. At last, defeated, they gave up. Zhang took a desk job as a clerk for a credit card company.

"What was the cause of the failure? I asked him. He: 'We didn’t realize this is a mature economy. So many permits, regulations, accounting rules, taxes! In China, we could have got this off the ground in no time, working out of back rooms and sticking up poster ads. Here — forget it! You’re killed by lawyers’ and accountants’ and agents’ fees before you get started. Stick up an ad, the city comes after you.'”

The rest is a good read as well:


Mrs. P

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