Biz Insider: “Krugman won, austerity lost” … say what?

Yesterday, Business Insider guru Henry Blodget wrote: The Economic Argument Is Over — Paul Krugman Has Won

I haven’t been a big Blodget fan since he was run off of Wall Street for hyping internet stocks during their pre-bubble bursting run-up.

I think he’s trying to balance the scales these days … leaning far left to – he hopes – increase his odds of getting through the Pealy Gates.

The essence of his article is that the only thing wrong with the economy is a lack of adequate aggregate demand.

So, the government should keep borrowing and spending  … and things will right themselves,

The economic water level will rise to a point that reluctant CEOs will have no choice but to start hiring and building plants to meet demand.

That’s not a patently dumb notion … it’s just flat out wrong.

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Here’s what’s wrong with Blodget’s argument …

It’s about behavioral economics … to be precise, “behavioral managerial economics”.

CEO aren’t and won’t invest because they fundamentally don’t trust a president who conspicuously detests business and is willing to make life both unpredictable and miserable for companies.

CEOs may

Way back in 2009, we posted “Why private sector jobs won’t be coming back any time soon … hint: it’s called passive aggressive resistance.”

Given the Blodget piece, now seems to be a good time to reprise the piece … so, here it is.

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Team Obama thinks that it has corporate America right where it wants it –- under its thumb.

CEOs and Boards serve at the pleasure of the President, executive compensation is overseen by a Federal czar, product lines are green-dictated by Federal czars and Task Forces, contract law is suspended at will,  bankruptcy laws are changed on the fly — relegating secured creditors behind politically-favored unsecured ones, ineffective government agencies dictate to stumbling companies, unions are given jolts of legislated  adrenalin.

The Administration has empowered itself to sort out good guys from bad guys, to pick marketplace winners and  losers, and to destine survivors and failures, Companies (and individuals) that question government policy are ridiculed, harassed, and punished; those that oppose the policies are squashed faster than decades-old GM or Chrysler dealers.

Corporate CEOs are quaking in there boots … or are they ?

Team Obama –- which consistently demonstrates uncanny business naiveté — may be underestimating a staple of organizational behavior: the power of passive aggressive resistance.  Rather than being openly insubordinate when confronted with undesirable tasks — and getting nailed by vindictive superiors –  employees and organizational units will often just procrastinate and work work inefficiently, in effect, pocket vetoing the unpopular orders from above.   In corporate jargon, it’scalled “slow rolling”.

Sure, corporate chieftains will tell President Obama what he wants to hear, and may even stand next to him on a stage in a faux show of support.  Why risk the rath of a Presidential punishment, especially when there are other ways to skin a cat?

Specifically, with respect to continuing job cuts and rising unemployment, here’s a theory of the case.

First, you can’t  let a good crisis go to waste, right?  Businesses always use tough economic times to clean house.   Fat builds in all organizations over time.  In “normal” times, it’s difficult to get rid of dead wood.  Employment laws –  perhaps well-intended originally –- serve to protect slackers by making it cumbersome and difficult to fire anybody.  When the economic tide rolls out, companies have the air cover they need to resize and purge under-performers en masse. The tendency is to cut deep.  If some muscle gets pared too, so be it.  It can be rehabilitated later.

In typical business cycles, employment is a so-called lagging indicator of an economic rebound.  That is, when the economy starts to recover, jobs are usually added back very slowly.  Why?  Because businesses have a renewed zeal for productivity, they recommit to keeping the fat from building up again, and they want to be sure that the signs of better economic times aren’t false positives.

Eventually, open positions are filled and capacity — human and physical –  is added to meet increasing demand.  It may take awhile, but the system eventually gets back in balance.

If the economy is bottoming out now -– as many experts assert –  employment would be expected to start rebounding in 2010.  But, it won’t. Why?

Because the rules of engagement have changed.  It has become far more costly and risky for companies to restore or enlarge their payrolls.

For openers, the minimum wage is scheduled to increase by over 10%, making entry level staffing more costly.  Then, there is the risk that “employer mandate” will force companies to expand health insurance coverage or pay fines – again, making labor most costly.  Then, there is the threat of “card check” legislation turbo-boosting  the mass unionization of U.S. businesses .  And now, there’s the evident risk that government will change rules and regulations on political whims, creating an unprecedented level of uncertainty.

The bottom line: businesses will resist government policies passive aggressively.  Fewer jobs will get added back than history would suggest, and those that get added back will materialize later than past patterns.  Businesses will add jobs as a last resort rather than trying to build capacity ahead of the economic growth curve.  Why should companies  increase their costs and  risks any more than is absolutely necessary ? Companies will continue to off-shore jobs, but will be more clever and clandestine about it, e.g. by vertically disintegrating and simply buying goods and services from 3rd parties.

Given the Administration’s anti-corporate rhetoric, actions, and proposed game-changing rules, I doubt that many CEOs will be taking on added costs and risks to boost the administration. More likely, they will let unemployment continue to creep up, and will slow roll the process of rehiring.  Corporate chieftains will sit back and watch the President squirm and spin his “4 million jobs – saved or created”.  As Rev. Wright would say “the chickens will have come home to roost”.  Passively aggressive  resistance at its very best.

Unfortunately, that means we’ll be seeing a stagnating economy as far as the eye can see ….

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My point, Mr. Blodget, is that the Feds can’t borrow enough to make the economic water level rise enough to make CEOs start hiring in droves.

They just don’t trust the man … and will continue to act out passive aggressively.

That’s called behavioral managerial economics … how things really work.

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