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Businesses don't have last word on U.S. economy

Having all but solidified the GOP presidential nomination, Mitt Romney shifted attention to President Barack Obama, whom he describes as a very nice guy who is in over his head — as someone who inherited a recession and made it worse.

While bemoaning Obama's recent regulatory initiatives, Romney described the president as liking the economy but not liking businesses, which he claims is as incoherent as liking omelets but not eggs.

Equating an economy to a collection of firms is as wrong as believing that it takes only eggs to make an omelet. In addition to firms, an economy requires a government-provided infrastructure (streets, roads, computer superhighway, sewer and water systems, barge lanes and school buildings); the skills of a workforce; the ideas generated in universities and medical centers; and a host of other elements.

Businesses are a key part of this whole, but not the whole. Keeping with the omelet analogy, eggs are essential, but there are additional critical elements needed — the skills of a cook, farmer, grocer and trucker as well as a stove, frying pan, butter and spatula.

Let's move beyond this inapt analogy to the main questions: Are business leaders inherently better at fixing or running an economy? Does business experience provide superior insights, or is it a hindrance? Are business leaders "job creators" who will be willing to employ more people if their taxes are lowered?

It is a common sentiment in the business community that the economy and the government should be managed as if they were business firms. Yet, there are instances in which the application of business principles will lead to incorrect public policy decisions.

For example, in a recession, it is wise for a firm to cut back on its spending; but when governments follow that example, the result is deeper recession and higher unemployment. Even so, the business community often condemns such spending as irresponsible and wasteful, if not downright nuts. Unfortunately, this is precisely what is happening in the European Union today. Acting as if they are businesses, European governments have imposed austerity measures that have reduced economic activity and increased hardships in their countries and made it harder for them to control their debt.

Recessions are an excellent time to make capital expenditures. Borrowing costs are low since interest rates are low. These expenditures help the economy in two ways: They employ otherwise unemployed people during the recession, and they prepare the infrastructure that will be needed once the recovery is underway. If we wait until the recovery to fix infrastructure, those repairs will interfere with that recovery. The capacity installed during the recession will be ready to support a more robust recovery, raising productivity and reducing costs.

Business people often misinterpret the deficits that result from spending in a recession. It is true that scary deficits have been run for four years: the final Bush deficit and the three Obama deficits are all over $1 trillion. But imagine the consequences if these deficits had not been incurred. Mark Zandi of Moody's Analytics and Alan Blinder of Princeton University predict that, absent those deficits, the unemployment rate would have risen to 13 percent rather than peaking at 9.5 percent.

The notion that the economy consists solely of its business firms is complemented by another misleading mantra: that employers are "job creators." This particular myth is gaining credence through constant repetition on cable news channels, where the message is that job creation is dependent upon reducing the taxes of the job creators.

Note that employers are profit-seekers. They employ people only when it is profitable for them to do so. If outsourcing jobs or substituting robots for people become more profitable, they will do that instead. Job creation is a much more comprehensive process of which employers are a part — much like eggs to an omelet — but the process is also dependent on a well-functioning public sector, effective schools and a healthy economy.

Charles O. Kroncke, left, is associate dean in the University of South Florida College of Business. William L. Holahan, right, is a professor of economics at the University of Wisconsin at Milwaukee.

Businesses don't have last word on U.S. economy 04/25/12 [Last modified: Wednesday, April 25, 2012 7:05pm]
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