TCS Daily

Where Are the Entrepreneurs?

By John E. Tamny - August 4, 2004 12:00 AM

The June 29th Wall Street Journal reported that the accounting profession is presently experiencing a growth spurt. In "Crunch This! CPAs Become the New BMOCs," Journal reporter Diya Gullapalli wrote that in the aftermath of the corporate scandals, colleges around the country are experiencing record numbers of accounting major applicants.

The initial response to this for many might be a positive one. To the extent that accounting error truly was the cause of Enron/Worldcom-like implosions, it has to be a positive that there will be more accountants in the workforce.

Looked at more critically, the above-mentioned phenomenon may help to explain why U.S. stock markets are presently lacking sustained, positive direction. It also will hopefully cause both political parties to cast a more skeptical eye towards GDP and unemployment numbers.

Regarding unemployment, the party in power regularly touts unemployment figures that show job growth. The obvious fallacy here is that if jobs were truly the goal, creating lots of them would be as simple as outlawing tractors, ATMs, and self-serve gas stations.

It's the quality of the job that matters, and to the extent that job creation simply involves new layers of accountants and lawyers to handle expanded accounting rules and regulations, job growth will be meaningless. Polyconomics President Jude Wanniski perhaps put it best when he wrote in a recent client letter "the economy becomes inefficient when more of the people who work in it must facilitate trade instead of producing for trade."

When Charles Prince took over for Sandy Weill as CEO of Citigroup, much of the commentary was that as a lawyer, he would know how to handle the regulators. Hiring is up at investment firms, but it's also true that many of those jobs are in compliance. Just a couple of weeks ago the SEC announced expanded hiring plans; a development that presumably will be met with more hires on Wall Street to interface with the SEC's increasingly muscular presence there.

Regarding the economy, both political parties cite rising GDP numbers to defend whatever their economic plan is. The problem is that government statistics such as Gross Domestic Product are enormously unreliable, and have historically misrepresented the state of the economy.

Consider what GDP will do in a falling dollar environment like the one we're experiencing today: as the unit of account weakens, it's expected that producers will be able to raise prices. From steel to houses to movie tickets, that's what they're doing right now. The increased prices have and will expand the GDP number, but it will to some degree be meaningless in terms of real economic growth.

By most accounts, the '70s decade was very much a lost one characterized by inflation and sluggishness, while the '50s were a time of economic rebirth. You wouldn't know it from growth figures. Indeed, Charles Murray's 1985 book Losing Ground showed that GNP growth (they used GNP back then) was greater in the '70s than it was in the '50s. This despite the fact that the Dow Jones Industrial Average rose 245% in the '50s. The 1970s? The Dow rose a meager 3.5%, and in inflation-adjusted terms it plummeted.

As for the present, it's increasingly apparent that the economy is recovering. That said, a regular question that accompanies the recovery is why the markets aren't responding more positively to these rises in GDP and jobs.

Uncertainty relating to the upcoming election is certainly a factor, but there is a good argument that the answer also lies in stories like the Wall Street Journal's about the growing desirability of the accounting profession. When the best and brightest are increasingly attracted to professions like accounting and the law, it's a good sign that the economy is producing facilitators as opposed to entrepreneurs.

Investors seek productivity and innovation, and will understandably be reluctant to invest in an economy that's moving away from innovation towards facilitation.

Nobel Laureate Paul Samuelson was among other things famous for noting that the stock market had predicted nine of the past five recessions; the implicit point that the stock market is an unreliable indicator of the state of the economy.

It says here that Samuelson had it backwards. The stock market is the single best indicator of the direction of the economy, while government statistics such as GDP and unemployment will continue to trick politicians. Under Jimmy Carter the average unemployment rate was under 6% during his term, while the economy expanded nearly all four years he was in office.

Judging by his landslide defeat in 1980, it seems voters and the stock market were the only ones not tricked by the flawed government data.

John Tamny is based in Washington, DC and can be reached at


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