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Job Creation 101
Dec 22nd, 2008 | 7 responses
Job Creation 101
The word is that when President Obama looks at taxes, he won’t be seeking to lessen our surging deficit by doing away with Bush tax cuts for the rich. Why? Because the thinking of Democratic circles in Washington is that, while these tax breaks may have been excessive, during a recession with so many job losses we need the rich to stay that way so they can provide funds that create new jobs.
Rich people are the prime job creators? So sayeth economists. So endlessly parrot conservative think tankers. And these worthies have a paradigm (you’ll forgive the expression) to show how this works. The rich, it’s said, look for obscure geniuses working in garages to invest in so as to realize huge profits down the road. Or the rich sink their money into all kinds of other investments that in diverse ways end up puffing the employment rolls.
An interesting and appealing notion. Which alas is largely hokum. In the Bush years the rich have never done better in terms of taxes and the job rolls grew at pathetic rates even before the present recession took hold.
In today’s real world, not the one occupied by economists and think tankers, rich people don’t look for good ways to make money on their own. They give their money to professional money managers to do the job. And these managers are all working to produce short term profits so as not to lose their business to other managers. They are thus inevitably drawn to Madoff-like investments, or directly and indirectly to private equity firms whose takeovers almost always lead to firing employees to produce short term profit improvements. And oh yes, the very rich also hire accountants who find loopholes in the tax code that send money to things that rarely if ever generate new employment.
You can therefore soak the rich without sending many more people (fund managers excluded) to the unemployment lines. But how, then, in the real world, do you create more jobs through taxing policy? The answer, of course, is to give tax breaks to the poor and middle class.
Put more money in these people’s paychecks and they will spend it. They will buy things that have to be manufactured, creating manufacturing jobs. They will be able to afford more services that create jobs in the service sector.
Soak the rich to keep the deficit under control. Bestow tax breaks on the poor and middle class to create jobs. Too bad that Mr. Obama has apparently been sold on overlooking the first part of this sensible prescription.
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7 Responses to “Job Creation 101”
You can only give tax breads to people who pay taxes.
“Put more money in these people’s paychecks and they will spend it.”
This has just made trickle-down into a case of bulletproof logic. As have other things you've written, but this deserves mention here.
People won't spend the money they're given (or allowed to keep) if they'd rather save it (or invest it), or if they'd rather service debt instead.
Where were you during Japan's many “lost years,” full of stimulus, vast public works spending (don't forget that “solution”!), and so on?
I think anyone who is well steeped in US history has to realize how far we've gotten away from the original ideas and spirit of the whole endeavor – meaning the creation of this country. If the little guy spends all his time and energy struggling just to survive, while the rich and storied people and corporations continue their celebrations of excess – with help from the government no less, then what was the point to begin with? As far as I'm concerned the American people have been, and are being taken to the cleaners by the combination of incompetence and corruptness of their “elected” representatives. Of course the people themselves deserve their share of blame, since too many of them don't take the trouble to educate themselves about what is really going on to begin with. Suffice to say, the feudal system is alive and well under a different guise.
The data, as I understand it, suggests that the wealth gap has increased under Bush, but I think your post makes several assertions that I'm not aware of any support for (perhaps you can points me to some supporting information).
“In the Bush years the rich have never done better in terms of taxes and the job rolls grew at pathetic rates even before the present recession took hold.”
The graph from the BLS (http://data.bls.gov/PDQ/servlet/SurveyOutputSer…) shows that unemployment rates have steadily declined before the most recent recession. I've heard the argument that Bush's tax cuts on the rich led to a recession, but I have yet to hear any specifics on how those those two things are directly connected.
As for your argument for why the wealth of the rich does not translate into jobs for the middle class and poor, I agree that the short-term focus of our economic is a problem (which is seems to me was part of the cause of the current recession as people got too focused on short-term gain and made decisions that were unwise in the long term). However, I think your characterization is extreme. Are you seriously arguing that the more we invest the more people get fired? I think the opposite effect described by most economists (who you dismiss with no explanation) is much more plausible. The scenario you described might be real in some cases, but I think it's far outweighed by the less cynical economic principles.
Please don't confuse me with a die-hard conservative (after all, apparently even Obama agrees with me or he wouldn't be delaying his tax increase). As I mentioned, it is true that the wealth gap is increasing, which is a great concern, but if we don't find the true cause of it, we'll just end up implementing policies that don't fix the problem.
“I think anyone who is well steeped in US history has to realize how far we've gotten away from the original ideas and spirit of the whole endeavor – meaning the creation of this country. If the little guy spends all his time and energy struggling just to survive, while the rich and storied people and corporations continue their celebrations of excess – with help from the government no less, then what was the point to begin with?”
When our country was founded, the tax system was far less progressive, and far more “helpful” to the rich than it is now. In fact, the income tax was a flat tax of 0%. I'm not advocating a flat tax, but given that fact I don't understand your point.
“the little guy spends all his time and energy struggling just to survive,”
Do you think the little guy today has a harder time “struggling to survive” than the little guy did at the time of the founding of our country? I'd much prefer to be a poor person today than a poor person back then, when poor people in our country truly did struggle to survive, in the literal meaning of the phrase.
I'm not against progress (of course I don't think the founders believed the world should remain as it was at that time), but I don't agree with the argument that we are regressing. I think our standard of living is clearly much higher than in the past, which we have grown accustomed to. So we have just redefined the term “surviving” to mean much more than it did in the past. A great deal of our relative economic prosperity is due to our free market economic system, which even with its flaws, is the best system we have found. We should seek to mitigate the flaws of the free market, but without undermining the fundamental principles that make it work.
The past recovery was by far the weakest labor market recovery since WWII. It also had no increase in median wage for the first time…uh maybe ever. Definitely since WWII at least. The reason why wealth disparity leads to economic downturns is because there is only so much “good” investment that can be made. Once we have a glut of investment, all that's left is for money to chase the newest trend, and is one of the reasons for the serial bubble blowing that we're seeing. Similarly, when there is too much wealth concentration then too much of the nation's resources are tied up as possible expenditure, without having a stimulating effect. This is a reason why the last few decades have seen immense food and health care inflation. Back when we were on a hard currency, wealth hoarding literally led to a shortage of cash (meaning each recession was accompanied by deflation) so it was a problem that economists were very concerned with…now the government just “stimulates” its way out of recessions to get things flowing, but the problem is that the benefits of inflation naturally flow upwards. By changing to a fiat currency, we've made it so wealth hoarding is less of a problem in the short term, but so that real wages slowly decrease over time for most of the middle class. Don't believe me? Look up inflation adjusted wages, which peaked in the 70s.
The cycle is about to end because the populace is in so much debt that it can't afford to borrow any more. That's why even though the Fed's have created infinite liquidity it doesn't matter…and that is another consequence of wealth disparity.
As for the cause, it's complicated and has to do a large deal with monetary policy, but also tax policy (only the “moderately rich” i.e. 200k- a million get squeezed, most millionaires have lower effective rates than the middle class because they earn it through capital gains and dividends which are taxed less….Warren Buffet offered money to any major CEO that could show they paid lower income tax rates than the average low level employee — $40k annual salary or so — and not one person took him up on it) and it's also a natural consequence of outsourcing and free trade. When it comes to the latter, our government having a policy to keep the $ stronger than it should have been combined with Japan and China's propping it up enabled our debt driven economy. So some of the problem arose out of global trade imbalances as well.
Also many psychological and economic studies have shown that people's perception of quality of life is largely determined based on whether they think they are being fairly compensated compared to other people. Even though our standard of living is obviously much higher than even the 1950s-60s, the truth of the matter is that the top echelons of society have seen the bulk of the gains, which only exacerbates the problem politically and economically as the “average joes” attempt to keep up.
I have my theories about the impact of taxation. Basically a flat tax funnels money to the top of the spectrum. Poor people are just incapable of saving money. Too much, if not all of it, is forced into just getting by. Also, at the lower ends, an increase in pay does not translate into more savings, just a better quality of life, as someone going from $18k/year -> $25k/year simply realizes they can now buy clothes without holes in them, if that. Anyways, the point is poor people spend every dollar you give them and are the driving force behind a majority of consumption, which drives production. Nobody really starts saving until you get into the $50k salary range, and even then only when single. (NOTE: that value will change with geography, I live in CA)
The rich on the other hand, can manage to save much more readily. Going from $1mil/year ->$2mil/year really doesn't improve your lifestyle any. So, as the rich get richer, they do save more money out of proportion to poor folks, and as the poor get richer, they get better quality of life without managing to improve the overall outlook any. Hence, the money flows to the top of the pyramid since the only people actually saving money are those who don't need it to go back out the front door right away.
This over any amount of time means less money at the bottom, and soon the wealthy have TONS of money to invest, but since the consumer market has less spending money demand falls off, so does production, the wealthy have nothing to invest in that's legit, an we get crashes on overvalued crap. Capital growth without corresponding production growth means nothing. You don't have production growth unless the bottom of the pyramid has cash to buy stuff, which flat taxes take from them. Hence the effectiveness in progressive taxes in balancing money distribution and driving the economy. Also, our gov't doesn't get upside down in debt as easily. Reverse trickle down.