--Robert Frank, economist and professor at Cornell University, author of the "Economic View" column at The New York Times
Professor Frank explained the point again, later in the segment:
A business hires a worker if it thinks it can sell the stuff that the worker's going to produce for more than it has to pay him. In this case they're not going to be able to sell the extra output they get from hiring an extra worker because people don't have money that they're spending to buy things. So it wouldn't matter whether the owner of the business was a billionaire or a pauper; if you can't sell what an extra worker would produce then there's no economic reason to hire that extra worker.
I've been trying to figure out if there's something I'm missing. Like if I put myself in the position of the business owner maybe I'll understand the counter-position. So let's say I own a business and we make and sell 10 units a day. Then the recession hits and no one is buying so we're only selling 5 units a day. So I lay off half of my employees because I'm not making the money to pay them and they're producing more than I can sell anyway. So now the government gives me a tax cut - or heck, to keep it simple, let's just say they give me the money outright. Let's say the government gives me enough money to hire another worker. If I'm still only selling 5 units and I've already got enough workers to produce 5 units, why would I spend my new government money on another worker? Given the recession, why wouldn't I save the money just in case things get worse? I guess I could see spending the money to make the workers I have left more efficient, so that would have some stimulating effect.
If I'm a consumer of the units made by the company above and I lose my job, I have no money to buy units. I get an unemployment check, I resume buying units. The check isn't for very much, so I'm not buying as many units as I would, but if I didn't have this check, I wouldn't be buying anything, right?
I mean... right? What am I missing?
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Does this theory also explains the transfer of jobs to China & India and then re-importing the goods back to your home country?
Jobs? What jobs. The overwhelming majority of U.S. manufacturing jobs have been outsourced to foreign countries. Unless U.S. workers emigrate to those foreign countries to get those jobs, high unemployment will persist.
Notwithstanding, and a la the Dust Bowl era, unemployed workers need to research those States that have low unemployment and move there and find work.
Congratulations, you understand economics better than any free market mousketeer does.
You are missing taxes.
If they raised your taxes and then gave you a break for hiring that extra person you didn't really need you might end up doing it.
If they raised your taxes and then gave you a deduction for upgrading your factory someone would have to hire people to do the upgrade.
If you raise taxes on the big piles of money you are sitting on then you'll come up with ways to move that money around rather then let the government have it. And all those tax dodges will have to hire people and invest in things.
If you are dumb enough to hire a person because you get a tax break for hiring them, you truly deserve to watch your business go into the toilet. No tax break is going to zero out the additional costs of hiring that person. It won't cover all their salary or benefits, so if you hire someone to get a tax break, it will STILL cost you money, and you will STILL be increasing your production capacity for goods that are already in oversupply.
If you are upgrading your factory because of tax breaks, you are only going to be able to do that if you already have money put away to do so, because banks aren't lending money for much of anything today. So, you already have the money, the costs of building or upgrading are at historic lows, and you STILL won't do the upgrades unless the government gives you money to do so? Gee, I thought government interfering with business was bad? It was supposedly bad to give money to GM and Chrysler to stay in business, upgrade their factories and product lines, but OK to give businesses tax breaks to basically do the same thing? What is the difference? Well, actually, the GM and Chrysler bailouts were better, as they involved the purchase of stock, much of which is now being bought back at a premium. In other words, the government made money on the deal, just as it is doing with TARP. With tax breaks, you see only a loss in revenue for the government.
As for raising taxes on big piles of money you are sitting on.....I assume you didn't know that 25% of all corporations paid NO taxes at all last year. They don't need further incentives to avoid paying taxes...they are doing quite well at it already without further incentives. Your argument is basically that if taxes are raised, more corporations will cheat on their taxes.
Corporations are making money hand over fist. During this recession the wealthy went from sitting on huge, obscene mountains of cash to sitting on gigantic, obscene mountains of cash.
You missed the point.... not being taxed at all is completely different from finding ways to not pay taxes. And if there is one thing rich people do well it's come up with ways not to pay taxes. Heck a bunch of them would rather give their money away rather pay one dime to the Government!
Crack open a history book. When tax rates have been highest on the wealthy this country has boomed.
They start charities, they build libraries, they build things they can write off, the buy equipment so they can write it off as depreciation, etc.
They lend their money, they invest it, they move it around... they do everything they can to not have to pay taxes on it.
Employees stop being treated as an expense that only affects the bottom line too. Raise their tax rate and they'll remember wages are also an expense that lowers their tax liability. Give them tax breaks to hire people and yes, they really will hire people to do nothing rather then give the money to the government in taxes. That's why they call them tax write offs.
If they threaten to move the jobs oversees then hit them with a tariff when they bring the goods back and use the money to seed small businesses.
Tax the heck out of them and then give them loopholes to wiggle where we want them to go.
I still don't see any evidence that tax changes will improve the unemployment situation. The basic fact is that no one is going to add to their personnel as long as demand isn't increasing. Any business that adds staff just because the government gave them a tax break won't last long.
Whenever business is given tax incentives to do something, they find a way to circumvent it, or live with it for the shortest time possible under the deal, then skip out. I can't tell you how many times I've seen a business get a big tax break as an incentive to build in a state, only to see them shut down and leave at the earliest possible opportunity. Sometimes they wait until they fulfill their end of the deal with the state, and sometimes they just skip out early, and eat the financial penalties.
Well lets see, most major sports leagues started off as a way for rich business owners to write off a ton of taxes... That is athletes salaries, front office people, ticket takers, hot dog vendors...
The problem is all the wealth is pooling at the top. Taxing the heck out of it every where it is just sitting still will get it moving again. Even if it is literally just getting physically moved you're going to have to hire more money movers.
Buy stuff so you can write it off and someone gets to go to work to make the stuff.
Now you are creating some jobs.
Waiting for it to trickle down, or injecting it at the bottom to just rise up and stagnant doesn't get the wealth moving. You've got to make it more attractive to keep it circulating then letting it sit doing nothing.
Money used to circulate more readily in the upper wealth circles because they often reinvested that money in new industries, or in improving their existing industries. That seems to still happen, but the investment is taking place overseas. The money goes to build new factories in India, or China, or Russia....not America. So jobs get created, but not here. Is it because of taxes? No, it's because the wealthy prefer to put money into places with hyper-low wages, little or no labor, tax or environmental laws, places where some bribes will get you what you want. Changing tax laws here won't change that situation, because multinationals will still get better deals in countries where workers work 16 hour days, 6 days per week, get paid pennies per hour, have no health insurance, no labor laws, no environmental laws. The only way to prevent that is to go back to tariffs that make such offshore production less profitable. Unfortunately, as a member of the WTO, we are barred from doing a lot of that, so we get flooded with cheap goods that we can't compete with. Like I said, tax laws can't change that sad fact.
In addition to the demand issue addressed here, the fallacy that raising income taxes will cut small business expansion. This is supposed to relate to S-corps where the business and personal taxes are all rolled together and taxed as personal income. But the taxes are essentially paid only on the money taken out of the business--faced with a higher tax rate, taxes can be avoided by spending more money in the business which becomes a business deduction on the return. There are some complications--you must pay yourself a reasonable salary. But there are skads of ways to avoid revenue from generating taxes in the S-corp tax regime. I'd love to see a real tax expert explain the issues.
I think it's actually worse than "If I'm still only selling 5 units and I've already got enough workers to produce 5 units", because many businesses learned to also do more with less. Not only did they lay off 5 people, they cut the hours those employees are working from 40 to 32 hours each week, further killing demand. Getting more out of the same workers doesn't necessarily mean any sort of stimulus.
I really do not understand people that champion supply side economics. The only thing that occurs to me, is that they could be thinking "maybe if we wrap this in enough double-speak people will actually buy into this and cut their own throats to make us even richer".
@SSchoene I would love to see a real tax expert put the S-corp tax holes into lay-person's terms also.
Does supply side mean that producing more than the demand will create the demand? Bush Senior was right, voodoo economics.
Republicans know that the CBO is only right when it supports the position you had before it's report.
This is why it is so nearly IMPOSSIBLE to stop a deflationary spiral, as opposed to reining in inflation. There are measures that exist to rein in inflation (interest rates). But deflation is a positive feedback loop that seems to only be able to get worse.
Deflation, real deflation (not simply price adjustments) is a very bad thing, like running off the road and going off a cliff.
Curbing inflation is like running off the road and the ditch slopes up on either side, thus slowing you down even as you lose control.
WHY does everyone in this country (except Paul Krugman) seem to think deficits and inflation are the risk? Am I crazy for believing in Krugman (and Keynes?). I feel like I am as crazy as I felt in the run-up to the Iraq War, because I worked in the media and wasn't drinking the Kool-Aid.
Otherworldly and surreal. And perhaps going off a cliff. (See also 1937)