Tuesday, July 31, 2012
Views on news: tax breaks and jobs
For years now it seems, the left and the right have diametrically opposed views on if tax cuts to the wealthy or business help create jobs.
It's an argument about 32 years old, and one on which Ronald Reagan was elected. Of course, Reagan endorsed the idea of tax cuts to create jobs and won over Jimmy Carter with the country hoping he was right. His Republican primary opponent, George H.W. Bush famously called it voodoo economics.
The debate tends to evolve into a social argument versus an economic one. The social one, of course, gets much more media play because it's simple to understand and easy to sell with buzz phrases, like tax the rich, class warfare, the 99 percent talk as well as job killing talk.
My old master program economic professors would be amused at the ability of politicians to abscond with reason and replace it with vitriol.
Even today, there's a little bit of pseudo economics running around. The left or even center left tends to point to the record of how we cut taxes with the Bush tax cuts in 2001 and we actually lost jobs the next five or six years in the aggregate, across the country.
While that looks like the tax cuts didn't work, it may be only partially true. It's true that employment went down, but that doesn't mean SOME employers didn't hire because they got a tax cut.
The real point here is that if we pronounced our policy will create jobs, we should expect people will measure that across the board, throughout the country. But even my most liberal professors would admit that there are many factors that influence job creation including wages, demand for products, imports, exports, the interest rate and the value of the dollar.
Unforunately as we've come to learn, bizarre, unregulated things like credit default swaps also influence job creation.
And anecdotally, we can find stories that prove both points. I know a high-earning hedge fund manager who pays the low 15 percent rate on the vast majority of their capital gain income. This person told me if they got a tax break, they would not likely buy a new car (they already have one) a new house (already got a nice one of those) or really would expend too much more income, except may go out for dinner a little more.
Of course, they would have more money to invest, which shouldn't be discounted, but it doesn't give the same bang for the buck as consumer spending, which makes up 70 percent of the U.S. economy.
At the same time, I know a small business person who said if they got a $3000 tax break on their property tax bill, they probably would hire a new employee.
Both have circumstances that direct their decision. And we should know that if we think a general policy will affect everyone the same, we are simply kidding ourselves.
The key, (if you've hung with me this long, congratulations for caring about this stuff , and you're among the top 10 percent at least) is we have to understand how a policy might affect the "aggregate." In other words, how will it affect most people or a large enough share to make a difference in job creation.
And we should ask our politicians who are espousing these economic theories this crucial question: Tell us of a study, an example or data that suggest at the most your theory about the policy is true? And if they can't give a good answer to that, we ask: So are we just supposed to take your statement on faith, just believe you that it will happen?
So do tax cuts create jobs? The answer is basically, "It depends.'
And if they end up concluding we should just believe them. Buyer beware!
Subscribe to:
Post Comments (Atom)
Tax cuts do not create jobs any more than governments create jobs.
ReplyDeleteThe key is having policies that best deploy capital resources within the economy. On that there are two theories - one says government can best direct those resources because government has no profit motive or bottom line to adhere to, the other says private capital investment can best direct those resources through the 'invisible hand' in Adam Smith's words. Both have consequences, however.
Exactly what vision does government use to make sure it is deploying capital that makes the best use of that deployment? If there is no profit motive, no financial incentive for government to best deploy that capital it comes down to one of a political incentive which is to say government will deploy capital that offers the biggest political return (e.g. incumbent re-election). At the same time, when government directs resources, it always results in a dire consequence - it wants to provide an equal output of economic growth. We have seen over the last four years of the government attempting to enact policies that foster economic growth that has an equal output. That goal is impossible to ever meet. If you ever have economic growth, you are going to have unequal participation in the output. This is why the policies of the current administration have actually made things worse - they are trying to have economic growth that has equal results across all participants.
When more capital is left in the private economy that finds the best use of that capital thorugh Smith's 'invisible hand', you will have both economic growth that does two things: result in unequal participation in the growth (some people will get richer than others in a growing economy) and you will drive production. And production is the key to job growth and vibrant economic activity. Say's Law says that supply creates its own demand meaning supply must come first and where does supply come from - it comes from production. Job growth will occur out of increased demand in the economy, but it has to be real demand. The Fed just printing money and (rhetorically) dropping from helicopters to the citizens below does not increase demand because there are no more good and services in the economy. And fiat demand (printing money) only drives up the prices of existing goods and services. Government policies that foster production is what is needed. Those could be cutting tax rates, those could be cutting government spending.
So, the question becomes which policies are best for fostering production. That is the key to long term job growth. It doesn't happen overnight, but by the time Reagan's tax reforms hit in 1983, the economy was adding 500K jobs a month at the peak job growth and government revenues were soaring. I don't think anyone can same the same about the policies of the current administration.
Interesting Patrick. All valid points. The only thing I might suggest you reconsider is your assumption that politicians are motivated not by profit, but by re-election.
ReplyDeleteDon't get me wrong, many are motivated by re-election.
However, I have been around enough of them for 25 years in this business to know that some of them truly are motivated by helping the private sector create jobs, through as you say, making production easier.
Many I've met over the years, are motivated to improve how government serves its customers the taxpayers in an efficient way.
Once they've done that many of them quit on their own, as we've seen this year.