Who really creates jobs?
The supply side economists claim that people have an inherent propensity to spend if there is supply of goods and services. They postulate that cutting taxes for the wealthy will entice them to invest in creating supply. That was tried in 81 when the top tax rate was cut from 70.1% to 28%. The tax code was simplified and many loopholes were eliminated. When the unemployment increased to 10.4% in 1983 (source: Wikipedia) it was the expansion of government and rebuilding of infrastructure that gave the kick needed to lower the high unemployment rate. In the process, President Reagan left the largest deficit, $2.1 Trillion, even though he raised taxes seven times, cancelling half the cuts.
If it is the supplies we need to create jobs, then how come many small businesses are closing and stores are liquidating their stocks and the big corporations are not hiring. Where are those who benefited from President Bush’s tax cuts of 2001, 2003 and 2004? How come they are not building supplies? Since 2010, the corporations have accumulated $1.3 trillion of profits and interest rates are bottom low – a very friendly environment for investing. They should be lining up to expand their operations or upgrade their infrastructures.
But none of this is happening. Why?
Real wages have been declining since the 80’s. It was home equities and two earner families that had been driving the consumption. Then came the subprime mortgage bubble burst causing the collapse of the financial institutions resulting in wholesale credit freeze and large scale layoffs. Presently, 12.7 million, 8.2% of the workforce cannot find work and the majorities of those who are working make minimum wages and therefore can only afford to purchase the bare necessities.
In 2010, the Republicans/Tea Party suddenly developed a conscience about the deficits. Government expansion and deficit spending has been the hallmark of Republican Administrations since Eisenhower. The newly elected Tea Party supported state governments, refusing to accept Federal Stimulus, have laid off 610,000, teachers; police officers; firefighters; and other service personnel while cutting taxes for their favorite constituents, the corporations. This has further diminished the already shrinking DEMAND at a time when we need more of it. At the same time these newly unemployed are no longer paying taxes resulting in further reduction of revenues for the government.
Warren Buffet tells us that motivation for investments is profits and not taxes. The profits come from demand. In 1914, Henry Ford understood this well. His efficient production line was producing more cars than he could sell. In January of that year he doubled the daily wages of his employees so they could also become his customers. His action created DEMAND. The rest is history. Another example, crude but true to the principle, is the illegal drug trade. Although criminal, the drug cartels are shrewd businessmen who stay one step ahead of the mighty DEA to satisfy the DEMAND of their products and make profits.
We had a spurt of hiring earlier in the year due to stimulus and growth in exports. However, that did not last very long because of the Euro crisis and slowdown in DEMAND in China and India. The Republican’s eagerness to cut expenses and implementing austerity is prolonging our Great Recession, the worse since the Depression.
Europe offers a clear example that austerity during a recession is a prescription for failure. The IMF has studied 173 cases of austerity packages since the 1970s and all led to recession not growth. Republican Romney reminds us that we are heading to the same fate as Europe. His prediction will come true unless we focus on creating demand. Germany, presently dictating austerity to others, did not gain economic stability by practicing what it preaches. Immediately after the 2008 crisis, Germany revived its auto industry through aggressive financial stimulation. We followed their model to revive our own auto industry after the reorganization of GM. If GM had seized to exist, thousands of suppliers would have had to cut their operations resulting in unemployment for millions more. Germany has also been subsidizing (a bad word in the Republican language) its clean energy industry and has taken the lead in solar panel technology.
Time and again history has demonstrated that in a time of recession, the economic pump can only be primed by governments. They renew nation’s infrastructures and invest in industries of the future. The resulting employment creates demand that encourages the investors to invest in the ensuing growth.
It is the people earning decent wages who are the real JOB CREATORS.
When Romney and his surrogates want to give 25% tax cuts to the so called ‘Job Creators’, ask them a simple question: Would you invest if there is no DEMAND? The likely answer will be, “No, but demand will follow investments.” It has never happened.