Friday, November 4, 2011

Dubious Dogma

Oracle of Omaha
Do higher taxes discourage business investment and hiring? Would eliminating regulations lead to job growth? Cutting taxes and regulations are on the n-point plan of every candidate for the Republican nomination. For decades Republicans have claimed taxes on corporations and the wealthy and business regulations are job killers. These are the twin pillars of Reaganomics, articles of faith among conservatives. At first blush these dual tenets of conservative economic thought seem plausible. But are they actually true?

Bruce Bartlett, economist in both the Ronald Reagan and George H. W. Bush administrations said, "Republicans favor tax cuts for the wealthy and corporations, but these had no stimulative effect during the George W. Bush administration, and there is no reason to believe that more of them will have any today." In fact, most economists agree that tax cuts are not stimulative; increased government spending is. Regarding the notion that eliminating regulations will lead to significant job growth, Bartlett said, "It's just nonsense. It's just made up." He should know. He was there.

The fundamental flaw in these two bits of conservative economic dogma was pointed out by no less than the Oracle of Omaha, perhaps the most successful investor of all time, billionaire Warren Buffett. Taxes and regulations are simply not relevant in determining the timing of business investment. The overriding factor is the expectation of growing markets for products and services. The Bureau of Labor Statistics reported that for the first 6 months of 2011 1,119 layoffs were attributed to government regulations vs 144,746 attributed to poor "business demand."

Corporate profits have never been higher. Research firm Birinyi Associates and rating firm Moody's say cash reserves of U.S. corporations are at an all time high, well over a trillion dollars. So why aren't they hiring? Well, in fact they are, but due to federal and state budget cutbacks government funded jobs have been disappearing almost as fast. Nevertheless, employment in the private sector needs to grow faster. The reason it isn't is actually pretty obvious. Business investment and hiring won't go up until Corporate America is convinced that consumers are going to start spending more.

The U.S. economy is consumer driven. Lowering taxes on the rich and eliminating regulations would have little effect on unemployment, but would increase corporate profits and lead to greater income divergence and degradation of the environment. Cutting government spending in an effort to reduce the deficit would cause reduced consumer spending and even higher unemployment. It's exactly the wrong thing to do in a weak economy, dubious Republican economic dogma notwithstanding. According to Bartlett, "People are increasingly concerned about unemployment, but Republicans have nothing to offer them." Panderbear agrees.

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