While there are some on the left who are focused on issues
such as ending the war, and others on the right looking to impose their version
of morality on the rest of us, the overriding concern of most voters is the
economy and jobs. The stock market is way
up, unemployment is slightly down, we’re no longer bleeding jobs but we need to
do a lot more. So now that we have three
weeks to confirm our choices for the next few years (Congress and the
Presidency). I offer this primer for
your consideration.
The fundamental economic principle is the Law of Supply and
Demand. It is very easy to over-simplify
this law, but I don’t think it would be as helpful to overload you with nuances
and details. The basic concepts should
be sufficient. Like any other view of
the world, there is disagreement on the details, but keep in mind that if one relies
on a detail or two to form an overall conclusion on what to do about the
economy, you miss the bigger picture. It
would be like focusing on the curtains when the foundation is crumbling.
The law basically says that as demand increases, prices rise
or remain high until production increases the supply in response. When supply exceeds demand, prices fall in an
attempt to create demand – think of last year’s iPhone. So let’s think about job creation. When demand increases, production increases
follow since there’s profit to be made.
Increased demand therefore creates jobs.
In the absence of increased demand or declining demand (lots of folks
out of work), job creation can’t happen, since the increased supply with no
demand would cause prices to fall along with profits. But how does tax policy influence this
phenomenon?
History shows that tax tweaks have very little impact on
jobs. This fact is not my opinion, but
rather a well-documented reality. Before
you dispute this fact, do some research – you’ll not find contradictory
evidence. So what do tax tweaks actually
do? They primarily create
cannibalization, a shift in demand from one good or service to either a cheaper
or more costly alternative depending on the type of tweak. Bottom line is that the identities of the
unemployed change without changing the net unemployment. There are those that will claim that this
substitution has created jobs to meet the demand shift to another product or
service, while at the same time ignoring the loss of jobs related to the
replaced goods and services.
One curveball before I close with my conclusion – corporate and
business taxation changes will bring about a change in strategy, since profits
must be retained. Encouraging or
punishing outsourcing through taxation for instance, does have a very real effect
on jobs.
The Law of Supply and Demand clearly tell us that reducing
taxes on the “Job Creators” can’t create jobs, since added demand for increased
work isn’t there. What business owner
would hire more people to do anything that won’t increase profits, but would only
take money out of her/his pockets? Demand
stimulation creates jobs as business scrambles to get the potential
profits. The building of hydroelectric facilities
and the interstate highway system, along with the space program are examples of
government action that created demand and growth. Government investment in infrastructure,
energy and technology worked in the past and will work again. Or you can ignore history and ignore the
facts come election day.
