Tuesday, October 16, 2012

21 Days to Go

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.

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