Jobs: the basic mistake of Republican economics

2004.03.07 — Business | Jobs | by Derek Jensen

Republicans think that they can spur the economy by reducing taxes on the rich. It's a central tenet of their economic philosophy. They say that, because two thirds of upper income earners are small businessmen, lower taxes give them capital to work with and create new jobs. This is a fundamental fallacy of Republican policy.

The fallacy begins and ends with the idea that corporate profits somehow create jobs. But that isn't the case. What creates jobs is demand for the goods and services that the business provides. Coincidentally, that creates profits at the same time.

Republicans get the math backwards when they believe that rising profits and expanding jobs are directly linked. After all, if that were the case, we would expect a fall in profits whenever a company lays workers off. But what really happens? Profits increase. Profits increase when workers are laid off because businesses choose the workers carefully, determining who is redundant and who is vital, and eliminate workers whose jobs can be absorbed by other workers or by improvements in process or automation.

Another real world example can be found in companies like Microsoft. Microsoft makes huge profits as a percentage of revenue (and ranks 5th on Forbes' most profitable list) and, if Republican logic holds true, should be the largest employer for its size. But Microsoft is a much smaller employer than most companies with similar revenues... but not all; in fact—look at that list again—there's no real correlation at all between revenue, profit, and number of employees.

Worse, fat tax breaks for upper income earners is not even giving money to businesses. It's giving money to wealthy citizens, most of whom are not small business owners who would put it back into their businesses. A stockbroker isn't going to hire anyone because the government gave him a $45,000 tax break... except maybe a butler.

The truth is that Republicans need to be less concerned about the profits of corporations and more concerned about the ability of the average consumer to buy the products of those corporations. Even Warren Buffett agrees.

And even when companies are given a big gift in reduced taxes or subsidies, they don't use it to hire new workers—there's no point. More workers would merely produce more goods and services; and without additional demand, there's no reason to do so.

Instead, they invest the extra profit in themselves (by buying back stock or maintaining a cash reserve), other companies (by buying them out), and in bigger salaries and bonuses for their executives (who must be doing a great job to have such high profits). Little of that investment creates additional jobs.

To increase demand, the government should give bigger tax breaks to the lower and middle classes, who will actually spend the money. This will increase corporate profits naturally, and companies will use the fresh capital or else borrow to fund expansions in production.

It's pretty simple... unless you think like a Republican.

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