Friday, June 22, 2012
Who are the real job creators? (Guest Post)
This is a guest post by Jonathan Krajack. Jon told me he learned a lot about economics and MMT by reading this blog and he wanted to make a contribution. I was very happy to post this up. -Mike Norman
Who Are the Real Job Creators
by Jonathan Krajack
We often hear in the news and from our elected representatives that we need to lower taxes on the job creators, and in so doing, jobs will be created and the unemployment rate will fall. While this is true, it is widely misunderstood. The myth is that wealthy people are the job creators. This is misleading at best, and outright class warfare against the not-wealthy at worst.
In a market economy, where people exchange money for goods and services, it is consumers that are the “real” job creators.
Consumption is the force that drives a market economy. If people were to stop spending money, the economy would come to a screeching halt. Imagine for a moment that everyone decided to stop spending money for… a week? a month? etc. What would happen to jobs?
At first, we would see businesses begin to lay off workers in order to cut costs and stay afloat. As the spending freeze continued, many businesses would 'go out of business.' The longer the spending freeze persisted, the closer we would get to a Great Depression, or worse. After all, how are businesses going to pay workers if the businesses are not receiving income from sales?
The scenario I just described is an extreme version of what we’re actually seeing today. It’s not that no one is spending. The problem is that everyone is not spending enough. It raises an important question: how is this related to businesses deciding whether or not to hire more employees?
Well, why do businesses hire employees?
Businesses hire employees for two main reasons: 1) more are needed to successfully meet current sales, and/or 2) more are needed to meet an expected future increase in sales.
Do you see the connection? Business is all about sales. So, how do we increase sales (broadly throughout the economy)?
It’s simple: consumers need more money to spend!
There are various ways to change the amount of money in the hands of consumers, but the two primary mechanisms are federal taxes and federal government spending. Lowering federal taxes and increasing federal government spending translates to more money circulating throughout the economy. Likewise, increasing federal taxes and lowering federal government spending translates to less money circulating throughout the economy.
Therefore, the U.S. government ought to be LOWERING taxes and/or INCREASING government spending.
Lowering taxes is fairly simple: who is getting the tax cut and how much are they getting? Government spending is a little more complicated. The U.S. government could just cut everyone a check. This would be exactly like a tax cut. But the U.S. government can also make purchases with it's spending, be that on healthcare, infrastructure, missiles, etc. All else equal, each option has the same “net effect” on money in circulation.
But for the purpose of increasing consumption broadly throughout the economy, the important question is: who gets the money? And it is here that we come full circle…
Most people are not wealthy. Wealthy people do not need more money. By definition, they already have a lot of it. Giving them more money will do very little to increase consumption broadly throughout the economy. Therefore, lowering taxes on the wealthy will do very little to stimulate the economy and decrease unemployment.
In order to stimulate the economy and decrease unemployment, we need to get more money in the hands of the “real” job creators: the not-wealthy. It is the masses of not-wealthy people that drive the economy. They are the soil in which new and existing businesses blossom.
(Well done, Jon!)