I have always thought that businesses created jobs and that personal wealth creates foundations and charities. Any comments on the President's view of job creation?

http://www.washingtonpost.com/wp-dyn/articles/A61988-2001Mar26.html

Later, Bush defended his plan to help the highest-income Americans. "By dropping the top rate, we're enhancing the cash flow of the major new job creators in the country," he told workers at a greeting-card factory.

-- Anonymous, March 27, 2001

Answers

Yeah, it's classic supply-side economics. The usual argument I'd make at this point is that the theory was discredited when it was tried in the early 80's and precipitated a recession. The supply- siders then generally rebut with Milton Friedman's classic statement that economics is a positive science, and experimental verification isn't as important as believing really hard in something. I usually get nasty and say if you believe in economics fairies, clap your hands three times and the invisible hand will still give you the finger.

But I'm in a foul mood.

-- Anonymous, March 27, 2001

What creates jobs, in the final analysis, is demand.

When you cut taxes for working people, they usually go out and spend most of that money. That stimulates demand very directly. When you cut taxes for the very wealthy they usually invest that money.

Investment stimulates demand, too, but very indirectly. Investment, when correctly done, doesn't create jobs so much as it increases efficiency and produces more with less. It does stimulate a demand for innovation. If you can supply innovation, you're OK.

Politically speaking, it is very smart to talk about job creation. But what no politician talks about much is where the jobs are created and why.

In a global economy, investment is global. If the wealthy invest that money in manufacturing capacity, they are very likely to invest it to build a factory in a developing country like Vietnam or Hondouras, and to fill the factory with the machinery from Germany or England.

By the same token, when a USA working class family spends their extra $150, they are more likely than not to go to a Wal-Mart and buy shoes made in Indonesia or a clock radio made in China.

A large part of what has floated the US economy for the past 10 years was investment in high tech. Not all of that investment was wise. When a dot com company raised $300 million by issuing stock, hired a bunch of geeks at high salaries, ordered some expensive servers and routers, built a vast warehouse and filled it with pet food, then the economy got a big boost. But when that warehouse proved uneconomical and the dot com went belly up, all there was to show for all that investment was a lot if unused warehouse capacity, plus a bunch of unpaid bills and unsold pet food.

That's about where we are today. The problem with this economy is not a lack of investment, but a lack of return on investment. If you gave the rich an extra trillion dollars tomorrow, they wouldn't be able to figure out anything useful to invest it in. That same lack of sound investment strategies is what fueled the tech stock bubble.

After 1997 there were too many dollars chasing too few investment opportunities. Demand for investments was higher than supply. The markets obliged that demand by creating lots of new investment opportunities in new companies. The problem was, they were mostly bogus or empty opportunities - convenient ratholes to throw huge amounts of money down.

How many more good investment opportunities exist today? How many of them would create jobs in the USA? In my view, not many. A much sounder investment would be paying down our debt.

-- Anonymous, March 27, 2001

Most jobs are created by small business. I am sure this is true altho I can't immediately post a reference link. Look back at the last 30 years. There are millions of new jobs, in categories of business that never even existed before.

How many jobs has Microsoft and similar enterprises created either directly or indirectly? These jobs were created on the supply side---there was no demand for these products because they did not even exist.

-- Anonymous, March 28, 2001

"... there was no demand for these products because they did not even exist."

Ahem. It might be literally correct to say that the jobs were "created" before there was demand for the product, but those jobs would have disappeared in short order if there had been no demand for the product. Unless some demand can be scared up all that is really "created" by an entrepreneur is a debt disguised as a job.

-- Anonymous, March 28, 2001

I haven't seen the complete tax proposal because it doesn't yet really exist. As far as I can learn, it will give little or nothing to small businesses. As it stands, it will be like the Reagan tax cut. Great if you sell large boats or Lexus. Not so good for others and will further widen the income disparity that has become America.

Best Wishes,,,,,

Z

-- Anonymous, March 28, 2001

LN.

Yes, there is more than a little chicken and egg here. Which came first, the supply or the demand?

My point is that a top-down, command-economy like the former USSR has little tolerance for weirdo kook/nerds like Jobs, Wozniak, Gates, etc because their ideas are unique, "out of the box" and threaten vested interests.

Their innovative products were created because our relatively free-enterprise allowed them to work on silly notions that did not require approval by a committee of old farts. Likewise they were free to solicit financial backing for these silly efforts from venture investores. Didn't cost the taxpayers a thing.

The creation of their products caused a demand for them and created wealth that had not previously existed. It is not an accident that most of the world's innovations occur in free economies.

The whole notion of what is a "job" is also an issue. My best pal, an ardent and informed Socialist, maintains (when pressed) that if the Government was to pay someone to dig a hole and then fill it up again then that compensated effort is a "job".

I disagree. IMO, a job is an activity that performs a service or produces a product that someone else is willing to pay for. Yes, by that definition, a hit-man is a job. What constitutes a legal job is another issue.

-- Anonymous, March 29, 2001

I thought a real live small business owner should jump in here. Although my experience is Canadian-based, I am sure there is a high degree of relevance to the American situation.

Last Canadian stats I saw said that small businesses, defined - I think - as being under 50 employees, created 80% of the new jobs in Canada in the 1990s. (This is in greater proportion to their representation in the economy as a whole.) My company is at 35 staff right now, up from 27 a year and a half ago, and we'll probably add another 4 or 5 by the end of the year.

In our particular case the Internet has driven a lot of our growth. We sell high-end home and office furniture and the web has allowed us to reach out to customers all over North America. The sickly nature of the Canadian dollar (or northern peso as we've taken to calling it) versus the greenback has aided us a lot, as our stuff ends up being cheaper for American customers.

Before I joined my family business in 1994 I worked for a large management consulting firm. My personal experience is that small business entrepeneurs are less likely to over-expand than the corporations. They are thus less likely to have to make the large cuts that Nortel et al are going through now. When it is your own money on the line (and the banks are often not lining up to provide credit to the little guys anyway) you tend not to go to town on the expansion thing. The other thing is that as a owner-manager it is gut- wrenching experience to have to lay off some staff. These are not drones in an office or factory that you never see; rather they are people who you work very closely with day in and day out.

In sum, I agree with whoever said that demand creates jobs. How to stimulate that demand is, as Shakespeare would say, the rub.

Just my C$0.02.

-- Anonymous, March 29, 2001

Mike,

The usual argument I'd make at this point is that the theory was discredited when it was tried in the early 80's and precipitated a recession.

I respectfully disagree.

Reagan's tax cuts WORKED. The reason why the federal deficit went up was because the idiots running the government (from Reagan on down) increased spending at the same time. But those tax cuts DID spur the economy.

Had they kept spending at the 1980's levels, we would have been ahead of the game, because net tax revenues INCREASED during the period in question.

The recession that hit in the late 1980's (the so-called "Bush Recession") was caused by a number of factors. One was that the Fed raised interest rates several times in quick succession to combat inflation (brought on by the roaring economy in the mid-80's) and they badly overcompensated.

Then, too, there was a stock market collapse in the late 1980's that didn't help matters. I am still wondering how the current shakeout will effect the economy.

-- Anonymous, March 29, 2001

"Had they kept spending at the 1980's levels, we would have been ahead of the game, because net tax revenues INCREASED during the period in question."

Had they kept spending at the level of 1980, then the government would not have spent approximately $3 trillion during the decade. Those $3 trillion had a "multiplier effect" in the real economy of something like a factor of 10. So the average effect of that government spending on the real economy was on the order of $3 trillion per year from 1982 to 1992.

OK. Now, let's be really conservative and bump that number down by 66% - to a mere $1 trillion per year.

Obviously, federal taxes were collected on that extra $1 trillion of economic activity every year. Even at the lower tax rates under Reagan that amounts to a fair sized boost in federal revenues thatcannot be attributed to the tax cut, but (ironically enough) can be attributed by a massive Keynesian-style stimulus to the economy provided by all that deficit spending. (Which is NOT to say that I think that all that deficit spending was a peachy-keen idea - only that that's what happened.)

Whatever you may think, Stephen, there is no way that you can postulate not spending all that extra money, while still collecting all those extra revenues. Your economic model (and historical outlook) seems to be suffering from a dose of wishful thinking.

-- Anonymous, March 29, 2001

Think,

That's only if you buy Mr. Keynes' economic theories, which I don't. The historical record demonstrates, to me, at least, that the private sector has ALWAYS had far more influence on job creation than the government. A couple of other points:

1. Government spending has never amounted to more than a fraction of the GNP.

2. Tax revenues primarily come from INCOME, so the fact that they rose is reflective of the facts that unemployment went down and average incomes rose.

The economic expansion of the 80's was, at least in part, tied to the stock markets, too. (People had more disposable income and used it to invest -- just as Supply Side economics predicts.) The crash of the late 80's helped precipitate the "Bush" recession. It still remains to be seen if this most recent bear will do the same.

By the way, what amazes me is how few people are really upset about the bear markets right now. Most of the people I've talked to are just taking a "wait and see" attitude, agreeing that the market had to correct itself (it was overvalued). They're waiting for the bear to bottom out, and then they'll start buying again.

I posted elsewhere here that the mutual funds are sitting on several trillion dollars just for that purpose. When they think the market has hit bottom, they're going to flood the markets and they'll start going up again.

-- Anonymous, March 30, 2001