Commonsense Economics

The discussion rages on in Washington DC about how to get the economy back on track. The position of the Democrats and the GOP could not be more polarized. The Democrats claim the only way to kick-start the economy is to infuse government money (actually our money) into the economy to create jobs, especially in public services such as the police force, teachers and firemen and by improving the country’s infrastructure. The GOP thinks the only way is to cut taxes, especially for the wealthy and corporations, arguing they are the ones that are able to create jobs. Leave it up to private enterprise.

Looking at the GOP proposals, I would like to ask a question. Let’s say you have a corporation, selling products or services, what would motivate you to hire more people? If your profits were to improve from $100,000 to $110,000 because of a tax break, are you likely to go out and use that extra money to hire more people? Or are you likely to stash that money away into your reserve fund for a rainy day? Or are you more likely to hire more people if you had more customers asking for your products/services? I have run many corporations in my time and I do not recall ever being motivated to increase hiring just because my profits increased. In fact it was a very common practice to fire employees to increase the bottom line.

If this doesn’t raise a question in your mind, what about real life proof to see if this GOP strategy is viable? If we take the George W. Bush presidency, this was his main strategy. He enacted some of the biggest tax cuts in US history. During his administration the country experienced to lowest economic growth since the Great Depression. Incomes of working Americans stagnated and never grew but corporate CEOs’ salaries quadrupled and non-financial corporate profits soared to the point where today they are sitting on the biggest hoard of cash ever – $2.0 trillion. So why are they not employing more people (the GOP strategy) and the unemployment rate stays stubbornly above 9%?

The only reason companies hire more people is if more customers turn up at the door and want to buy more products. For that to happen they have to have work. Even those that are gainfully employed are more cautious when they keep reading the doom and gloom of more than 9% unemployment. Looking now at the Democrats strategy, which includes spending our tax money to hire people to get certain things done. Building or repairing bridges and roads, keeping teachers and policemen employed, would seem to make more sense. Getting people off the unemployment lines and out to work where they earn and spend more money would in itself create more demand for products, which is what encourages corporations and small businesses to expand.

History is also on the side of this strategy. Many of the biggest expansions in history have come after periods of strife and war. This is when the government spends money on weapons and infrastructure. In the case of the Second World War, increased taxes that paid for the war funded one of the biggest economic expansions ever experienced in US history. So to say that decreasing taxes stimulates the economy has no factual or historical basis. Decreasing taxes results in government trying to cut back on expenses, further causing increased unemployment and a reduced tax base. It starts to become a vicious circle.

So if common sense cannot prevail in the GOP camp why are they so adamantly against the Obama plan that aims at stimulating the economy? It can only be political. They know and fear that such plans do work and will create jobs but they are terrified any good news on the unemployment front will kill their chances of winning the election next year. Arguing that taxing the rich will kill economic recovery doesn’t even sound right. Is it about time that the wealthy give back some of their enormous wealth to the very people who made them rich – the US consumer?

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