6/23/2012

Are Consumers the Real Job Creators?

I’ve seen several pieces over the last week that maintain this as economic fact:

http://www.forbes.com/sites/johntharvey/2012/06/17/job-creators/

http://whowhatwhy.com/2012/05/27/rich-guy-on-how-middle-class-are-the-job-creators/

http://www.dailykos.com/story/2012/06/17/1100766/--The-Only-Real-Job-Creators-Are-Consumers

I think what happens here is that some liberal blogger, professor or pundit writes something like this and then everybody else jumps aboard and starts echoing the meme without doing any critical thinking.

Consumers do drive an economy, but these authors miss the mark. Lots of businesses happen to be consumers of other businesses. So when you tax businesses and pass legislation that makes it harder for business to succeed, businesses stop buying things, which ultimately hurts consumer spending.

All of this does not even touch on the fact that small businesses are the true engine of growth for this country. And, most small businesses are taxed like individuals, i.e., the owners pay the tax.

The notion that we can somehow "create" demand is a fallacy. The notion that cutting government spending will not improve the economy is a fallacy. The government doesn’t have any money, so every dollar they spend is a claim against the savings of their citizens. The less of these claims that exist, the better off financially the people will be and they can adjust their outlook accordingly.

Workers are hired for one reason: the employer feels the added value (such as profit) they bring in, outweighs their cost – that’s it. If you could hire someone for $50k a year but they bring in $200k more a year in business or production then you would keep hiring as many people like that as possible.

Keynesianism makes sense, until you actually think about it. Demand does not come out of thin air like magic which most Keynesians believe. Demand comes from production, demand does not come from demand.

The 2008 crash occurred because we actually tricked ourselves into thinking borrowed money equaled productive capacity. It no more equaled that than borrowing against a future paycheck equals a raise. If you do this long enough eventually you have to cut back hard, and it’s painful, hence 2008.

By the logic of Keynesians we could solve all of our world’s problems if we just built a new aircraft carrier. This ship would not add any productive capacity to our economy but it would also not have a final completion date or price tag. It would thus cost unlimited amount of money and as a result generate an unlimited amount of jobs. It would move the aggregate demand curve off the charts. We would call this ship the USS Paul Krugman and it would be our path to utopia.

Consumers do drive an economy. However, how does a consumer receive his fuel (money)? By having a job. How does he attain this gainful employment? Because a business has a need for him. How does a business decide it needs an employee? Because it decides to expand. How does a business expand? By receiving the money to do so. How do they receive said money? By having a tax and regulatory environment that encourages growth. The consumer needs the business for work, and the business needs the consumer to buy from it. Unfortunately, we have proven that taxing businesses and wealthy individuals does not prove to be a feasible long-term solution. We may raise revenue in the short-term, but in the long-term, we have a disappearing middle-class. This is why even though top tax rates have ranged from a low of 28% to a high of 92% over the last 60 years, the revenue to the government as a percentage of GDP has remarkably stayed at about 18 percent.

One last point – we are not in a free market economy right now and look at the mess we’re in. The government, via the FED, controls the most important pricing discovery mechanism in capitalism. We can’t return to prosperity until interest rates are allowed to be determined by market forces and we stop the Keynesian tinkering with interest rates and money-printing stimulus programs.