I thought that the graph included in this post on the Krugman Blog was pretty interesting. It goes back to 1986.
It’s Demand, Stupid
I’ve said this before, but Catherine Rampell has a very nice chart making the point: if you ask businesses — as opposed to their lobbyists — what their problem is, you find no hint of the stories the usual suspects are telling you about government interference, political uncertainty, etc.. Businesses aren’t hiring because of poor sales, period, end of story:
And the best thing government could do to help business would be to spend more, increasing demand. The fact that it’s not going to happen doesn’t change the fact that it’s the simple truth.
The graph comes from here:
The holy grail for the GOP is tax cuts. In fact, of the almost 800 billion stimulus bill, $300 billion or almost 40% of it was tax cuts. The amount of spending on infrastructure was cut and the amount of tax cuts was increased in order to placate a couple of Republicans and some conservadems. This is what the congressional budget has to say about the stimulative effect of tax cuts.What’s Holding Back Small Businesses?
By CATHERINE RAMPELL
The biggest single problem facing America’s small businesses isn’t taxes or overregulation. It’s low demand, according to a new report released by the National Federation of Independent Business.
Thirty-one percent of small businesses surveyed by the N.F.I.B. said that “poor sales” are their company’s “single most important problem.” The other options included were competition from large businesses, insurance costs and availability, financing and interest rates, government requirements and red tape, inflation, quality of labor, cost of labor and “other.”
Here’s a chart breaking down what percent of small businesses cited each of these problems as their biggest challenge, going back to 1986:
National Federation of Independent Business, via Haver
Much of the debate about how to spur growth and encourage hiring has focused on making the tax picture temporarily more business-friendly. But as you can see, the portion of small businesses citing taxes as their superlative problem has remained about the same — mostly in the 17-22 percent range, say — for about a decade.
Additionally, lending help for small businesses is another key stimulative policy in play, and meanwhile financial and interest rate concerns are a comparably negligible concern.
By contrast, the share of companies saying the poor sales is their main challenge has about doubled since the downturn began.
Exactly how to address soft demand, though, is even more complicated and contentious than supply-side policies like cutting taxes or providing interest-free loans.
My grandfather started out at Cadillac Motors before it was part of GM, lived through the depression, then started and operated his own extremely successful businesses until the 70s. He used to talk about how important a vibrant middle class was to a healthy economy. He talked about how a healthy middle class created demand for the products he sold. Now we hear something completely different. Newt Gingrich said last weekend that tax cuts for the middle class are not effective in creating jobs, that it's the rich that hire people, that regular Joe's don't create jobs. You see, that's what today's politicians think. Rich people create jobs, demand is secondary. We need to help the benevolent rich get as rich as possible so they'll throw us peasants a bone and give us a job. I think it's what they call supply side economics.Tax Cuts May Prove Better for Politicians Than for Economy
[E]conomic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.
The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest “bang for the buck,” because wealthy Americans were more likely to save their money than spend it.
The office gave higher marks to the proposal, now embraced by President Obama, to allow small businesses to write off 100 percent of their investment costs.
If you ask most conservatives these days, we need to cut more taxes on the rich. And we need to cut pay for the middle class. After all, compared to workers in China and India, the middle class here makes too much money, has too much health care, and is just plain too used to having a good quality of life.
Here is a great article that speaks to this point very well.Your Fat Paycheck Keeps Your Neighbor Unemployed: Kevin Hassett
By Kevin Hassett - Sep 6, 2010 8:00 PM CT
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Some observations perfectly at home in economics textbooks can be so beastly in practice that nobody is willing to mention them.
Ignoring the facts, though, leads to bad policies, and with the U.S. unemployment rate at a stubborn 9.6 percent, we don’t need more of those.
So here comes the leap into ice-cold water: The biggest problem with the labor market right now is that wages are too high. As Washington again turns to government spending as a cure for unemployment, some against-the-grain thinking is in order.
Economics teaches that full employment would be reached if wages adjust downward, to a level that better reflects current circumstances. At lower wages, employers would desire more workers. Labor markets generate persistent unemployment only if wages are sticky, failing to fall as demand declines.
A number of reasons help explain why wages don’t and won’t drop, beginning with federal and state minimum-wage laws.
Second, because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.
Third, the natural reluctance of workers to accept lower pay is amplified by how their wage helps define their identity. A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.
Finally, workers and jobs might be mismatched, either geographically or occupationally. Workers might be needed in places they don’t want to move to, or can’t afford to live.