Job creators create jobs in the same way oil companies create oil. Companies harvest consumer demand by providing goods and services. Poor economy=no demand. No demand, no jobs.
Keynes hypothesized that, during an economic downturn, demand falls off, so companies can’t continue to employ their workers, and thus lay them off. This creates three problems:
- By laying off workers, it further depresses the economy.
- The workers who maintained employment are still making the same amount of money as they had been when there was an economic boom.
- The unemployed expect to be employed in accordance with the going rate for their job, as exemplified by those who are still employed.
Consequently, you end up with a situation where the economy will continue to try to shrink itself and where it is difficult for companies to take on new employees, because they’re already overspending for the ones they have, relative to the strength of the economy. (Plus, generally, companies let go of the least productive employees first, so those who are unemployed are always going to be viewed with suspicion).
The solution that he proposes is to artificially recreate the boom economy by using the various powers of government to inflate the economy back to where it had been.
Roosevelt - the most influential post-Keynesian Lefty in our history - used a method of creating government jobs to try and achieve this. Obama sent out checks to the every man and invested in startups, focussing on new (green) technologies. Reagan and other Republicans have generally lowered taxes.
In all cases, the goal is to keep the economy afloat until things start to recover. None of this actually produces a recovery - recovery is largely a matter of public psychology, rather than anything economic - it’s just meant to staunch the death spiral from occurring. And in all cases, the government is taking a haircut or going into debt to accomplish the goal.
And, in all cases, the goal is basically to create employment.
If you pump the economy with money, e.g. by sending out checks, then theoretically that helps with demand because the people who get the money are going to turn around and spend it on stuff. But, there’s a risk that people will instead just put the extra money under their mattress or that employers will realize that it’s an artificial demand increase and distrust ramping up production to match it.
If you create a bunch of government jobs, then certainly you’ve kept people employed. But, there’s a risk that those jobs aren’t really training the workers for what the economy needs, since it’s just some random task (e.g., building a bridge to nowhere) not one created by market forces, and that people will stay rather skittish and distrustful of the health of the economy, because they know that all these temporary jobs have a due by date. As mentioned before, economic recovery depends on the public psyche.
So neither of these methods is a slam dunk. I’d be hesitant to put much stock in them.
The supply side of things takes the premise that you can’t really create demand and have anyone trust it, nor is reasonable to try and create an artificial economy, for the same reason that central planning made the Soviet State highly inefficient - you can’t intellectually come to the same conclusion as actual market forces.
Instead, what you can do is invest in the next generation of businesses. If you can boost the number of startups, then you’re letting the market decided which possible technologies are worth putting resources into. Startups have no expectation of having demand nor of making a profit for several years, they encourage workers to work for smaller wages since the workers are more prone to think that it’s reasonable for a startup to offer less than Microsoft would, they’ll allow the employees to continue developing in interesting fields that the market is interested in, and most employees won’t view it as a temporary nor artificial gig.
Basically, it allows the government to do the same thing as Roosevelt, but without the demerits of a planned economy. You create a bunch of make-work for the unemployed, with the hopes that either the economy repairs itself or that the make-work produces something which will help to spur the economy forward again. Obama went halfway, by directly investing in a few specific industries.
There’s the risk that the wealthy will simply put the money under their mattress, just like the poor would if given free money. But in general, you get wealthy by using money, not by hoarding it, so the odds are probably slimmer. So probably the greater risk is that you’re encouraging people to invest more heavily in high risk investments. Consequently, there’s a risk that you’re creating a new financial bubble and setting people up for another big bust.
So basically, none of these are slam dunks by any means. Personally, I would argue that it makes more sense to go back to the root cause and figure out ways to push wages down to match the health of the economy. But as of yet, this isn’t an idea that politicians have been willing to tamper with.
Another option, which I don’t think really fits on either side, is to offer scholarships, so that people can go back to school during an economic downturn. There’s probably no strong downsides to this, but it probably only works as part of a larger overall plan of attack.
The “economy” is not some separate entity that is detached from “job creators”, the “jobs” they create, the needs and wants of the people or the products and services used to fill them. It is the sum of all those things. They are all inter-connected and the aggregate of all the business transactions that connect them is the “economy”.
Economic activity initially starts with needs and wants. I need food and shelter. I also want an iPod. Unless I plant to create all those things from scratch by myself, I need to engage in a transaction with other people to exchange my labor for theirs. A healthy economy is one where people who are willing to trade are able to connect with other people to trade with.
The whole “job creator” mentality presumably comes from a variation on the “producers” from Ayn Rand’s Atlas Shrugged. The concept is that without the various captains of industry in the novel, all economic activity would cease. And to a certain extent that is true. We depend on the Henry Fords, Dale Carnegies, J.P. Morgans, Bill Gates, Mark Zuckerbergs to create world-changing inventions, as well as the entrepreneurs and small business owners who open a humble restaurant or frozen yogurt store that employs a dozen people. So IOW, we want an economy where it is easy for enterprising people to start new businesses that create jobs for people.
OTOH, the Right has largely co-opted the term “job creator” to be synonymous with “rich people” as way to justify their elite status. While we want an economy where enterprising people can get rich through hard work and innovation, what we don’t want is an entrenched class system where the super-wealthy own all the assets, control all the means of upwards advancement (education, investment capital, access to resources) and sequester themselves in guarded enclaves away from the rest of the world.
Another thing that the “job creators” don’t mention is that disruptive technologies also tend to render some jobs obsolete. While companies like Walmart and Uber do create thousands of new jobs and restructure the way we do business, they also eliminate thousands of other jobs. Ultimately, I do believe they do provide a long-term benefit in terms of more efficient use of labor and resources. However, our current “winner take all” economic structure seems to decouple the “job creators” from the externalities of their actions.
That’s really kind of a simplistic view. Romney created Bain Capital, a spinoff of the management consulting firm Bain & Company. Political controversies of leveraged buy outs and whatnot aside. Trillions of dollars are also moved about venture capital, private equity and investment firms to finance new companies and the jobs they create. Yes, a great number of people on Wall Street make their money purely through speculation. But ultimately that money has to be invested to fund growing companies, otherwise no one makes money. And that’s what happened in 2008.
What can accomplish a nation wide reduction in wages is monetary policy. By making money worth less, everyone takes a pay cut even though the numbers on the checks stay the same. This is what Roosevelt did when he took the US off the gold standard and What Bernanke did with QE3. This is how you can restore employment during recessionary times.
This does not fix the entire economy though, supply side factors matter for long term economic growth. Thus you can have economies like Japan and the UK with low unemployment but also low economic growth. This is still preferable to the EU (non Germany) model of high unemployment and low growth.
I have heard calls for job creators to be coddled and treated carefully, generally what i hear is their taxes should not be raised too much. This is because of simple mathematics. If I have an investment that costs 100 dollars to invest in that could return a profit 200 dollars or nothing and has a fifty percent chance of success. This investment will create 1 job. The net value of the investment (150$) is higher than the (100$)cost so I do it. However if I am being taxed at a 50% rate then the net value of the investment no longer exceeds the cost and I don’t do it. Thus tax rate determines whether or not the job gets created.
First you need consumer demand, which is supported by a healthy economy. Then you need someone who can meet that demand. So you need both, but you need one of them first.
Nitpick: “stanch”.
A good capitalist can create consumer demand where none existed through the use of marketing or just plain luck.
Were consumers demanding pet rocks before they came out?
Were consumers demanding Beanie Babies before they were manufactured?
Were consumers demanding cameras in their phones before Sprint ran all the ads showing things you could do with a camera phone?
That’s actually not correct.
If the cost is $100 and the net profit is $200 then the “net value” is $200.
Revenue = $300 (or 0)
- Cost = $100
Net Profit $200 (or -$100)
Your expected return on this investment is
50% * $-100 + %50 * $200 = $50
or, factoring in a 50% tax rate
50% * $-100 + %50 * $200 *%50 = 0
So you happen to come up with the same answer.
But this demonstrates your point. Increasing taxes on an investment reduces the expected return, which may lead investors to decide to not make that investment.
True, but then you need an even healthier economy. If the economy is in the crapper, people are less likely to buy pointless luxury goods.
I feel I should note that my post was about how to handle an unhealthy economy.
Cutting taxes, quantitative easing, investment in new industries, etc. are all efforts meant to be undertaken to help the economy come back from a recession. When the economy is healthy, those things shouldn’t just be stopped, but effectively reversed.
So really, when the Right attempts to cut taxes, it is generally more to starve the beast, than because of any economic goal.
I meant, rather, that I would like to see a solution that works in real time so as to prevent job loss, rather than one which is manually applied after the fact, when jobs have already been lost. The problem with a crash is that one small part of the economy ends up taking out other parts of the economy, because of the death spiral. The faster that you are able to act, the less that the crash will affect the tertiary markets. It’s silly to have you solution to this be something which acts after the fact and is managed through manual intervention.
You could set up some form of automated check-cutting system that automatically sends out money to each individual every week, based on the level of QE that is necessary. That’s not particularly realistic. Really, you need some form of market index that’s published regularly - similar to a currency exchange rate - so that businesses can calculate sums by it. For example, income tax rates could be adjusted according to the index or values listed in contracts could be adjusted according to it.
(Also, while it does seem that Roosevelt did something related to the Gold Standard, it was Nixon that officially took us off of it.)
Monetary policy works very quickly and one part of the economy taking out another part of the economy is not a problem in an economy as large as the US.
The best way to manage monetary policy I have heard of is Nominal GDP level targeting. This would have the Fed announce a target it wants GDP plus inflation to equal. Say 5 percent. Then if GDP is slowing due to a sector imploding then inflation would automatically be raised to compensate and soak up any unemployment.
Sending out checks every week defeats the purpose of QE which is to exploit the money illusion, and so would not work.
Which is why Keynesian economics advocates raising taxes and running a surplus in good times, not in bad times. In a good economy the risk is relatively lower, so the expected return would be higher.
Raising taxes on the very rich is another matter, but they have enough surplus capital so that these type of investment decisions can be made and still do better than other places to park their money - assuming adequate demand. If the economy is bad enough that investment decisions which would usually be no-brainers are risky, they will not do the investment no matter what their tax rate is.
And the expected return on investment has a lot of uncertainty in it.
I doubt any of these things nudged demand much at all as compared to the size of the economy. Plus, if someone bought a beanie baby instead of a cabbage patch doll (or several beanie babies) overall demand has not changed a bit.
I think it is a bit more complicated than this. If everything stayed the same, you can add an extra 0 to the money in all the wallets and prices and bank account balances and it won’t make any difference.
However in general wages are stickier than prices, so increasing inflation lets businesses raise prices faster than wages, which increases profitability and thus encourages more investments. Also, consumers knowing that prices will increase means they will tend to buy now rather than later, which increases demand. Deflation is bad because it makes sense to wait for the last possible minute to buy.
Plus, if investing at today’s prices leads to return later at tomorrow’s inflated prices, the rate of return will be higher - though it will have to keep ahead of the higher returns of safer investments. And inflation can’t start driving irrational behavior or hurt some segments of the economy too much.