Thursday, March 31, 2011

Supply Side Shortcomings

It's no surprise that the business and economic news of the week is focusing on how the United States' economy is recovering and growing, yet it is not producing significant job growth. In fact, despite stronger economic gains than world trading partners, other countries are outpacing the United States in putting people back to work. The growth in the US is seen in a robust stock market and a corporate profit report that reveals profits setting records and operating at a twelve percent gain over the numbers prior to the recession. The reality is that American workers are more productive, and companies which shed jobs during the recession have realized they can make due with fewer workers. And so they will.

This realization leads to serious questions about the promotion of supply side economic policies as a way of generating job growth. The basic question is this: Who can argue that job growth is the goal of any business? In reality, it's not. Certainly, the correlation between increased business leading to a need for more workers is relevant. However, because labor costs are the greatest cost for most businesses - and that only increases as benefits' costs rise - no business is actively looking for a way to hire more people as its goal.

Expanded market share and profits are the goal of any business. Increasing sales and production while limiting costs is the predominant focus. If a company can increase profits without increasing labor or costs, it will - it must. Thus, to argue that governments can implement pro-job growth policies - especially in terms of taxes - defies basic economic sense. The current growth of the US economy validates this - albeit this is a simplified explanation.

To argue that a tax policy will spur more hiring makes no sense. Supply is only increased to meet demand. A generous business tax policy does not increase demand, and it's ambiguous that any tax cut will increase demand in any specific business sector. The economy and the spending habits and productions needs of the economy are far too complex. The economy is an emergent system, and identify specific factors of emergent system is not really possible, at least from a tax policy standpoint.


steven said...

If you apply the same rationale to the demand side of the equation you would have things right. Tax policy shouldn't be used to try to improve the economy, and neither should spending policy. Neither will work, because the economy is too complicated. Only an all-knowing supernatural being could control the economic decisions of millions of self-interested human beings, and there is no such thing as an all-knowing supernatural being. People might as well give up pretending that the state, run by human beings, can do things that they aren't capable of doing.

mazenko said...

I agree. Taxes should not be used to attempt to manipulate the economy. Taxes should be used to fund the basic functions of government. Period.