The real job creators: consumers.

[rjl]

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

The Real Job Creators: Consumers


Today on Face the Nation (hosted by fellow Horned Frog, Bob Schieffer), I heard Mitt Romney add his voice to the chorus of those saying that economic recovery would follow if only we relieved the terrible burden that the government has placed on the nation’s job creators: business. Were taxes and regulations relaxed, this would reduce costs sufficiently to allow firms to do what they are already dying to do, which is expand operations.

But even if we grant the argument that business taxes and regulations are high (which is by no means clear–in fact, it’s easier to make a case for the opposite), this ignores two crucial facts. First, as my friend Mike Norman has pointed out, employees are a cost, usually the most significant one faced by firms (Mike Norman Economics). For that reason, every rational entrepreneur’s goal is to reduce, not increase, the number of workers they have to pay. And quite right. Entrepreneurs have families, too, and they need to feed and clothe them. It would be irresponsible to do otherwise.

Second and more fundamentally, no matter how much you lower costs, if you don’t have more customers, you won’t hire more workers. If the demand for goods and services stays where it is today and we only cut industry taxes and regulations, there is absolutely no reason to think that firms would expand employment. Rather, they would continue to produce at the same level and simply earn higher profits. On the other hand, if we leave taxes and regulations untouched but increase demand, entrepreneurs will happily add workers. And that is the root of the problem today. The bottom line, lost on Mr. Romney and many others, is that the real job creators are consumers. The direct route to reducing unemployment is boosting demand, not reducing costs.

Ask yourself this question: what do you really think caused firms to lay off so many workers that unemployment jumped from 4.4% in May 2007 to 10% in October 2009 (remaining at 8.2% today), a sudden spike in business regulations and taxes, or a collapse in demand? It is impossible to imagine that anyone truly believes the former to be the case. In reality, the reason we are stuck where we are is because the middle class lacks jobs and incomes–something that will get markedly worse if we continue to try to cut government spending and balance the budget (many of my other blog posts cover this issue so I’ll say no more here).

In conclusion, let me add my voice to the chorus of those who actually understand what’s happening in our economy: WE DEMAND AGGREGATE DEMAND!

[RoyalShock]

So we should just continue deficit spending in the hopes it might increase demand? At what point then should the budget be balanced? That blog post didn't convince me that continued deficit spending will increase anything but the debt, further devaluing the dollar and fueling inflation.

I'm no expert, but I think the debt and extravagant personal finances are finally coming home to roost. Until the deficit and debt is dealt with consumer and corporate confidence is going to be shaky. Until we as Americans learn to live within our means (and within that I include what I believe are outrageous executive salaries and bonuses) and not think we're above working certain jobs, I don't see a major improvement on the horizon for unemployment.

[SB Shock]

275/hr for analyst
500-800/hr for associates
1,000+/hr for partners

Is what the lawyers are billing in the HBC bankruptcy. Bankruptcy is profitable for somebody.

[Kung Wu]

"Ask yourself this question: what do you really think caused firms to lay off so many workers that unemployment jumped from 4.4% in May 2007 to 10% in October 2009 (remaining at 8.2% today), a sudden spike in business regulations and taxes, or a collapse in demand?"

False choices coupled with cause and effect fallacy.

Unemployment happened because banks started collapsing due to the mortgage crisis, and those banks began _calling their notes_. When those short-term notes are called guess what? The businesses that rely on those notes go under or dramatically decrease operating costs in order to survive -- and the quickest way to cut costs is to reduce employee overhead.

If I am right, then I should be able to back my assertion with data. The data that would confirm or refute my assertion would be bankruptcies. So, let's see if we see corporate bankruptcies increasing over this period:

Year Bankruptcy filings
2010 56,300
2009 60,800
2008 43,500
2007 28,300
2006 19,700

Ut oh, it looks like businesses going under and struggling heavily might just be the simple reason people have lost jobs.

"Decreased demand" is a SYMPTOM of the problem, not the CAUSE. People don't die because they rode in a hearse. People ride in a hearse because they died.

So what caused decreased demand then? Two things happened to cause decreased demand:

1) People found themselves locked into homes that they could not afford due to government pandering via the mortgage industry.

2) The collapse of the mortgage industry caused the unemployment rate to skyrocket due to banks being forced to call their notes on businesses, which caused a tremendous number of layoffs.

Decreased demand wasn't the cause -- it was the effect.

Gov't pandering --> Gov't interference in the mortgage industry --> people buying homes they cannot afford --> industry collapse --> banks having to call notes in order to survive --> businesses having to close doors and/or reduce payroll to survive --> layoffs --> consumers on unemployment with reduced income --> decreased demand

[Wu du Nord]

Deregulation = Government Interference?

The voodoo that you do so well.

[Rocky Mountain Shock]

Yes, it was the lack of oversight, accountability, and regulation that caused the mortgage industry to run willy-nilly over common sense. Let's remember that while government interference in the private sector is generally a bad thing, it CAN both be necessary and have a positive effect on free enterprise.

[Kung Wu]

Deregulation = Government Interference?

The voodoo that you do so well.

Government regulations imposed on private banks and enabling the GSEs = government interference. Deregulation had nothing to do with the government regulations that caused this disaster.

Yes, it was the lack of oversight, accountability, and regulation that caused the mortgage industry to run willy-nilly over common sense.

Absurd. Oversight can't overturn bad laws. Only the combination of Congress and a President's signature can. An act of Congress caused an unsustainable number of bad loans to be made. The private sector wasn't choosing to make bad decisions, private banks were COMPELLED to make bad loans by government fiat in many cases and due to CRA credit rating requirements.

Here's the very basic facts, I'm curious to see any counter arguments that support that "lack of oversight" had anything to do with the mortgage crisis. What oversight could have prevented it, given the facts below?

When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.

Those quotes come from here: http://online.wsj.com/article/SB1000...152189446.html

[Wu du Nord]

I was sure someone out there actually believed that.

I'm just shocked (shocked, I tell you) to hear that person writes op-eds for the Wall Street Journal. And - get this - the same guy is a long-standing proponent of deregulation.

;-)

[Kung Wu]

I was sure someone out there actually believed that.

I'm just shocked (shocked, I tell you) to hear that person writes op-eds for the Wall Street Journal. And - get this - the same guy is a long-standing proponent of deregulation.

;-)

Wallison didn't write this for the Wall Street Journal, they just ran it. He wrote it for a conservative think tank, American Enterprise Institute. That'll make your circumstantial ad hominem fallacy more substantial. :)

Note that I didn't quote any of his opinion -- I quoted only the very most basic facts of the disaster known as the mortgage industry collapse of 2008.

Since none of it is opinion, which portion do you find factually wrong?

[Wu du Nord]

your circumstantial ad hominem fallacy

Ahh, thanks for noticing! Yep, that's precisely the term for it. ;-)

Note that I didn't quote any of his opinion -- I quoted only the very most basic facts of the disaster known as the mortgage industry collapse of 2008.

I will disagree that the figures you provided constitute the 'very most basic facts of the disaster known as the mortgage industry collapse of 2008.'