More Tax Cuts Won’t Mean More Hiring

June 10th, 2011 at 11:36 am David Frum | 44 Comments |

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A cruel joke about politics: “It’s not that Mr. X lacks principles. It’s that he does not understand the principles he has.”

I keep thinking of this joke as I follow the debate over the supposed need for another round of cuts in capital gains taxes and other taxes on capital.

The original point of such tax cuts back in the 1970s was to incentivize companies to invest in capital equipment, thereby boosting labor productivity and national income.

Flash forward.

Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.

With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.

“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”

By what argument will still further cuts in capital taxes possibly ameliorate this problem?

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44 Comments so far ↓

  • tommybones

    Businesses hire enough workers to deal with the demand for their products and services. Give that small business a tax break and it does nothing to increase the customer base and therefore gives no incentive to hire any more workers.

    This is so obvious to anyone who isn’t an ignorant ideologue or a corporate stooge.

    We desperately need to create demand. This has always worked in the past and would work right now. Instead, we are literally seeing Washington focus on the OPPOSITE, with tax cuts and slashed spending. This will prolong the recession/depression endlessly until either we officially turn into a banana republic or we finally start doing the right thing.

    • dante

      Yup, I’ve pointed this out before, but if hiring another employee means greater revenue than the cost of that employee, a company will hire. That’s it. That is the ONLY reason that companies will hire more employees.

      Taxes mean nothing. As a small business owner, if hiring someone else doesn’t mean additional revenue to (more than) cover his cost, I’m not hiring. If I get a tax cut I say “thank you” and keep running the business exactly as I currently am. It’s why companies today have MASSIVE stockpiles of cash. The demand is flat, and they can keep running things the way they have been with the current number of employees. If they make more money, it goes into the bank (or senior manager’s pockets). Nobody is going to do any “pity-hiring” just because they have some extra cash lying around…

    • vishnu

      “We desperately need to create demand. ”

      tommybones, of course we do, but the way you do this is by raising the minimum wage, giving tax breaks to all consumers (except maybe the richest), etc… but of course the Republicans only believe in giving tax breaks to corporations and the rich, which of course has been proven again and again does not create jobs (how many jobs did the Bush tax cuts generate, eh??)

      but well, Republicans don’t believe in facts either, only in their irrational ideology and obsessive hatred of government, they don’t understand much else… they certainly don’t understand (and don’t want to understand, because it goes against their ideology) what it takes to make an economy grow….

      (oh, and by the way — we’re already a banana republic in some respects at least — the wealth- and income-gap in this country has now reached third-world proportions.. amazing how this still doesn’t bother the right-wingers… I would like to ask them: how much money and wealth has to be concentrated at the top in this country for them to stop bitching and saying that the rich need even more tax cuts??)

    • Rob_654

      Yes, what you said is absolutely correct.

      If we are going to cut taxes – let’s cut payroll taxes on lower income and middle income people who are going to go out and spend the money right away – that will increase demand and employers will hire employees to meet demand.

      Even if we raised taxes on businesses – if demand is there they will hire to meet the demand, if not, another business will.

  • Jim_M

    Well David I find myself in the unusual position of agreeing with you. Cuts in capital gains tax alone will not result in significant and sustained growth. How could it. With the overreaching federalism America mistakenly voted into power 2-1/2 years ago the private sector will stay retracted. It’s all about surviving today. Thriving will have to wait.

    • balconesfault

      With the overreaching federalism America mistakenly voted into power 2-1/2 years ago the private sector will stay retracted.

      The curious question is why except for defense-related industries, healthcare, and the real estate boom fed construction sector, the private sector pretty much stayed retracted throughout the previous non-overreaching federalism Administration, and in fact went into extra-heavy-duty retraction overdrive despite the preponderance of Heritage Foundation flacks throughout the bureaucracy?

    • ottovbvs

      With the overreaching federalism America mistakenly voted into power 2-1/2 years ago the private sector will stay retracted.

      It obviously escaped your notice that 2 1/2 years ago the US economy was 14 months into the worst recession since the thirties. As DF and various other posters point out the problem at the moment is lack of demand. How do economic geniuses like yourself plan to create demand? Cutting federal spending and thereby further reducing demand?

  • Graychin

    Heresy! No wonder most Republicans don’t like you.

    Why should capital gains be taxed differently than any other income?

    • nickthap

      Actually, the question should be reversed. Why should labor be taxed at a higher rate than capital gains?

  • bdtex

    Dear Mr. Frum and Mr Bartlett,

    Later this year in the next budget battle,there will be a big fight over tax cuts. Next year,in the heat of a POTUS election campaign there will be an even bigger fight over another extension,or not,of the Bush tax cuts. Your party will go all out for tax cuts in both instances. Where will you be in those fights?

  • Houndentenor

    Many corporations are sitting on huge profits and still not hiring. How would tax cuts encourage them to hire when profits don’t inspire them to expand their payroll?

  • Diomedes

    Tax cuts are meaningless at this stage. Even another round of Quantitative Easing will yield nothing.

    The problem that caused the financial crisis (a distruption of credit and a lack of capital) is now gone. Companies have a huge amount of cash lying on the sidelines. The issue is not liquidity anymore. The issue is uncertainty and an unwillingness to invest. With Congress threatening to not raise the debt ceiling and all the partisan politics that is going on, that is what is truly the problem. (Along with the issues in the middle east and japan)

    Note we are also going into summer which is usually slower in general for both the markets and general consumer spending. (Unless its on vacations)

  • Jim_M

    I stand corrected. Yes, the private sector (families AND businesses) did retract, meaning slowed their spending (lowering demand) roughly 4 years ago. That’s when we so brilliantly put Nancy in charge of the National purse strings.

    Bush sucked on many levels. Never used the bully pulpit to my unending dismay. But high spending was his most obvious failure. Then coupled with the moon unit from the bay area…well there you have it. This correlation is inconvenient for the left. So the question is, how do we increase demand? It is not as complicated as we might believe. Once fear and apprehension is gone the American economic engine will roar again.

    • balconesfault

      The problem isn’t so much that Bush spent … it’s that he committed the US to spending massive sums of money on a couple prolonged wars and on a Medicare Drug Plan without pushing for any new Federal revenue to pay for the war or the drug plan.

      You could also add in mismanagement of contracts and rushed contracting processes that led to over spending for the wars, and the GOP blocking the government from even being able to negotiate down the price of the drugs that Medicare pays for.

      I’m not sure how the “moon unit” (who really has been one of the most responsible politicians in Washington over the last decade) comes into this equation. Had she still been Speaker of the House last winter we’d have at least seen the expiration on schedule of the budget busting Bush Tax Cuts.

  • aml_reads

    looks like reality is turning mr. frum into an almost liberal on economic issues. too bad that the president and his economic team have turned into conservatives; pre-insanity conservatives but conservatives nonetheless.

    • ottovbvs

      too bad that the president and his economic team have turned into conservatives;

      Would you like to give us some examples of where they’ve turned conservative? I mean actually turned conservative not assertions by fairly left liberals.

  • ottovbvs

    It is not as complicated as we might believe. Once fear and apprehension is gone the American economic engine will roar again.

    Well that’s all very nice, I like puppy dogs too, but what is going to make the economic engine roar again. Again it’s obviously escaped your notice that US corporations are a) making record profits b) sitting on mountains of cash. The reason they are not investing that cash has nothing to do with fear and apprehension and everything to do with lack of demand. So instead of a load of bs why don’t tell me how you stimulate demand? You think shutting down the US govt and creating a huge financial crisis by refusing to raise the debt ceiling would help. That’s the main cause of apprehension at present.

  • D Furlano

    Real issue will be when they do give a tax holiday and it produces marginal resulting we end up with a bigger deficit/debt. Then there will be more noise about how terrible the debt is and how the world will come to an end if it is not reduced.

  • LauraNo

    Unless businesses start hiring employees they don’t need, the only way I see to get out of this is for everyone to get wage increases. And since we know this will never happen I despair. I just despair.

  • jg bennet

    otto

    how to create demand?

    patriotize american made products then tariff the hell out of china. americans like winning and our bribed leaders refuse to put us in the game.

    basically switch to domestic production, and cut foreign goods consumption

    CREATING demand is business 101

    if the facts were explained to the american people that the reason we are in debt and their wages and job options have declined is because they are wearing a t-shirt made in china, shoes made in vietnam, underwear made in india, living in an economic system that is nurtured by our politicians and designed to make the rich get richer and the average joe nothing more than a consuming automaton….this might inspire them to they buy american

    The neoliberal creed…..
    “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”
    Adam Smith

    Translation…. OUR JOBS ARE OUTSOURCED BECAUSE PRODUCERS DO NOT MATTER
    classic neoliberal economics… adam smith is the neoliberal’s joseph smith AND robbing the average joe of wages by outsourcing and putting the difference (lower labor cost) in their pockets is their economic religion and very very anti true republican.

    free trader/neoliberal core principles…..

    Adopting Thomas Malthus’s population theory, Classical liberals saw poor urban conditions as inevitable, as they believed population growth would outstrip food production; and they considered that to be desirable, as starvation would help limit population growth.

    ***They opposed any income or wealth redistribution, which they believed would be dissipated by the lowest orders.****

    not as harsh today in the states but look what the multinational corporations do with all of their SWEATSHOP wage workers. http://www.globalexchange.org/campaigns/sweatshops/sweatshopsfaq.html

    So how to create demand?

    Explain this to them….

    DOLLAR DRAIN DEFINITION

    Dollar drains are trade deficits that result when imports exceed exports in monetary terms. For instance, a country that imports more goods from overseas than it exports to foreign countries is, in effect, sending its currency overseas in return for those goods. This can lead to a shortage of currency in circulation at home, creating a tight money situation in which companies have difficulty obtaining the loans and funds they need to grow or to continue operations. Consumers feel the effects of dollar drains as well, since they cannot obtain loans for the purchase of property or for other immediate needs; a shortage of currency in the home economy affects every aspect of that economy.

    MAJOR RISKS OF DOLLAR DRAINS
    A ready supply of circulating money is necessary for economies to engage in setting monetary policies; loosening or tightening the supply of money in the market is one of the most important tools government has in determining fiscal policy. When there is a shortage of currency in the economy, the government cannot exercise this control over the economic situation. If the dollar drain continues for a significant length of time, the government may be forced to curtail foreign purchases or to borrow heavily from other countries in order to meet its obligations. This can lead to inflation and devaluation of the currency on the international FOREX market.

    **Most analysts believe the long-term solution to dollar drain is to promote and encourage consumers to purchase goods manufactured in their own country where possible; this can stem the flow of currency out of the country and lessen the trade differential over time.** …..

    we could create a campaign to inform the public of the dollar drain much like the keep america beautiful campaign with the indian in the 70′s but instead of pollution the new campaign is about trade and domestic manufacturing.

    of course the neoliberal will fight tooth and nail against such blasphemy but with a third party pres who has his own campaign cash….who knows

    • rbottoms

      if the facts were explained to the american people that the reason we are in debt and their wages and job options have declined is because they are wearing a t-shirt made in china, shoes made in vietnam, underwear made in india, living in an economic system that is nurtured by our politicians and designed to make the rich get richer and the average joe nothing more than a consuming automaton….this might inspire them to they buy american

      Who doesn’t already know that shopping at Walmart means buying stuff from China? They don’t care or they can’t afford to care. I refuse to shop at the union busting China supporting behemoth.

      Here’s an idea, support the unionizing of Walmart and efforts to rein in their decimation of local businesses. Think global, act local? More liberal “nonsense” that would help reverse the trend you’re complaining about. Struggling families have to do what they have to do, but they are tying the noose around their own necks.

      I buy China sourced goods when there is no other alternative.

  • ottovbvs

    basically switch to domestic production, and cut foreign goods consumption

    Protection? Well it was such huge success in the thirties perhaps we should give it another try. It certainly worked in the end. A pity about those 50 million deaths. But you don’t make omelettes without breaking eggs.

  • nickthap

    Basically the last 30 years of stagnating wages for the middle class are coming home to roost. The low interest rate/credit bubble system papered over the fact of stagnating wages. That system collapsed with the credit/housing bust. I’m sure the argument is tax cuts will do this, or that the socialist needs to get out of the White House, or whatever. But what we need is to focus our policies on the worker side. All efforts are on the owner side. Democrats have been complicit in this.

    • balconesfault

      ^ +1

      As one put it … for awhile we were able to paper over the stagnating middle class wages in America by changing banking laws across the country to allow/encourage people borrowing against their homes for purposes other than home improvement. But once all the homes were re-financed this was no longer a viable mechanism …

  • jg bennet

    otto

    you are buying into FDR’s propaganda. not even milton friedman believed it was protectionism that caused the depression and he loathed protectionism. that argument is disproven propaganda but it still works on millions of republicans.. remember CATO called Reagan the most protectionist president since hoover.

    INTERVIEWER: You’ve written that what really caused the Depression was mistakes by the government. Looking back now, what in your view was the actual cause?

    MILTON FRIEDMAN: Well, we have to distinguish between the recession of 1929, the early stages, and the conversion of that recession into a major catastrophe. The recession was an ordinary business cycle. We had repeated recessions over hundreds of years, but what converted [this one] into a major depression was bad monetary policy.

    The Federal Reserve system had been established to prevent what actually happened. It was set up to avoid a situation in which you would have to close down banks, in which you would have a banking crisis. And yet, under the Federal Reserve system, you had the worst banking crisis in the history of the United States.

    There’s no other example I can think of, of a government measure which produced so clearly the opposite of the results that were intended. And what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary. At all times, the Federal Reserve had the power and the knowledge to have stopped that.

    And there were people at the time who were all the time urging them to do that.

    ****So it was, in my opinion, clearly a mistake of policy that led to the Great Depression.****

    not tariffs….

    • ottovbvs

      It may come as surprise to you but I don’t consider Milton Friedman the ultimate authority on all matters economic. He was right about somethings but not this. There’s a mountain of evidence to suggest that protectionism (Smoot Hawley in our case) and economic autarchy were major factors in the creation and prolongation of the worldwide slump in the thirties which in turn was a major contributor to the rise of fascism, militarism and expansionism. I know you don’t live in a fact based universe but here’s a summary of the noxious beggar my neighbor effects of Smoot Hawley. Nobody disputes there were other contributory factors to the great depression, but protectionism just made a bad situation worse like pouring gasoline on a fire.

      http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act

      • D Furlano

        Just have the Fed give money to the states to hire back public sector employees.

        That alone will not only reduce the unemployment rate it will help states with revenue shortfalls and spur demand.

        It isn’t rocket science.

  • LFC

    Great article in Slate about the failure of the Bush tax cuts to achieve any of the goals that Bush himself said that they would.

    So, to recap: The Bush tax cuts were followed by low GDP growth, negative median wage growth, and little job growth. Even before the Great Recession, growth in the Bush business cycle was the weakest since World War II. And the cuts cost about $2.6 trillion between 2001 and 2010, according to the Economic Policy Institute—adding to a debt future generations of taxpayers will pay for, plus interest.

    Full article is at:

    http://www.slate.com/id/2296578

    And now Tim Pawlenty, apparently with a number of Republicans cheering him on, wants to double down on stupid. If they can’t learn from such recent and obvious failures, is it any wonder they are incapable of understanding topics like evolution and global warming?

  • parkesprag

    So, what if there were a ‘credit’ given for new hires: pay a new hire (say) $100,000, but for purposes of tax calcs, let it be $120,000? Corps might see some utility to that?

  • D Furlano

    The Traders Crucible: Businesses do not hire more people when Corporate Profits are high

    “The red line is the growth in employment since the prior year in percent. The blue line is the change in corporate profits since the prior year in percent, inflation adjusted.”

    • ottovbvs

      Businesses do not hire more people when Corporate Profits are high

      Actually I’d say this chart tends to prove the opposite. When corporate profitability picks up and is sustained so does hiring.

      • D Furlano

        Explain the increase in employment for 1991 to 1995 as profitability went unchanged and the drop in employment from 2000 to 2002 as profitability went up.

      • ottovbvs

        Explain the increase in employment for 1991 to 1995 as profitability went unchanged

        It’s a year on year chart. Duh. Profitability went up after the late 80′s/early 90′s recession and remained at elevated levels for about 7 years. It was nirvana as a business environment I can tell you from personal experience.

        and the drop in employment from 2000 to 2002 as profitability went up.

        And then profitability then fell again in 2003 although only briefly and not dramatically (the depth of the trough is at same level as 90′s peaks). This was the dot com bust. People didn’t hire because of the dot com bust which was principally a Wall Street phenomenon and had little impact on main street but for a while businessmen were in hiring freeze mode because of uncertainty. I think there was only one quarter of negative growth. So they briefly stopped hiring which in itself helps profitability but it was essentially a false alarm for most mainstream businesses.

        BTW it is imho a highly iffy chart produced by someone with an agenda.

        • D Furlano

          No, in relation to your comment, remember this?

          “Actually I’d say this chart tends to prove the opposite.”

          Whats opposite? There is no correlation.

        • ottovbvs

          Whats opposite? There is no correlation.

          Are you dumb or something…You asserted:

          The Traders Crucible: Businesses do not hire more people when Corporate Profits are high

          You missed this bit

          Actually I’d say this chart tends to prove the opposite. When corporate profitability picks up and is sustained so does hiring.

          In fact the chart imperfect though it is shows considerable correlation between profitability and hiring and firing. We know that in the period 1992 to 2000 the economy created around 22 million jobs. One would have to be fairly obtuse to believe that this happened in an environment where corporate revenue and income wasn’t consistently strong which in fact is what your chart shows. When profitability nosedived in 2006-9 hiring nosedived too. Sheesh.

  • rbottoms

    By what argument will still further cuts in capital taxes possibly ameliorate this problem?

    They won’t.

    But they will make rich people richer, which is the point of the GOP.

  • Krissy

    Sacrificing the future for today’s profit is what the Republican Party is now all about since they are now nothing more then a wholly owned subsidiary of Corporate America. The Corporatists are in control of the US House of Representatives and all they give a damn about is transferring as much wealth from main street to Wall Street.
    Don’t waste your time opposing the Republicans because the simply have no power. It’s time in this country to AGAIN liquidate monopolies, like AT&T, Microsoft, ENTIRE OIL INDUSTRY, and the biggest group of thieves of all, HEALTH CARE COMPANIES.

    When the corporations run a nation, that nation has no real future, because corporations only think in terms of the next quarter, not the next generation. Corporations will naturally do whatever they can to maximize their profits right now, including poisoning the children with vaccines, poisoning the population with toxic food products, sacrificing the financial future of the nation for short-term gain, destroying the environment, ignoring the health care needs of the People, inciting war so they can sell more profitable weapons to war-torn countries around the world, and so on. Essentially, corporations will sell out the future for higher profits today, and that’s exactly what they’ve done in America.

  • Jim_M

    ottovbvs,

    BS? My wife is the owner of an “evil” cooperation, a small service company. Before the current “malaise” it employed 7 full time techs. Today…2.

    “Profits” too have risen. Not because she’s doing more business. It’s because her costs (spending) has nearly stopped by comparison. The phrase “you have to spend it to make it” has real meaning. She will, in a heart beat, trade this cash for market share. That’s called growth. Diversification.
    People. Not puppies.

    So with that said she intends to hold on to her little piece of evil for as long as she can. Hopefully other evil cooperation’s big and small will do the same. They’re her biggest consumer.

    • ottovbvs

      The phrase “you have to spend it to make it” has real meaning. She will, in a heart beat, trade this cash for market share. That’s called growth.

      Jimbo, you’ve just described, although in a somewhat incoherent fashion, why DEMAND is the problem and why businesses (in this case your bride) aren’t investing in expanding capacity. And it has nothing to do with tax cuts. And you still haven’t told us how you’re going to stimulate DEMAND.

  • indy

    Personally, I don’t think one-time options like tax holidays or rebates or similar are going to work this time. De-leveraging is most people’s first option with excess cash right now (or so I think).

    The best way to stimulate the economy would be through better wages but I just don’t see that happening in this environment. In the absence of that, though, I think this economic funk will be fairly long.

  • Jim_M

    Typical response from a statist. Don’t agree…label it, in this case “incoherent”. I understand why you disagree. It’s inconvenient. Makes you uncomfortable. So, you become offensive and arrogant. Plays well in your little internet sandbox, but like a turd in the swimming pool out here in the world.

    You speak of DEMAND like you understand it. I don’t believe you do. DEMAND is a product of WANT. It’s powered by simple confidence and positive attitude about where we all are and where were headed. Look up from your computer. That attitude and confidence is in VERY low supply. Their is hope for new and vigorous DEMAND. November 2012.

    • ottovbvs

      Typical response from a statist. Don’t agree…label it, in this case “incoherent”. I understand why you disagree.

      Boy you’re not exactly the sharpest knife in the drawer are you Jimbo? I was actually agreeing with you or to be more precise you were perhaps inadvertently agreeing with me that demand is the problem. Whatever. Sigh.

  • indy

    So, this economic mess can all be fixed by firing the marxist-socialist-kenyan and rehiring the fellas with the policies that caused the biggest economic collapse in modern history? And this will be because we will all be in our happy place once again?

  • BustedBoomer

    Jim_M,
    Re ‘DEMAND is a product of WANT, confidence, and positive attitude about the future’

    Sounds good but you forgot INCOME in the equation. Without INCOME, it is not DEMAND, it is WISH. And no, more credit and debt is not the answer, I have personally researched this.