Economic Myths

The latest tax bill under consideration in Washington supposes that money saved by companies will create jobs and improve wages.

A sympathetic interest group called the Tax Foundation claims the tax cuts would create 975,000 new jobs over 10 years, and boost wages by more than 3%. These are dubious claims, at best, since they ignore the realities of why and where companies spend money.

Wages are an expense, and responsible business management demands that expenses are kept as low as possible. So a fast food restaurant isn’t going to hire a second burger flipper until it has maxed out the flipping frequency of the first (or replaced her with a faster flipper).

The wages for that job aren’t based on how much money the fast food company has in its coffers, but rather by the market’s going rate for flipping, which is based on the number of workers possessing the skills available to do it.

Ultimately, what drives new hiring is demand for more hamburgers, which would mean leaving more money in the pockets of hungry low and middle income consumers.

The tax bill does little on that front, if at all.

Could the new jobs and higher wages come from companies locating (or relocating) back to the United States because taxes are lower? Again, only if they could pay rates at or lower than what they pay somewhere else, so no wage growth here, and if they had to pay more for specific skills in the US market, there’d be no reason to create jobs here in the first place.

It’s far more likely that corporate tax savings will be to increase stock value (by rewarding shareholders with dividends, a goodly percentage of whom are foreigners, and/or buying up stock), and investing in automation and robotics to replace human workers altogether.

Robots are an unrepentant capitalist’s wet dream, because they replace renting imperfect humans with owned machines that don’t need healthcare or time off, turning a balance sheet expense into an asset.

So the tax plan could actually hasten the inexorable move toward fewer jobs, not more of them.

Also, because it could add something north of $1 trillion to the deficit, it will require either more spending cuts over time, which will impact regular taxpayers’ ability to buy things, and/or additional borrowing, which will enrich foreigners who profit from loaning money to the US. Again, nothing positive for jobs or wages.

The argument for the tax plan is that economic growth will create jobs, increase wages, and pay for the tax cuts.

In other words, it’s based on economic myths, like “all taxes are bad,” or “the magic of the marketplace.” Growth will simply emerge from a marketplace because the rich, unfettered by government-imposed responsibility to community or environment, will create opportunities for all.

It would make Ayn Rand and Gordon Gekko proud.

But it’s an insult to capitalism; no, it’s worse than that, it denigrates and impedes the system from working as it should. The debate should be about what problems we’re trying to solve, and then how we might spend — or stop spending — our tax dollars to solve them.

What’s the trade-off between cutting corporate tax rates and, say, investing in a mammoth program to rebuild America’s infrastructure? Could aggressive skill retraining enable more Americans to find currently unfilled jobs vs. paying companies in hopes they’ll find workers to fill new ones? Will a cut in the estate tax that benefits a small percentage of people help the economy more than slashing the mortgage deduction taken by many more may hurt it?

If we’re going to borrow $1 trillion, could we do things smarter and more aggressively helpful for economic growth than simply hand it off to corporations and wealthy individuals?

Capitalism works when the market can vet and choose the best ideas, which means valuing things that contribute to both individual and collective good. It’s not something in which one can believe; valuation is done in legal tender because it’s an agnostic arbiter.

As such, the marketplace of public discourse is failing us, too. It’s being dominated by one political party that presents its hopes and biases as if they were facts, which they’re not. The opposition is structurally relegated to opposing instead of co-leading, but has otherwise failed to explain how better to address the problems that the tax plan purports to fix.

Economics should be a conversation about numbers, not theology, and its conclusions administrative decisions, not declarations of faith.

No true capitalist believes in myths.

[This essay was originally published at Recapitalism.net]