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Banbury Cross

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Post details: Myth of Job Creation

Myth of Job Creation

As the Marathon presidential campaign season enters its homestretch, some of the sound bites that were coyly droning under the radar so far are putting on the war colors and bursting high into the sky.

My favorite bite of wishful thinking is the notion that cutting taxes for the wealthy will somehow automatically create millions of jobs. To begin with - it is not clear why the rich would turn any additional wealth into job producing assets, when there are other - and less dicey - places where you can park your money. Commodities, currency exchanges and especially foreign markets supported by cheaper labor present lucrative opportunities every day. Why would you choose investment vehicle whose risk/reward ratio is only slightly better than planting turnips in the Yankee Stadium outfield?

But what bothers me even more is the mechanism itself. Are jobs really created when the wealthy owners of the means of production get to keep larger share of their profits? I always thought that what created jobs was organic demand. The willingness and ability of potential customers to buy your stuff. Pure and simple.

Imagine this. You have a struggling factory which makes only a modest profit because no one in the country has any money to buy your product. You, the owner, get your brand new Congress approved tax cut - and then what? - all of a sudden you start hiring more workers to produce more stuff which no one can still afford? Methinks not.

In my world, a smart businessman will ramp up the production only if there is an increased demand for his product - which usually happens when a significant segment of the society has more money to spend. Rich people - being a fairly limited group almost by definition - simply do not have the numbers to drive the consumption up by themselves. How many bars of soap, how many iPhones or loaves of French bread do the affluent really need? That is why a healthy economy starts with a strong middle class whose members - by the sheer volume of their purchases - can significantly stimulate the overall business activity. Henry Ford knew this 100 years ago. What is so difficult about it that the conservative commentators don't understand these days?

Cutting taxes will only create more income inequality, and less vibrant economic environment. It will lead to the bananization of our republic. But it will contribute very little to the job growth we need. The bottom line is very simple. If the majority of the population won't have means to buy goods and services, then this recovery will wither on the vine - no matter how deeply the upper bracket income taxes will be cut.


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