On the Brink

by Travis

As the #OccupyWallStreet crowd takes over American cities, it seems prescient to disambiguate some misconceptions.  There exists – at some of the highest levels – a fundamental misunderstanding of both how and why the economy works.  Seeing as how we’re teetering on the brink of social revolution, with the Tea Party on one side and these guys on the other, (although the Occupy Wall Street is 1% of the Tea Party crowds), America is fed up with fill-in-the-blank, and I thought I’d throw some facts out there before it all goes down.

There is one point of agreement between the two factions: Overhauling the tax code to ensure equality.  This would tax all corporations at the same rate as all people.  On this point, Left and Right are not far apart.  Our decisions moving forward past that point will lunge the nation one way or another, with the American dollar suffering as the hardest hit victim, as our debt continues to pile up and productivity continues to plummet.  Pure capitalism will produce winners and losers in the marketplace; pure socialism will take wealth from the private sector, kill prosperity, stagnate unemployment at about a ten percent average, ultimately destroy all freedoms, and kill the American dream.

What’s on the Table?

There are two proposals from the Left to “fix” the economy: The Jobs Bill and the Revenue Package.  First, Obama’s Jobs Bill will never pass.  It was never meant to.  Some legislation is likely to evolve from Congress to build bridges, roads, while padding the pockets of their corporate and labor buddies, now standing with the Jacobins.  The #OccupyWallStreet crowd would have you believe all corporations, profit, and capitalism is the enemy; I’ll cover that shortly.

Obama’s Revenue Plan, however, may come to fruition.  To appease the population, we will be given, again permanent spending programs, paid for with temporary tax breaks for the middle class, and permanent tax hikes on the wealthy.  I have gone to great lengths (here, here, and here) to spell this out, but I’ll do it again:  According to IRS figures, a 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion.  That is roughly 10% of  the current annual budget deficit.

As 42 cents per dollar spent by the federal government is borrowed, we are careening off the track, the dollar is tumbling, and won’t be the world’s economic superpower a decade from now.  So let’s get some facts straight before it’s too late.

Big vs. Small Business

First of all, about half of all American employees work for companies of 500 employees or greater.  Although other guidelines exist depending on the industry, I would consider this 500-member thumbrule the SBA’s dividing line between the half of us that work for “corporations” and the other half that works for “small businesses.”

We know what the Obama Administration thinks of corporations.  To be more specific, as CNN points out in their interview piece, we know what Obama thinks of certain corporations:

“If you tell me that corporations are vital to American life, that the free-enterprise system has been the greatest wealth creator we’ve ever seen … that I absolutely agree with.  If, on the other hand, you tell me that every corporate tax break that’s out there is somehow good for ordinary Americans … then that I disagree with.”

What qualifies Obama to divide Americans into the “ordinary” versus “extra-ordinary?”  Regarding tax breaks, I would submit that all tax breaks are bad for America.  We are a nation of laws; tinkering with the tax code to reward the few undermines the rule of law and increases cynicism with capitalism, when corporations are to blame.  If you are a small business, odds are you won’t get the sweetheart deal that Jeff Immelt’s GE did, paying $0 in taxes in 2010.

The Administration is not trying to assist corporate America largesse, just his buddies.  He says, however, he is trying to assist small businesses.  According to a recent poll, however, 70% of small businesses say the President’s Jobs Plan will not change their hiring practices.  Why is that?

Excess Profits and Job Creation

For both corporations and small businesses, excess profits is the reason they exist.  What is remarkable in the free market is that both parties in a transaction believe they are the one benefiting from the transaction.  While profit is the reason for these corporations of individuals to go into business, it is not the reason why businesses hire.

This escapes most people, including some of the most influential among us.  On Bob Schieffer’s Face the Nation, President Bill Clinton – while simultaneously congratulating himself – offered some advice to President Obama:

“I don’t believe America can return to the full employment days of the ’90s until we clear this bank debt over the mortgage crisis. And I hope that will be done. Meanwhile, I think a combination of payroll tax changes that Obama recommended, setting up an investment bank and doing more in infrastructure and then looking at areas of specific opportunities to put people to work can really create millions of jobs and get us out of the worst of this doldrums and that’s what I’d like to see America focus on.”

Clinton’s assessment of how the economy works is completely absurd.  Cash on hand has absolutely nothing to do with the hiring practices of businesses.  To speak in legal terms, cash on hand is necessary for hiring, but it is not sufficient.  This is demonstrated by the approximately $1 trillion on corporate balance sheets inside the United States, with another $1 trillion overseas.  Note: on the balance sheets, not in the pockets.  It’s sitting there, waiting to be leveraged.

In a recent interview on Paul Gigot’s Journal Editorial Report, Harvey Golub, retired CEO of American Express, executive committee member of the American Enterprise Institute, and chairman of Miller Buckfire, gave one of the best synopses I’ve heard:

“The view that people are hired because a company has cash to hire them reflects an ignorance about how businesses and people actually are motivated and work that is–that is astounding. People–businesses hire people when they have more business and they need the people to conduct that business. If they don’t have the business to conduct, they’re not going to hire the people.”

Let me put it to you another way:  if you produced widgets from the comforts of your home at a cost of $5/widget, spent three hours a day making as many widgets as you could sell, and you sold these widgets as a price of $20/widget, would you necessarily be incentivized to hire another employee?

The answer: maybe.  Considering rising health care costs among the many liabilities associated with hiring someone, you might not.  Now, Obama introduces another disincentive for hiring:  Subtitle D of the American Jobs Act, Page 129, is entitled “Prohibition of Discrimination on the Basis of an Individual’s Status as Unemployed.” If a business does not hire someone who has been unemployed for six months, they can be prosecuted for discriminating against a protected social class. Solution for businesses? Don’t interview unemployed people.

The reason businesses aren’t hiring is simple: Uncertainty. Businesses are uncertain about the future, because government keeps jacking with the outcomes of the market, opposing freedom, in favor of control over the economy and the individual.

Why Government (Always) Fails Business

When government directs funds to a company, as it did to the solar company Solyndra with $535 million of taxpayer’s funds, it distorts the market in three ways: first, the aided firm avoids the cost-cutting measures necessary for its own fiscal solvency; second, it hurts the aided firm’s competitors, as those without additional funds are having to compete with an enhanced firm; and third, the funds eventually hurts the firm itself, when the illusion of revenues dries up.  This does not include the ever-present unforeseen consequences of ham-handing the market.

Whether it’s general with federal Broadband subsidies, or specific like Government Motors Chevy Volt funding, there are consequences to market interference.  Keeping these “too big/significant/special to fail” firms funded is not capitalism; it’s lemon socialism, and is ultimately not good for jobs.  This reminds me of the Austrian economist Friedrich Hayek, observing the digging of the Panama Canal, looked down on the work being done.  He asked, “Why are they doing this with shovels?  Why not heavy equipment?”  The answer was simple: “It’s about jobs.”  His reply: “Then why not use spoons instead?”

Funny, but this is how government works: it creates yesterday’s jobs, and never answers to demand projections.  Government cannot create permanent jobs.  Due to an illusion of revenues, jobs may be created for a period, but they are not permanent.  A business must, eventually, answer to the demand (or lack of it) that exists in the market.

Apparently on the Road to Serfdom, Solyndra’s failure has not averted the Administration from trying to dump another $9.2 billion into wind and solar companies.  These interventions are stagnating the American economy.  One has to wonder, as I have since this Administration took office: are they that dumb, or are they deliberate?  Does the emperor have no clothes? Does the empty suit have no emperor?  Or does the emperor know exactly what he’s doing?

“A major source of objection to a free economy is precisely that it does this task so well.  It gives people what they want instead of what a particular group thinks they ought to want.  Underlying most arguments against the free market is a lack of belief in freedom itself.”
~ Milton Friedman, 1962

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