|An advocate of Modern Money Theory advocates for Aggregate Demand at Occupy Wall Street gathering.|
Sunday, January 8, 2012
Job Creators R Us
We hear over and over: "We can't raise taxes on the job creators." The story is that job creators are business people, who invest in building companies to supply our wants and needs. That it just the old “trickle-down” economics scam. Since it failed miserably in the 1980s, we don't hear about trickle down any more. Now it's “job creators.”
Basically the idea is that by investing in the supply side goods will be more plentiful and prices will come down. This suggests that our dollars will be worth more, so we can buy more and businesses will sell more. That sounds great, but it’s not the way the world works. Business is driven by demand for products not supply of them.
Look at it this way. Would the business people build buggy whip factories? Of course not, because there is no longer any demand for buggy whips. No business person with any good sense will produce a product in the absence of demand.
Demand sets up a virtuous cycle. It is our demand that leads to production of things for sale to us, and that leads to hiring us so that we have income to buy what we produce. Because our demand drives the economy, we are the job creators.
We do not buy products unless we have or expect to have money in our pockets. For most of us, that money comes from wages earned by delivering goods and services to a customer (employer). From a strictly economic point of view, it matters not whether that customer is a government agency or a private business.
Roughly speaking our income is sufficient to consume all we produce. Or, sadly, we will produce only what we consume. So, economists introduce the idea of Aggregate Demand (AD), the total of what we buy, which is what largely drives our economy. When AD is high, we have high production and low unemployment; when AD is low we produce less no matter what our productive capacity might be and unemployment rises. If AD outstrips our ability to produce, we have inflation. But, with high unemployment and unused facilities, the possibility of inflation is not a problem.
When AD is low, as in the current recession, much of our productive capacity, which includes facilities and people, just goes to waste. Both peoples’ skills and equipment efficiency become outdated and unusable. Consequently, our productive capacity is not only wasted; it diminishes, and we pass on to our grandchildren a degraded capacity for them to produce and prosper.
To keep AD high either government or business must spend on goods and services. This is just simple, basic economics. Some will say that government spending "crowds out" private enterprise. It is true that government spending appropriates resources that might otherwise be used by private industry. However, during a recession, our productivity goes to waste resulting in lost jobs and depressed AD. Then it is necessary for government to step in and pick up the slack in AD by purchasing more goods and services from the private sector.
Claims of crowding out are based on gold-standard thinking, where government and business compete for a fixed amount of money. Those, who limit government spending that would increase aggregate demand during a recession or its recovery, undermine our productive capacity, impoverish willing and able workers, and leave the country in a worse state for our grandchildren.
We, the job creators, must demand Aggregate Demand!