More thoughts on this post from yesterday:
The flat truth is no one is going to hire new employees unless there is some reasonable promise that the additional cost of the employee will be recovered through increased profits resulting from the new employee’s work. That’s not “greed”, it is bare survival in tough economic times. And all the recent additions to per-employee costs aren’t alone. There is a seemingly endless well of new possible costs coming, including new environmental regulations, the possibility of a massive new “carbon tax”, and “card check” that promises to raise labor costs even further with exactly zero (at best) increase in productivity. Vague gestures towards a few thousand dollars of tax credits to stimulate job growth don’t even begin to cover the risks.
On top of it all, if you happen to be an oil worker on the Gulf Coast, your job is politically verboten. Sorry about that. Or not.
Only a crazy person would be eager to start large-scale hiring in this political environment. Yet many anti-corporation zealots profess themselves outraged that the Evil, Greedy Corporations won’t get with the business of economic recovery.
The country’s in the very best of hands.
The reason Michael Fleischer isn’t hiring is that his company can barely cover the office supply costs. The company wasn’t very profitable during this century (running about $2-$3 million profit on sales in the $50 million range). In 2009, they took an $11.6 million loss on sales of $44 million. (Source = his company’s publicly-released financials.)
None of Fleischer’s costs per employee are new. He offered health care for years, taxes have not gone up over the period (in fact having gone down under Bush) and even in the article Fleischer admits that health care costs were spiraling up at 10% annually.
It seems to me that businesses aren’t hiring because they don’t need new workers. They don’t need new workers because demand for goods and services are down.
Hey, Chris Gerrib is back! The party-lines must now be in place. Can Jim be far behind?
Chris, what you say is partially true – demand is down, so production goes down. But that doesn’t explain the drop in new businesses, that by definition create new demand. Why are new businesses not starting?
What people are missing is that “new stuff” is what creates jobs. If you are continuing to produce what you made last year, the only way to increase profit is to decrease cost – so you employ less people. Only “new stuff” requires increased labor and materials. So why is there less “new stuff” being produced?
The answer is that “new stuff” makes no money for several years, and then finally will show big money in the end (hopefully). There are two important aspects to that statement – the “hopefully” and the delay.
The “hopefully” means that you cannot plan for breakeven. Half the time your new product/company will fail and return nothing. So you have the aim high, so that on average you will see a normal wage. This is important, because it amplifies the effect of tax increases on the rich – your new product’s success plan always qualifies as rich. So in your decision matrix on creating a new product, the highest tax rate is always the one applied and the likelihood of the product being created is inversely proportional to that highest tax rate. For example, if you are making a new company to make “green power”, you start with a 80-90% failure rate (the average). So success must make at least 5-10x your acceptable wage. That puts “success” in the highest tax bracket. A 5% increase in the highest tax bracket is a 5% decrease in the expected return, and thus makes it much less likely that a business will be formed. (The relationship is superlinear, because 1] it is a step function, and 2] businesses are forced to long term 0 profit, so there is a tight grouping of expected returns)
The other part is the delay. The complete and utter morons in the White House and Congress have spent the last several years saying “we are going to raise taxes as soon as we possibly can”. That is just amazing stupid to say! You are essentially killing the new businesses (see above), while not even generating any revenue! You could at least pretend that you are going to keep taxes low – then new businesses look much better. Ideally, you would claim “we can’t lower taxes at just this moment, but we plan on lowering them in 3 years”.
Additionally, the delay in profit means that you must raise the bar on expected return again! As discussed, that makes progressive tax rates even worse! You spend the first 3 years with no income (probably increasing you debt dramatically), and then once successful you have to pay yourself for those previous years at the highest tax bracket! For example, consider a business that earns nothing for 3 years (the normal length of time to show a profit), and then makes $240,000 in the 4th year. So the average wage of the owner was $60,000/year. in Unheardia, which uses flat tax rates of 20%: year 1-3 $0 in tax, year 4 $24,000 in tax – the same as everyone else making $60,000/year. In the US, he still pays $0 in years 1-3, but in year 4 he pays nearly twice that!
Progressive taxes are anti-new business. Announcing future tax hikes years in advance is insanely stupid.
Both policies are anti-job.
Does anyone notice that both left and right are waiting for the collapse so they can move on? Business, with no frontier, has no place to go. Is it all gloom and doom from now on?
I hope not.
Bilwick1 wrote:
Hey, Chris Gerrib is back! The party-lines must now be in place. Can Jim be far behind?
If so, we’ll know that the new JournoList is up and running!
Mike
“If so, we’ll know that the new JournoList is up and running!”
Yeah, it must be. Popular reaction to Michelle Obama’s extravagance can’t be ignored any more. So the entire MSM is abuzz with commentators opining of her behavior that “the optics don’t look good.”
“The optics?” Maybe one seriously illiterate person might come up with that, but it’s everywhere. Coincidence? Only JournoLists know for sure.
Pretty typical – 4 people ignore facts and instead start name-calling. I’ll assume they have nothing to add, since they can’t refute the facts.
David: For tax purposes, those three years with a zero return would generate tax loss carry-forwards, which you would take off of the year 4 returns. Alternatively, if the owner actually pays himself a salary (presumably from the invested money) then that’s booked as an expense and not taxable to the business.
Regarding raising taxes – the official line since Obama declared his candidacy was to let the Bush tax cuts expire as they were supposed to do when they were voted in. There’s no uncertainty there.
“It seems to me that businesses aren’t hiring because they don’t need new workers. They don’t need new workers because demand for goods and services are down.”
You bet! Who wants to spend money when so much of your costs aren’t known? No one is sure what health care costs will be. The Bush tax rate cuts are expiring so everyone’s w/h is going up. Cap gains rates going up. The only people getting a bigger slice are unions and gov’t workers.
Chris:
“For tax purposes, those three years with a zero return would generate tax loss carry”
Not true, unless you are rich. Zero return does not mean loss, zero return means that there is not enough money to get paid. Think about it, make a pretend business if you need to. (Business costs $100 to run. Business makes $100. You get nothing, no losses acrue.)
“as they were supposed to do when they were voted in. There’s no uncertainty there.”
Um, that’s ignoring everything I said. Promising to raise taxes in a few years is stupid, regardless of who’s fault it is. If it makes you feel better, blame Bush, but it is still stupid to let this hang over the economy.
At this point, the well has been allowed to run dry – not only are there no new businesses, but there are none in the pipelines. Real recovery is quite a while away at this point – we have to go through the 3 years of running the new businesses before we see real profits/growth again, and the new businesses won’t even get started until the country stops trying to raid everyone.
Zero return does not mean loss, zero return means that there is not enough money to get paid. – You may not get paid on a cash-flow basis, but you can certainly accrue a salary and show a loss.
Regarding “well has run dry” – not so much. Daveon, who posts here occasionally, is running a startup even as we speak. Somehow I doubt he’s the only person in the US running a startup.
“You may not get paid on a cash-flow basis, but you can certainly accrue a salary and show a loss. ”
The IRS does not let you do this. You cannot shift income to lower tax years.
No, but your company can accrue a salary for you, show a loss, and the loss is carried forward on the company’s tax return. Or you can set your firm up as an S-corp, and pay taxes as if it were a sole proprietorship.
All this ignores the underlying fact, which I just realized. Your math is wrong! See, in Unheardia, your cash flows are 0-0-0-$240,000. So your taxes are 0-0-0-$48,000, not, as you claim, $24,000. (Even Unheardia taxes income in the year it actually occurs.)
Under a progressive tax, your taxes are 0-0-0-$64,317 (See this site) which is 33% more, not “nearly double.” Do you really want to argue that the $16,000 more in taxes is a deal-breaker, or would you rather have the $175,000?
Oh – Dave, read this about tax loss carryforwards.
It seems to me that businesses aren’t hiring because they don’t need new workers. They don’t need new workers because demand for goods and services are down.
This observation doesn’t distinguish between scenarios. To slightly Godwin the argument, it’s like flat-earthers claiming the world is flat because the view of Earth out their window looks flat. The world could be spherical or a giant donut (which incidentally is another freaky idea out there), and still look flat out their window.
Basically, at this point there are two hypotheses about the current lack of new business. One is that the recession is “worse than we thought”. That is, the actions of the Obama administration would have fixed a lesser recession, but this was “worse than we thought”. So the corrective actions merely need to increase in size in order to work. The other hypothesis is that the current economics difficulties are due to the above government action. Lack of demand doesn’t distinguish between the two theories because we would expect it in both cases.
In my view, the best way to distinguish between the two is the length of time it takes to recover. While we’re only two or so years past the recession, it’s worth noting that the Japanese are still recovering from their 1990-1991 recession even though the government there huffed and puffed to the point that they have a debt much greater than their yearly GDP, yet still the country is doing relatively poorly.
We also have the example of the Great Depression where serious economic recovery of the US followed the removal of most FDR “reforms” during the Second World War. I’m sure there are other examples out there of the effects of government assistance on recovery from recession.
So as I see it, given these two examples, a long period of poor economic growth, perhaps with another fall or two into recession is the sort of effect you would expect to see from a government-funded recovery.
Another bit of supporting evidence is our knowledge of where job growth comes from. We don’t expect stagnant or declining industries (such as General Motors for a big example) to generate new jobs. That has to come from new industries, which as in the discussion above, can be influenced by higher tax rates, regulation burden, etc. While I disagree with Chris on the effect of losing almost 10% additional income on taxes (I do think it has an effect on the decision making for starting a business), it’s worth noting that future demand would be strongly influenced by taxes.
In our example of the startup that makes $240k in its fourth year, it’s worth noting that a common strategy at that point is to reinvest that profit into the business. I believe that generally, any additional margin, such as an extra $16k from taxes, will end up back in the business. Even if it doesn’t end up in a productive business, it will be invested or spent as desired by someone who has demonstrated some degree of business competency. In comparison, with higher taxes, this money goes to some government action, most which are either mediocre or even counterproductive in economic benefit.
When we look at Obama’s actual actions as opposed to hypothetical actions, we see that the situation is worse than in the abstract. He has introduced great uncertainty into various business decisions, particularly hiring and planning future capital investments, he has bailed out firms such as General Motors, that should have failed, and he has proposed and sometimes passed economically disastrous policies such as health care change and cap and trade.
It doesn’t help that many key members of the Obama administration, including Obama himself, have expressed hostility towards businesses in this struggling economic climate. Or that they’ve increased the size of the relatively unproductive federal government bureaucracy (which even outpaces the respective declines in state and local bureaucracies). Finally, they’re supporting failed state governments such as California, Illinois, and Michigan. All these actions come at the expense of future US growth.
So to summarize, we have considerable support for the theory that government policies are the cause of the current economic malaise. This evidence comes in three categories, a) evidence that we aren’t experiencing significant economic growth, b) evidence that past recession recoveries with similar characteristics of government activism demonstrate similar economic sloth, and c) overwhelming evidence of business-hostile policies and climate in Washington today.
a) General Motors turned a quarterly profit and is working on an IPO. Doesn’t seem like it was such a bad idea to bail them out. BTW, they’ve been hiring more workers too.
b) WWII saw more government control of the economy, more government spending, and saw a 92% top income tax rate. If WWII “fixed” the Depression, it did so by more of the same techniques FDR was using pre-war.
c) Again, your tax figures are wrong. If you re-invest the income into the firm, it’s an expense, not taxable income. (R & D expense, or cash purchases of equipment.)
d) The “propping up failed state governments” does have some merit. I would argue that Illinois (my state) got into the current mess by not raising taxes when it should have. But in the short term, not bailing out will simply increase the unemployment rolls.
The only way WW II “fixed” the Depression was by hiring all able-bodied young men and sending them overseas. The Depression didn’t end until Roosevelt died, the war ended, and a Republican Congress prevented Truman from continuing the damaging government tinkering with the economy.
Pretty typical – 4 people ignore facts and instead start name-calling. I’ll assume they have nothing to add, since they can’t refute the facts.
Chris, you’re conviently ignoring the facts of his post – that government taxes and mandates add 1/3rd to the cost of employing someone. Make labor more expensive and companies will use less of it. And you’ve done nothing to refute the facts about how government drives up the cost of labor.
I would argue that Illinois (my state) got into the current mess by not raising taxes when it should have.
Yeah, raise ’em to 100% and see how that works for ya. Perhaps pension cost has something to do with it?
a) General Motors turned a quarterly profit and is working on an IPO. Doesn’t seem like it was such a bad idea to bail them out. BTW, they’ve been hiring more workers too.
Did they? The federal government apparently owns 61% of the company and ultimately is responsible through the SEC for any supervision, or lack of supervision of GM financials. We’ll have to see down the road whether GM really earned a profit or whether it was just some financial book cooking in time for the November elections.
Having said that, it probably is true, but only if you ignore the massive costs that the federal government (and hapless former owners of GM) soaked up.
b) WWII saw more government control of the economy, more government spending, and saw a 92% top income tax rate. If WWII “fixed” the Depression, it did so by more of the same techniques FDR was using pre-war.
A key economic development during the military buildup was the dissolution of the FDR oligopolies. After around 1939, you could start a company and as long as you could deliver the goods that the military wanted, you could expect a piece of the action even if you weren’t one of the favored companies in the market. This continued after the war. For a notable example, Hewlett Packard started in 1939. A considerable number of their products went to the military. Also shortly after the war ended was the last attempt at a large car company in the US (Kaiser Motors).
c) Again, your tax figures are wrong. If you re-invest the income into the firm, it’s an expense, not taxable income. (R & D expense, or cash purchases of equipment.)
There are restrictions on the use of pretax money for that purpose. For example, look up the tax rules on home offices sometime. If I want to make a home office that doubles as an entertainment center or other personal interests (in other words, use my money efficiently for multipurpose capital), I can’t use pretax money for that.
And if I wish to invest in something unrelated to my business? I pay taxes.
d) The “propping up failed state governments” does have some merit. I would argue that Illinois (my state) got into the current mess by not raising taxes when it should have. But in the short term, not bailing out will simply increase the unemployment rolls.
And those people can be rehired. Why do terrible things merely because it doesn’t increase in the short term unemployment rolls?
Why is it when someone postulates a simple reason to explain a problem, a liberal has to come in with some ridiculously over-elaborate Rube-Goldberg-like set of machinations that he claims is “what really happened”? How do you people get out of bed each morning without consulting a GPS?
Businesses aren’t hiring because they can’t afford it. They can’t afford it because Uncle Sam is taxing and regulating businesses to death in a crap economy. That’s it.
Just wondering: in any controversy where there’s a pro-freedom side and a pro-State side, has anyone ever known Chris Gerrib to take the pro-freedom side? If he were smart, he would just to kill off libertarians who would die of heart attacks from the shock.
Andrea asks:
“Why is it when someone postulates a simple reason to explain a problem, a liberal has to come in with some ridiculously over-elaborate Rube-Goldberg-like set of machinations that he claims is ‘what really happened’? ”
I think Rand mentioned this phenomenon in an earlier post about another topic, and said that it’s a form of straw-man argument. The “liberals” want to do anything to divert you from paying attention to the real problem–the uber-problem– that is, the State grabbing and/or keeping more and more of your life
BTW, [GM is] hiring more workers too.
And we recall all your excitement that the economy turned around with the single largest month of hiring in a decade last May. Now those Census workers are being laid off, and everything we told you would happen is happening. As for your latest claim, I see that GM decided to keep a plant open rather than retool like they normally would (no job growth, and poor outlook on future). I saw earlier this year, they were hiring “temporary” (union for non-unioned employees) as union employees quit (zero growth). I also saw were GM claimed it would hire more workers as the Volt started production (talk of growth about as useful as their claim the Volt get 200 mpg). Perhaps you actually have something tangible to backup your claims?
The “propping up failed state governments” does have some merit. I would argue that Illinois (my state) got into the current mess by not raising taxes when it should have. But in the short term, not bailing out will simply increase the unemployment rolls.
No. Supporting irresponsible taxpayers like yourself, Gerrib, is not something other state taxpayers should do. Morons like you thought politicians like Obama, Blagojevich, Burris, and Ryan (I could go on) were good ideas. I see no reason others should support your habit of FAIL.
“I would argue that Illinois (my state) got into the current mess by not raising taxes . . . ” Raising taxes–the State-fellator’s cure for everything. Ok, maybe it doesn’t cure. But it feels sooooo good. . . .
Leland – I didn’t vote for Blagojevich (against him in both primaries and the 2005 general) or Ryan (voted for Dawn Clark Nesh, IIRC). Nobody voted for Burris, although we could have gotten a worse interim Senator. How I can be in irresponsible taxpayer and say “my taxes should be raised” is beyond comprehension.
Andrea / Bilwick1 – for every problem, there is a simple and elegant solution that happens to be wrong. In this case, all the “OMG iz too costly!” whining from Fleischer was true for decades prior to the current resession. Obama hasn’t raised anybody’s taxes, so all the costs listed are after the Bush tax cuts.
Nothing changed with taxes, so the lack of hiring can’t be a tax issue.
How I can be in irresponsible taxpayer and say “my taxes should be raised” is beyond comprehension.
Thank you for self-addressing your comprehension problems. Would you still be whining about your taxes needing to be raised if they were at 100%? 90%? Laffer’s truth that lower tax rates result in greater revenue drives you nuts doesn’t it? “It just doesn’t FEEL right, taxes need to be higher dammit!”
Obama hasn’t raised anybody’s taxes
By letting tax law revert to pre-Bush tax cuts, he has raised taxes. Further, you might not have noticed, but there’s a vast gap between what the US collects in tax revenue and what it spends. That will sooner or later be closed with a tax or with inflation which is effectively a tax on savers and lenders.
Curt asks: “Would you still be whining about your taxes needing to be raised if they were at 100%? 90%?”
Probably. A streak of self-loathing masochism runs strong in contemporary statist “liberalism” (e.g., the “West Side Liberal” syndrome). As Jim Treacher commented on Fareed Zakaria’s recent “Raise my taxes, Mr. President!” column, “I agree with him. Fareed Zakaria’s taxes should be raised, Mr. President. Then LEAVE THE REST OF US THE @#$% ALONE!” (Or words to that effect.) Unfortunately with the masochism comes a strong streak of sadism and power-lust that wants to force everyone to share the pain. It’s sometimes hard to tell with Gerrib’s sadomasochism whether the “S” streak is stronger than the “M.” Lately he seems to be going with the “M.”
Nobody voted for Burris
So he made State Comptroller and State Attorney General by appointment as well? Here I thought those were statewide elected positions. I guess if Illinois is that f’d up to appoint all there major political positions, then again I say we should not support their habit of FAIL.
Curt Thomson: Regarding the Laffer Curve – Obviously at tax rates approaching 100%, government revenue goes down. At rates approaching 0%, government revenue goes up. What we don’t know is the inflection point. At what point does raising taxes start to decrease government revenue? Since and including Reagan, cutting taxes reduced government revenue exactly as much as expected.
Karl Hallowell: I note that, prior to fighting two wars and cutting taxes, we were running a governmental surplus. It seems logical that raising taxes to that same 1990s level and cutting down to only one war ought to get us close to even.
Leland: Nobody voted for Burris for Senate. Since that was the first elected office he’d held since 1995, I assumed that was what you were talking about. (Heck, I live here and had to look that up!) I didn’t know you were such an expert on Illinois politics.
“What we don’t know is the inflection point.”
We also don’t know if there is just one inflection point. That is a gaping hole in the Laffer Curve story. The domain of the curve is 0 to 100%. The curve passes through zero at either end, but there is nothing else mathematically that prevents there from being 2N-1 inflections, where N is an integer from 1 to infinity.
I suspect there are at least three inflections at any given time, and that their position changes constantly.
The proof is left as an exercise to the reader, and should be intuitively obvious…
Karl Hallowell: I note that, prior to fighting two wars and cutting taxes, we were running a governmental surplus. It seems logical that raising taxes to that same 1990s level and cutting down to only one war ought to get us close to even.
There’s been considerable new spending in the meantime (such as ARRA, health care) and interest payments on the debt is higher. Plus we haven’t actually ended that second war. Finally, as is the subject of this thread, the economy isn’t recovering like it should due to government negligence and malice. So less revenue from the same tax rate.
MfK – we have absolutely no idea what the Laffer Curve looks like. There is no equation that describes it, and very little empirical data on it. It’s really only fit for SWAG-ing.
Even worse, I imagine the moderately competitive tax/government services market we have means that the Laffer curve can change depending on what competitors do.
But that doesn’t mean that we don’t know what the curve looks like. Remember the whole point of talking about the Laffer curve is that we do have an idea of what it looks like.
Chris Gerrib — There is no such thing as an actual Laffer Curve, and could not be one even in principle unless we live in a multiverse in which we could observe outcomes in any number of alternate universes. One would have to set the tax rates at a number of different values in a number of parallel universes having all other initial conditions identical, and then watch what happens.
The result would be a carpet plot in time, whose shape would vary until the transients died out — if they ever did. A steady state surface could then be sliced at constant time to yield a Laffer Curve.
It’s an analogy, and I was continuing the analogy to indicate that there might be more than one tax rate that would give maximum tax revenue at any given time. I doubt if they would continue to be the same points, but proving or disproving it requires us to go back to the multiverse.
Laffer was (perhaps unknowingly) using the geometry implicit in the Extreme Value Theorem to illustrate a point to Gerald Ford’s advisors, drawing a parabola on a napkin to get the point across. The point looks so mathematically sound that it can’t be denied! It’s unfortunate that people take it so literally, and I didn’t help by extending the illustration via the same analogy. I’m not the only one who does so.
Laffer Curve? Poor old Gerrib is still hunched over his copy ECONOMICS FOR DUMMIES, sratching his head and wondering what all this “supply and demand” stuff is all about.
We should not overlook the existential threat that statism represents over federalism (doesn’t it seem the meaning of those two words are backwards?)
By taxing some states to bail out others you create a systematic frailty where none should exist. So instead of a single state failing and recovering you risk the entire country failing (and perhaps no recovery as other countries move in to take advantage.)
Good article in the WSJ about why consumer spending is down. tl, dr: it’s generational; the Boomers are retiring.