Sunday, January 9, 2011

Why Republicans are Wrong About the Recession

Well, they're not wrong about the entire thing.

I just think that the evidence suggests that their approach to stimulus and job creation is a bad approach.

I touched on this recently in another article, where I make the argument that because businesses have become more efficient and productive, increasing their capital does not lead to hiring or increased employment.

An article in my newest BusinessWeek adds evidence for this conclusion.

According to this article (which has a totally different title in the print version, for some reason) small businesses, which in the past have driven recovery from recession by hiring, aren't. The reasons are the same as for large businesses: they have learned to do more with less, and tend to hire more part-time workers for greater flexibility. They've been doing fine (more or less), but improved revenues don't cause greater employment.

In fact, when the recession hit, small businesses turned to simple employment tricks to save money, and many of those are still paying off. An example, excerpted from the article:

"Josh Frey, chief executive officer of On Sale Promos in Washington, fired six of seven full-time salespeople in 2008. When he offered to keep the employees on as contractors, all accepted, he says. Since then, Frey has cut costs on benefits, payroll taxes, trash removal, electric bills, and an office lease for his business, which puts corporate logos on T-shirts, mugs, and pens."

And, as he puts it, he's never been more profitable. Of course, there are definitely legal issues associated with calling employees contractors if they're not. Recently federal and state Labor Departments have been stepping up enforcement and investigation into unpaid internships, many of which are illegal. You may save money in the short term, but if you don't know what you're doing you could get in trouble.

So this suggests, to me, that cutting taxes will not help us get out of the recession. Tax cuts to the wealthy don't get spent, and thus do little to stimulate the economy. And clearly tax cuts to businesses don't lead to hiring, because businesses have in general had a great year but aren't hiring, at least not enough.

Maybe in boom times, but not now!


  1. I'm no expert, but I've heard it said that even if rich-ppl-tax-cut money is saved in a bank account it stimulates the economy by enabling the bank to loan more money to the poor, who then spend it. Maybe not the most direct way to do things, but it's worth considering. Not that I think the tax cut extension was the right thing to do, because I don't, but still.....

  2. Hmmm. I'm not good enough at economics to find flaw in the argument, but I feel like its there. Not in your version, necessarily, but I did find an article from Fortune magazine that makes the argument. Like I said, I'm not buying it, but I'm not totally sure why.

  3. The flaw in ariel's argument is simply that banks don't (or shouldn't, maybe) loan money to poor people. That's part of the major recession problem in the first place, was that they were making all these loans to people who couldn't pay them back. So if you take a business view, you realize that banks won't be loaning the "rich people's interest" to poor people at all.