September 19, 2018

The Jobs and GDP Growth Aren’t There Because Taxes Weren’t Really Cut

s and p one year triangleU.S. stock markets remain volatile and their direction uncertain, although the S&P 500 may have broken out of what technical traders would call a “bullish triangle,” which began forming after the market fell approximately 12 percent in early February from a high of 2,872 the previous month. However, traders will also tell you every technical pattern can tell at least two stories. One must look to the fundamentals for confirmation, and they have been anything but unanimous on the underlying economy.

Stagnant Growth

Corporate earnings have been strong, but that may not be a real indicator of economic growth as much of the earnings per share increases are due to stock buybacks rather than organically increasing profits. And jobs numbers continue to disappoint. Not only did April’s number come in lower than expectations, January’s number was adjusted down by a whopping 63,000 jobs.

Job growth for the first four months of 2018 is still ahead of 2017, but by a lot less than previously thought and we don’t know if March and April numbers will be adjusted downward. Consumer spending remains weak, and surging energy prices, especially gasoline, may continue to eat up what would otherwise be discretionary spending dollars for average households. While unemployment is at or near record lows, so is workforce participation, a statistic conservatives seem to have completely forgotten about since President Trump was inaugurated.

GDP growth slightly beat expectations at 2.3 percent but is far below the 5.4 percent predicted by the Atlanta Federal Reserve just two months ago. Despite missing the real number by a country mile, the same institution isnow predicting 4.0 percent growth for Q2. Why should anyone expect this “irrational exuberance” to be any more accurate than last quarter’s?

Tax Cuts?

The trump card (pun intended) is supposed to be tax cuts. Although they obviously haven’t delivered the jobs or growth promised to date, sooner or later the supposedly smaller slice the government is taking must result in more domestic investment, jobs, production, and growth.

The problem is taxes haven’t really been cut. They’ve simply been deferred. The federal government is going to spend more this year, and every year for the foreseeable future, than in any year in U.S. history. That spending is ultimately going to be paid with taxes, either now or in the future.

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Why the Bull Market May Be a Jedi Mind Trick

Publication1The Bureau of Labor Statistics reported Friday that over 300,000 jobs were created in February, making it the best single-month total since July 2016. And unless you’ve been exploring the Arctic Circle or were kicked off Twitter for expressing politically incorrect views, you know that’s just the latest “great” news about the booming economy, bull market in stocks, and, best of all, the significant new job creation since Donald Trump became president.

Certainly, there is no denying that the stock market has continued to rise, with the S&P 500 up over 27 percent since 11/7/2016, as of this writing. But as for the overall economy and, specifically, job creation, even the Trump-hating liberal media seems to have fallen for an economic Jedi mind trick. Regardless of single-month spikes like the one that occurred last month, it only takes one click of the mouse to see that job creation continued to fallin 2017, as it had the previous two years. Looking at yearly totals over the past ten years, job creation looks a lot more like a protracted version of the last business cycle leading up to the 2008 crash.

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Trump’s Job-Killing Carrier Deal

trump-carrierDonald Trump has not taken office and already he is delivering on his promise to keep manufacturing jobs in the United States. Yesterday, he visited Indiana to celebrate his part in persuading Carrier to keep 1,100 jobs slated to move to Mexico at its Indiana facility. Speculation of bullying, tax-funded quid pro quo (Carrier’s parent company, United Technologies, holds large defense contracts) and corporate welfare were plentiful.

Today, Zero Hedge reports Carrier was persuaded by none of the above. Instead, the company received “$700,000 a year for a period of years in state tax incentives.” That means keeping the jobs cost the government about $636 per job annually in tax revenues.

It would seem a win-win. 1,100 Americans keep their jobs, Carrier gets lower taxes to avoid having to pass on the cost difference to its customers and all the local businesses in Indiana benefit from the purchasing power that remains there with the domestic Carrier employees instead of being exported to Mexico.

That, as 19th century political economist Frederic Bastiat would say, “is what is seen.” What is not seen is all the consequences of Carrier not moving those jobs to Mexico, where they could produce their products at a lower cost. When those consequences are considered and the ledger is balanced, the deal will have made the United States as a whole poorer and will have cost it jobs.

Let’s first consider the decision in a vacuum, without the tax incentive. Carrier was moving the jobs to Mexico because it could produce the same air conditioner there at a lower cost, which it could then pass on to its customers. Keeping the jobs in Indiana raises the cost of production above what it would be with the move. That forces Carrier to raise its prices.

And we must assume Carrier would have saved more than $636 per worker per year in tax breaks had they moved those jobs to Mexico, or the move wouldn’t have made financial sense. With each worker on average producing many air conditioners per year, saving $636 per worker works out to a negligible cost savings per unit. So, Carrier is likely absorbing some of the higher costs of keeping the jobs in Indiana, over and above what they are receiving from the government. Those costs must be passed on to customers or taken out of profits, the latter resulting in either lower dividends or less money reinvested in future improvements to production.

“Ah,” says the supporter of this move, “but many people are willing to pay a little more to keep those jobs in America!” Perhaps, but the economic consequences remain. Assuming the price of an air conditioner would be $5,000.00 if produced in Mexico and keeping the jobs in America only raises prices by the $500, Americans are now paying $5,500.00 for an air conditioner instead of $5000.00. They get no more for their money than they would have paying $5,000.00. All they have in exchange for the $5,500.00 is the same air conditioner.

Had the job moved to Mexico and that same air conditioner been available for $5,000.00, the customer would have been able to afford an air conditioner and a bicycle, or an air conditioner and a new carpet, or an air conditioner and a new suit, for the same $5,500.00 he now spends to get the air conditioner only. The consumer is poorer because of the deal. His standard of living is lower. And let’s not forget that for every one employee producing air conditioners, there are hundreds or thousands of people consuming what those employees produce.

At the end of the day, the ledger balances to this: the same number of air conditioners are being produced, but at a higher cost. That difference in the cost of production is lost. The standard of living of everyone who consumes air conditioners is lowered by however much more it costs to produce air conditioners in Indiana instead of Mexico. We assume it is $500, but the exact figure is not important. They are poorer by whatever amount the diminished efficiency increases production costs.

“But kind sir!” says the apologist, “you have missed something. You have forgotten the purchasing power of those 1,100 employees, which will help local businesses and keep that wealth in America. That creates jobs that otherwise would have been lost!”

No, it is not forgotten. It is merely balanced against purchasing power lost by all those consumers of air conditioners and against all the jobs they would have created with the $500.00 they would have spent with local businesses, had they saved it in purchasing the air conditioner. The air conditioner customer who also bought a bicycle, a new carpet or a new suit also created jobs or supported existing jobs, which are now lost. And not one in a million knows where they went. The unseen killer of those jobs is the decision to make the same air conditioner at a higher cost in Indiana than at a lower cost in Mexico.

It doesn’t end there. Let us not forget the 1,100 jobs lost in Mexico, the third largest importer of U.S. exports. Because of the lost purchasing power of Mexican consumers, U.S. companies who export to Mexico lose revenue and must lay off workers.

When the whole ledger is balanced, the jobs lost in the U.S. at least equals those 1,100 retained and likely far exceeds them, as inefficiency grows exponentially as its effects ripple throughout the economy.

Finally, the apologist for the deal makes his last stand. “Yes, good sir, you make many fine points. But this deal involved lowering taxes for Carrier, which bestows upon them the same savings they would have realized by moving the jobs to Mexico. And even you must agree that lowering taxes and paying productive workers is better than allowing the government to use it less efficiently!”

Well, there is the rub. The government is doing with those lost taxes precisely what the apologist said. It is using them less efficiently than the market would have. The market would have moved those jobs to Mexico and lowered the cost of air conditioners. The government has used its taxing power to keep the jobs in Indiana and raise the cost of air conditioners above what it would otherwise be if the jobs moved to Mexico, with or without the tax incentive.

But even on the tax incentive there is more that is not seen. It is not as if the $700,000.00 in tax revenues were left in the hands of the taxpayers, who might use it productively. 100% of it went to subsidize the higher cost of producing an air conditioner in Indiana instead of Mexico. And the government went on spending the same amount as before, simply collecting the $700,000.00 Carrier doesn’t pay from others, now or in the future.

So, while the cost of the tax break is not added to the sticker cost of the air conditioner, the public is still paying that additional $636 per worker per year in the additional taxes collected to make up the government’s loss on Carrier. The public is also poorer by whatever price increase or profit reduction is necessary to offset the additional costs the company agreed to absorb to make the deal work.

No matter what defense the apologist offers, there is no escaping this. By keeping those jobs in Indiana instead of letting them move where the market is directing them, the net effect is the United States as a whole is at least $636 poorer per year for every employee kept in Indiana by the deal. It also loses jobs due to the higher prices it still pays for air conditioners, over and above what the tax break could alleviate, or the wealth lost in dividends or reinvestment Carrier sacrificed to absorb whatever additional cost savings it had to forego to keep the jobs in Indiana.  And this is one little company and just 1,100 jobs. Imagine if Trump delivers on his promise to keep or bring back millions?

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

The Government Can’t Create Jobs (And It Shouldn’t Try To)

As the November elections approach, politicians are doing what politicians do best: making promises. President Obama’s anti-business image, justified or not, will not score points with voters this year as unemployment continues to court 10% on the government’s math and 20% in the real world. With these figures virtually unchanged since he took office, the president has been unable to sell the idea that his economic policies have created any jobs. So, he is doing the best he can with the hand that he has dealt himself and trumpeting the millions of jobs his policies have “created or saved.” In addition, he has rolled out yet another boondoggle from the Keynsian toolbox in the form of a $50 billion infrastructure package designed to stimulate the economy and finally create some actual jobs.

Meanwhile, the Republicans are gearing up for what should amount to shooting fish in a barrel in the coming mid-term elections, getting incredible traction on criticizing Obama policies which largely mirror those of George W. Bush, for which he and the Republicans were tossed out of office just two years ago. They correctly point out that Obama’s policies haven’t created a single job. Americans must put them back into office or face economic Armageddon. Polls show that Americans are largely buying what the Republicans are selling, having apparently forgotten the “jobless recovery” of the early part of the last decade, which occurred while the Republicans controlled the White House and both houses of Congress.

The truth is that neither the Republicans’ “supply-side economics” nor the Democrats “demand-side economics” have ever really created any jobs. Certainly, the housing boom successfully put some people to work in the homebuilding industry for a few years. However, when that bubble popped there was nowhere for those people to go. The Democrats’ success seems to have been limited to the 600,000 or so people that took jobs with the census bureau. Unfortunately, the demand for people counting won’t sustain a census-driven recovery. Obama’s latest act of political desperation isn’t getting much traction with anyone – even liberal talking heads are finding it hard to get behind another supposed “infrastructure” program, especially one that pales in comparison (in terms of dollars) to the American Recovery and Reinvestment Act, which was long on investment and short on recovery.

So, if neither supply-side nor demand-side economics work, if neither the Republicans nor the Democrats have a program that will actually create jobs that will outlast the average car loan, where else can we look for an answer?

Perhaps we should reconsider exactly what it is that we are asking the government to do. People of all political persuasions talk about “creating jobs” as if there were no question that the government should be trying to create them, the only question being what program will create the most jobs, the highest paying jobs, or the longest lasting jobs. This is just another in an endless series of false dichotomies that accompany every election year, when voters are served up a “debate” that is framed to include two undesirable alternatives, with no acknowledgment that there may be a third. On job creation, that third alternative is this: the government can’t create jobs, regardless of whether conservatives or liberals are at the controls, and moreoever, it shouldn’t try to create jobs.

Amidst the noise surrounding an election year, it is easy to forget the obvious. Before deciding what to do about unemployment, let’s answer a few fundamental questions. The first one is, “What is a job?”

A job is an agreement between a buyer and a seller that involves an exchange of private property. The buyer is the employer, the seller, the employee. The two parties reach an agreement wherein the buyer will purchase a specific service from the seller at a mutually agreed upon price. This simple fact does not change whether the employee is selling his services as a brain surgeon or a custodian. In each case, the buyer has a need for the seller’s services and the seller is willing to sell those services to the buyer if the buyer is offering the market price or better. The most important aspect of this transaction is that it occurs with the mutual, voluntary consent of both buyer and seller. This is the only way in which a job can be created.

When people are perfectly free to dispose of their labor as they see fit, including their unconsumed labor in the past (their savings or capital), there is a natural coordination in the labor and capital markets that results in people and resources being used most efficiently to meet the demand of consumers. People are not employed to produce products that consumers don’t want or can’t afford because employers are risking their own money and livelihoods and therefore must invest their capital (savings) in projects that will be profitable. Neither do most employers prefer to invest in temporary projects that will end in six months or a few years, because they would then have to take the risk of starting a whole new business. Neither employers nor employees are ever 100% correct, but for the most part they make the right choices because they stand to gain or lose personally based upon those choices. These natural market forces regulate the market, based entirely upon the voluntary choices of employers, employees, and the consumers who buy their products.

However, when the government attempts to create a job, all of these natural forces are removed. The market has produced no demand for the government-created job. In other words, no buyer has voluntarily agreed to purchase those services, because to do so under current market conditions would be unprofitable. Were it profitable to hire someone to do the government-created job, an employer would have done so voluntarily. So, the government steps in and forces the taxpayer to purchase those services against his will. In additional to violating the taxpayer’s rights, the entire coordination that existed between employer, employee, and consumer is disrupted.

A typical response to this argument from the left would probably revolve around how the profit motive and the greed of employers is what kept the person unemployed. However, this argument begs the question: Why were these greedy employers unable to make a profit from employing this person?

The answer is that the services of the employee were not demanded by employers because the products that would be produced as a result were not demanded by consumers. If consumers were willing and able to buy the products that the employer and employee would have produced together related to this job, then there would be no need for the government to create it. By overriding the choices of consumers and forcing them to purchase those services for the employer, the government not only engages in a theft, but causes vast resources to be devoted to producing products that no one will eventually buy. Thus, when the government “investment” in the job is spent, the job no longer exists. It generates no revenue on its own to allow it continue to exist.

To use one of the favorite buzz words of the progressive left, government-created jobs are unsustainable. They are all doomed to fail by their very nature because they attempt to set aside economic laws that cannot be set aside. Commerce cannot exist without voluntary choice. Government job programs attempt to override the choices of capitalists on what to invest in and the choices of consumers on what to consume. This is what produces millions of empty homes, food shortages born of miracle energy programs, and mass amounts of people unemployed. Worst of all, these programs destroy the capital that otherwise would have created real jobs that were demanded by the market. This is not because private investors are more noble creatures than government bureaucrats, but because their own livelihoods depend upon investing that capital wisely and profitably.

While it is easy to see how this argument applies to the government spending programs that are presently more associated with the Democrats, one should not forget that the Republicans’ ideas are no less wealth redistribution and no less destructive to the economy. Most arguments made by the Republicans involve targeted tax cuts that will either stimulate specific areas of the economy or merely leave more money in the hands of private investors in general. While this sounds like the exact opposite of what the Democrats are proposing, it is really just the same strategy dressed up in “free market clothes.”

In the present paradigm, where the supposedly free market is already distorted by a thousand government interventions and taxes are sky-high for everyone, decreasing taxes for a particular class of people is merely a back-door way to try to override the free choices of investors and consumers. If the cuts are targeted at specific industries, such as the oil industry, then more oil will be produced regardless of the true demand for oil by consumers. If the cuts are general in nature, then whatever that capital is invested in will be investment not by private decision but by government central planning.

One might ask, “How can this be?” Aren’t the investors spending their own money? Not really. The Republican plan never involves a reduction in spending to go along with reductions in taxes for the investor class. In fact, every Republican administration in the past forty years has increased government spending while cutting taxes, leading to large deficits that are funded by debt or inflation. This merely transfers the tax burden of that government spending to other taxpayers.  In other words, the jobs “created” through supply-side economics are really funded by taxpayers – by present taxpayers through the loss of their purchasing power due to inflation or future taxpayers through government debt. This explains why the artificial booms accompanying Republican administrations never last either.

The only real answer to the economic malaise is to stop asking the government to create jobs in the first place. Real jobs can only be created by individuals agreeing to exchange their labor and capital by mutual, voluntary consent. The use of force cannot create a job any more than it can create freedom, either here or anywhere else in the world. Furthermore, it represents violation of the very rights that government exists to protect. Instead of voting for candidates that claim that they can create jobs, Americans should demand that government get completely out of the job-creating business in particular and central planning of the economy in general. Only a massive decrease in government spending, leaving capital in the hands of the people who earned it and allowing employers, employees, and consumers to make their own choices can stimulate true job creation. Anything else is just another government program that is destined to fail.

Check out Tom Mullen’s new book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Right Here!

Home

© Thomas Mullen 2010