Saturday, August 25, 2012

Another Romney Secret?

Mitt Romney probably does know a lot about how things work in the private sector. But is he telling us what he knows?

The reason I ask is that his plan for getting people back to work makes no sense. Just a gentle prod makes it completely fall apart. I would guess that he's aware of that.

Romney adheres to the current Party line that reducing taxes on the rich, or "job creators," will lead to a surge in hiring. Let's suppose for the moment that all the rich are actually entrepreneurs, as opposed to people like him who are just living off their investments.

The problem is that employee pay is what is known, in economics and accounting, as a cost. Other things equal, entrepreneurs want costs to be as low as possible.

Therefore, businessmen will produce as much as they can with their existing workforce. Only when they are unable to meet demand will they go out and hire more people.

If you hand a businessman some money, say from a tax cut, he will say (maybe), "Thanks very much." But he will have no more reason to go out and hire people than he did before. Why should he? That would just reduce his profit.

Hiring someone will increase his profit if it enables him to bring in more revenue, that is, if he's unable to keep up with demand using his existing workforce. That suggests that the way to increase hiring is not to hand out more money in tax cuts, but to increase demand... for example, through more government spending.

Two caveats. First, if businesses can't expand because they can't get loans, then giving them cash might help. But it turns out that companies in the US are sitting on huge amounts of cash, so it looks like that's not what's keeping them from hiring.

Second, increasing the rewards to entrepreneurs should, over the long term, lead to some increase in the amount of entrepreneurship. But (1) it may not be a large increase, (2) tax cuts for the rich may not be an efficient way get that result, (3) it's not much help in the near term.

Is there something I'm missing, Governor?

(And speaking of entrepreneurship, here's an idea to encourage it: Let's set up a system whereby people can leave their current jobs and continue to get affordable health insurance. We could call it the Affordable Care Act.)

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