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Welfare for Millionaires

2014-11-11

The idea behind cutting corporate taxes during a recession is that the extra money would be reinvested, driving growth and thus hiring more people. That generates economic activity, creating jobs and breaking the recession. If the same business opportunities that exist normally still existed during a recession, this could work, but only if you also assume businesses are more interested in the public good than their own.

What’s missing during a recession is a basic driver of economic activity: demand. Demand drives profit, and that drives growth which means more people will be hired. A tax break increases profit, which ought to create jobs according the the previous logic. But not all profit is the same, even though “marginal differences” would count a tax break the same way it would count a sales revenue increase.

A tax break isn’t new sales activity. It gives you no new information about the market, about the demand for your product/service. None of that has changed, so none of your plans will change. During normal conditions, and assuming the company could grow, perhaps that cash would be put towards hiring people or raising wages, if the company was under financed for the projects it had in mind.  But under a recession, taking risks like that would obviously ruin your business. That you have things to sell doesn’t magically fix the problem that people can’t afford to buy those things, which is the problem in a recession. Further, that your business has taken the risk to produce without a market does not mean every other business will do the same.

A single company’s action can’t correct a recession. If your company takes the above risk, then only your employees would have the wages to buy things. Nobody else would benefit from you raising wages; nobody else works for you. To lift the recession nationwide, all businesses would have to agree to illogically hire people, to illogically produce, despite a shrinking market. That only makes sense purely out of altruistic interest in the public good rather than the normal self interested profit. Obviously, there is a huge risk here. If some businesses commit but not enough do, then those ones who did will go out of business faster while the others stay afloat longer—probably long enough to wait out the recession. If a lot commit but not all, then everyone, even those who didn’t help, will benefit from those who took the risk. For each individual business, it’s always better to not take action than to risk total ruination, even though it’s collectively better for them all to take action.

It’s simple game theory: businesses will protect themselves and not commit, knowing they can stay afloat longer and come out better off if they do nothing than if they take that risk. It’s an all or nothing risk hinging on the actions of people you can’t trust, people who know that the better plan is to let you take the risky public support action alone. A business is successful because it avoids stupid risks like that. Time and time again, businesses collectively repudiate the public good in favor of self interest. Because companies do that, wages are kept down, people are laid off, and people can’t buy things, which means jobs won’t be created, people won’t be hired, and even more people will lose wages and jobs. Self interest requires businesses to do the opposite of what’s required to fix a recession.

But then where does the money go, if not to wages? Usually, it goes to the owners and stakeholders. They’re in business for the profit, and they don’t want to take a pay cut—nobody’s running a charity. Had they been running a charity, they’d have done the obvious and taken the altruistic risk to raise wages, to keep producing, to keep hiring. They don’t and won’t. They were not created in the interest of the public welfare. But if rich people are getting richer, wouldn’t that increase demand? No. Rich people already have an abundance of money sitting around. Adding to that pile doesn’t change their spending habits enough such that they can replace an entire nation’s economy. Even if they did become the sole driving force, that doesn’t mean the recession is gone. It’s just been swept under the carpet into far away slums, where all the “working class” live, as opposed to the rich class who live like kings next to their modern slaves. You didn’t lift a recession. It’s just been relabeled as the status quo extreme wealth inequality.

Businesses create demand all the time, though—that’s what marketing is. The extra profit created by cutting taxes could be used to create demand if its lack was a normal marketing problem. Normally, though, it’s assumed that people have the ability to purchase things: demand can be met. You then influence their choice about that demand. A recession is an inability to act on needs, on demand, much less what choice they’d make with said need. Marketing changes choices, but it can’t restore an inability to act in the first place.

People need to be able to act on their demand, and that needs to be accomplished in a way that will result in the money being spent instead of sitting in an ever-growing pile. The people who are currently unable to meet their needs would spend any extra income they receive. That would revive demand, which fuels profit, growth, and adds jobs—the logic from the beginning. It’s in the public good that they would spend their money, but that seemingly altruistic act is in their own interest because they’ll be meeting their own needs. Even if these people save some of the increased income, collectively they make up most of the economy and so will still have a huge impact. There’s no risk here as there is with cutting taxes to businesses. This is the premise of a social safety net.

The only objection would be if you believed that the average worker deserved to suffer, purely because they weren’t “smart enough” to save for a recession. Again, the only people who don’t notice a recession are the very rich, but not everyone can be very rich—there’d be no employees, and thus no businesses to make you rich, if everyone refused to be an average worker. Even in Star Trek there’s janitors and service people. The modern society we live in requires that most people are average, and thus that they are unable to ride out a recession. Even if they could make it through a recession, that would ruin their savings and retirement—the next time the car breaks down, the next time there’s a recession, they won’t make it. Nobody deserves to suffer purely for being part of one class of society instead of another. Not to mention that the entire country benefits from a safety net arrangement: far more people are able to contribute, which means far more advances are made, and the country becomes better as a result. Slum lords might have fancy lives either way, but that arrangement didn’t give us smart phones and it didn’t give us medical science. Treating people badly means those people aren’t working on advancing knowledge, which means the country stagnates or regresses while everyone else advances.

You’d have to believe that people would immediately turn nasty and selfish, would altogether quit searching for a job once they began receiving welfare, to oppose it. The catch there is that this is exactly what we expect of businesses, and this is exactly how they have always behaved. Yet we still, for some baffling reason, want to trust them over the people whose actual desires line up with social goals. How’s that for a brain teaser?

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