Friday, June 11, 2010

It's Aggregate Demand, Stupid.

A widely favored stimulative measure is targeted tax breaks for small businesses when they hire new employees. These proposals are generally pretty popular among politicians on both sides of the aisle, but they're actually a really stupid way to try to create jobs. If a company doesn't have the sales/business to hire, a small tax break probably won't be the impetus needed. Indeed, the National Federation of Independent Businesses surveyed their members, and the single most important problem was sales.

It's all about aggregate demand. Consumer confidence is only ticking up slowly, and there are currently tens of millions of people unemployed or underemployed, sapping demand. Unfortunately, most states are still cutting spending and laying off thousands of teachers, firemen, and police officers. In fact, since the recession started, we've had no net stimulus at all. State and local spending cuts have outstripped even the massive spending in the ARRA. It's a miracle we're in a recovery at all. But we're in for a long, hard, jobless recovery at this rate. Without customers, businesses can't hire, and without hiring, people don't have money to spend. That's why the government needs to step in with expansionary fiscal (and monetary, if necessary) policy. Unfortunately, right now the government is laying off more people than it's employing.

(HT: Yglesias)

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