Businesses Hire when they are Swamped with Demand, Part XXIV

Harry Blodget trumpets Corporate profits just hit an all time high, while wages are at an all time low:

I keep pointing out Businesses Hire When They are Swamped with Demand. We do not have a booming economy today, because we don’t have enough people purchasing goods. We have people just sitting on their ass, instead of working, because they cannot get jobs. The unemployment rate is 7.9%.

Of course, they could all start their own businesses. Of course, starting a business is a terrible idea in a slack economy.

So what is the solution? Certainly, one idea is to stimulate demand by simply giving working people money. Just cut payroll taxes for both employees and businesses, and more people will have money to spend, which stimulates demand. This would make it more attractive to go back to work because wages would be higher, and businesses would pay more to employees AND make more money themselves.

When business people talk about taxes, it sure seems like the single largest business tax they must face is payroll taxes. And it is.

It turns out the business portion of social security taxes completely dwarfs normal corporate taxes. Social Security taxes are 50% larger in raw numbers than standard corporate taxes. The easiest way to give companies more money would be to lower their portion of payroll taxes.

 

 

Comments

  1. While worker income has been stagnant over the past several decades, worker compensation has been constant. This means that more compensation is going to benefits rather than income. Relieving businesses of those benefit obligations that are more properly served by government, like pensions and health care, would quickly solve a great deal of the income gap if worker compensation remained constant.

    But the country and world still need to address the rise in unemployment due to productivity increases. Even China is transitioning to robotics not only due to worker compensation increases but also to meet the quality standard required the country to remain competitive. Governments are inevitably going to have to pick up some of the slack over the coming decades, now that push toward robotics is picking up steam.

  2. David Beckworth says:

    Michael, along these lines I couldn’t let Casey Mulligan’s latest NY Times piece pass without commenting. http://macromarketmusings.blogspot.com/2012/11/a-great-vacation-or-great-recession.html

  3. A little off topic but …

    I’d like to know what everyone (including JKH) thinks of this:

    http://www.ritholtz.com/blog/2012/11/hoenig-a-better-alternative-to-basel-capital-rules/

    • Agree generally, although you can’t get away from some sort of risk weighting.

      This is a good start from first principles:

      “Capital is the foundation on which a bank’s balance sheet is built. There can be no fortress balance sheet without fortress capital. In a market economy, capital insulates a firm from unexpected shifts in risk and from losses on loans and investments gone bad. A reliable capital measure facilitates the public’s and the market’s understanding and judgment of the financial condition of a firm and industry. And finally, while essential to the health of a firm, capital has its limits. Even high levels of capital cannot save a firm from bad management or save an industry from the cumulative effects of excessive risk taking.

      In judging the role of capital, it is useful to look back at bank capital levels in the U.S before the presence of our modern safety net. Prior to the founding of the Federal Reserve System in 1913 and the Federal Deposit Insurance Corporation in 1933, bank equity levels were primarily market driven. In this period the U.S. banking industry’s ratio of tangible equity to assets ranged between 13 and 16 percent, regardless of bank size. Without any internationally dictated standard or any arcane weighting process, markets and the public required what would seem today to be excessively high capital levels.”

      People make the mistake of assuming that the market won’t finance bank equities, if required capital ratios are higher and leverage lower.

      But it will – because risk will be lower and therefore so will required risk-adjusted returns. There will still be a place in risk managed investment portfolios for banks stocks.

      • “Liquidity is the ability to convert assets to cash without loss. ”

        I don’t believe Hoenig is right about that.

        Plus, is there any way to know what the effective reserve requirement and effective capital requirement were in 2006?

  4. “In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of “Kaldor’s stylized facts,” articulated half a century ago by the Cambridge economist [and Ramanan hero-father] Nicholas Kaldor.
    Recent experience betrays this lesson. Over the past two decades — and especially since about 2000 — the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries… The difference from 1990 to today — about 5 percentage points or so of private-sector income — amounts to more than $500 billion a year. In other words, if labor’s share hadn’t fallen, labor income would be $500 billion higher this year. ”
    http://www.bloomberg.com/news/2011-10-19/kaldor-s-facts-fall-occupy-wall-street-rises-commentary-by-peter-orszag.html

    • ” …We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.”

      • Put some more people into retirement and fund it correctly. That will tighten up the labor market.

        • Yes!

          All the talk now is about raising retirement age. Keeping the geezers in the job markets longer……… crazy.

          How is it that almost every neoliberal prescription is just backwards? One would almost have to be intentionally a contrarian to be this consistently off target.

          • Greg, because they believe the most common definition of economics is true, UNLIMITED wants/needs and limited resources. I don’t. That leads them to believe that all instances of price deflation and/or negative real GDP is an aggregate demand shock. Aggregate demand shocks are “fixed” with more debt. I don’t.

            Then there are some rich people who use that definition as an excuse for why they need to be even richer. Their “rich” savings leads to more investment leads to more real AS, and therefore more real GDP (ignoring the real AD side).

            • Thanks Fed

              Ive never seen it spelled out exactly that way but that does appear to be so.

              I dont totally disagree that instances of price deflation or negative GDP are aggregate demand shocks for the most part but they seem to focus on supply side problems to fix them.

              Seems this come from a confusion of where credit arises and why. I think you are correct that they view their savings as THE source of credit.

              Just like the quote that anyone can create money its getting it accepted thats the key, anyone can create credit its getting it paid back that is the key.

              • “I dont totally disagree that instances of price deflation or negative GDP are aggregate demand shocks for the most part but they seem to focus on supply side problems to fix them.”

                The “they” believe real AD is unlimited. That is why they focus on the supply side. And, one of “their” solutions is to lower real wages. They can’t understand that lowering real wages when real wages were too low to begin with won’t solve the problem.

                • Oilfield Trash says:

                  Fed Up

                  Would you not agree that individual agents in an economy have unlimited demand for purchasing power?

                  • I’m going to think about that one. By “purchasing power”, do you mean medium of exchange?

                    • Oilfield Trash says:

                      The amount of goods or services that can be purchased with a unit of currency. Currency can be either a commodity money, like gold or silver, or fiat currency, or free-floating market-valued currency like US dollars.
                      For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s.

                    • Oilfield Trash said: “The amount of goods or services that can be purchased with a unit of currency.”

                      How about the amount of goods or services that can be purchased with a unit of medium of exchange (currency plus demand deposits)?

    • “Labor share normally bounces around over the business cycle, but given how long the decline has lasted, it can’t be dismissed as cyclical.”

      Go tell that to nick rowe. I doubt if he will believe it.

    • “In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of “Kaldor’s stylized facts,” articulated half a century ago by the Cambridge economist [and Ramanan hero-father] Nicholas Kaldor.
      Recent experience betrays this lesson …”

      Another economic assumption bites the dust. Goodbye and good riddance! Now if only the economic assumption that real aggregate demand is unlimited (unlimited wants/needs and limited resources) could bite the dust!

  5. I think Robert Reich has the right idea, supersize the EITC.

    “He has some prescriptions, and the first was fascinating: a reverse income tax. He tries to sandwich a pretty radical economic proposal by first citing the conservative, Chicago economist Milton Friedman as a father of the concept and the usually popular Earned Income Tax Credit (EITC) as the best working model now in operation. Here’s how it would work:
    Full-time workers earning $20,000 or less would receive a wage supplement of $15,000 (i.e. income = $35,000).
    Supplement would decline on income changes
    o +$10,000 for $30,000 earners = $40,000
    o +$ 5,000 for $40,000 earners = $45,000
    o + $0 for $50,000 earners capping off the reverse income supplements
    Tax rates would also support this pushup from the bottom
    o 10% for incomes from $50-$90,000
    o 20% for incomes from $90-$160,000″
    http://chieforganizer.org/2011/01/03/reich%E2%80%99s-reverse-income-tax/