Our friend John Harvey wrote a great new piece on why businesses hire. Really, he didn’t write it, it’s a letter from a businessman friend of his, who wrote a letter to his congressperson, and John reprinted the letter in his column over at Forbes.
Check out these key lines:
“As an owner of two small businesses, I can tell you that no amount of tax decreases or deregulation is going to convince me to hire more people. Businesses only hire when they have to. That is, when demand for a product is greater than what we can produce at current staffing level”
Hey! This seems like common sense, but some people do not understand it. For example, here is someone who does not understand businesses hire when they are swamped with demand. Meet Tyler Cowen:
“The simple Keynesian explanation for the initial unemployment is that aggregate demand — the country’s combined spending and investment — has been too low. But it’s unlikely that spending is the only problem, as unemployment is too high and too persistent relative to similar episodes of disinflation in recent history. If weak demand was the main problem, profits should be collapsing too, but they are not. Investment and corporate profits have been fine for some time now, and they are broadly within the range of pre-recession estimates.” [Bold Mine]
There are so many errors in this paragraph. Tyler does not understand there is little or no relationship between overall demand and corporate profits. Rather, corporate profits not closely related to employment levels or hiring rates. (Update: the relationship between corporate profits and government spending is part of another post.
are highly dependent upon the level of government deficit spending.)
I demonstrate this here:
It’s a bit hard to believe someone like Tyler Cowen could be completely ignorant of a such a strong non-relationship between two things he is talking about in this article in Foreign Policy magazine! It’s as though he never even bothered to look at the historical record.
There are easy ways to explain it to people, in ways that match the historical record. Here is Paul Davidson talking about a restaurant he visited:
“Recently I went to a well-known restaurant in Evanston, Illinois. This restaurant has a reputation for providing excellent food and service. But the night I was there, it was less than half full. I asked the manager if he would he hire more waiters and chefs if his taxes were reduced and/or government removed the existing regulations controlling the way his restaurant could operate. His answer was that even if his taxes were reduced and regulations eliminated, he would only hire more staff if more customers came in for dinner. On the other hand, if there were twice as many customers for dinners than there were on this night (and there were many more customers before the recession began in 2007) he would gladly double the number of workers he employed even if his taxes were not reduced or regulations changed.”