Arnold Kling  

Consumers or Businesses?

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Hall and Woodward write,


One problem with the employment stimulus is that the funds go in the first instance to the owners of businesses and not to consumers generally.

This criticism applies to my preferred stimulus, which is to take Bryan Caplan's suggestion and cut the employer contribution to the payroll tax.

I strongly disagree with Hall and Woodward. Owners of businesses, including owners of small business and shareholders in large corporations, have taken huge losses compared with the average worker. Through the third quarter of 2008, wage and salary disbursements were still up. Profits were down. When the fourth quarter data become available in about 4 weeks, my guess is that it will show that relative to the fourth quarter of wages and salaries will be about flat and profits will be down by 20 percent are more.

Profits are the most cyclically sensitive component of income. If you want to redistribute income from profits at the peak of a boom, that's one thing. But if you're still against profits in the midst of a recession, then you're against capitalism.


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COMMENTS (8 to date)
Bill Woolsey writes:

I think Kling's remark here is unfair and unreasonble. To me, it is very strained to see opposition to cutting taxes on profit during a period when profits are low (so that after tax profits will fall less) to involve some kind of prejudice agaisnt profits in general.

In a no tax world, profits would fall during
downturns. Would it be anti-profit to advocate using taxes to provide subsidies to residual claimaints?

Investment has dropped off tremendously during the last year. Why? Is it because firms cannot obtain financing? Or is it because they don't see profit opportunities in the short run?

Likely, it is a mixture of both. Perhaps 9 months ago, a reduction in the employers portion of payroll taxes would have expanded investment of some sorts. Last fall when "credit" was supposedly frozen, and Baa bonds shot up, this
would have been appropropriate.

Currently, the more relevant consideration is that losses will be reduced, cash flow improved, and emergency cut backs reduced. Presumably, firms will cut prices more, and cut production and employment less, when faced with the drop of in demand. This would be good.

The profit to finance investment should help with the upturn. And, in the long run, the extra profits get competed away in higher wages--after we are back to something approaching full employment.

While I have little faith in forcasting, many are
suggesting a slow recovery (like in 2001-2002. This should help speed it up.

Of course, raising other taxes to finance social secuirity will have an adverse impact in the long run and maybe in the short run. And anticipation of cuts in SS benefits in the future might have adverse effects in the short run. I don't worry much about this, because I don't believe in ricardian equivalence.

But lower SS benefits should cause more saving, and as long as everyone is trying to save by holding very low risk short term assets, it exacerbates current problems.

It seems to me that the benefits I can see would work with a temporary cut in employers contributions.

Perhaps a temporary investment tax credit against employer payroll tax?

Les writes:

Most often I learn from, and agree with Arnold. But when he says:

"If you want to redistribute income from profits at the peak of a boom, that's one thing. But if you're still against profits in the midst of a recession, then you're against capitalism"

then I am forced to disagree, and say:

"If you want to redistribute income from profits at the peak of a boom, or in the midst of a recession, then, in either case, you're against capitalism."

scineram writes:

What Les said.

Snark writes:

@ Bill Woolsey:

"But lower SS benefits should cause more saving, and as long as everyone is trying to save by holding very low risk short term assets, it exacerbates current problems."

Perhaps I'm confused. Isn't this an affirmation of the Paradox of Thrift?

R. Richard Schweitzer writes:

Missing from this chatter: What are "profits?"

If we were to take the description (definition?) set out in a Peter Drucker essay of years back, profits will fall in the category of "the cost of capital." Thus, profits are costs, which if not covered, will end the enterprise.

So, some attention should be given to the cost of capital aspects. How is the cost of capital being impacted; and by what actions?

dWj writes:

Stimulating C and G counts, but stimulating I is "a problem". When the personal savings rate tags zero, it's awful that people aren't saving enough, but when people start to save, it's imperative that we thwart responsibility.

What we need -- what we have needed for a long time -- is a bit less C and a bit more I. It's harder to get savings to translate into investment when the financial system is in shambles, but at least this is what the fed seems to be trying to do. The administration -- the last one too, but this one more so -- seems intent on preventing any benign adjustment.

And a strong "yes" to Caplan.

Lord writes:

No, when people save they need someone else to give them the saving vehicle and that is what government spending does. There is nothing wrong with people saving more, but they will need more income to allow them to do so, for if they curtail spending they will cut someone else's income.

Jacob Oost writes:

Then it looks like our new President is against capitalism, if he really did say what he said about financial companies and how now is not the time to be making a profit.

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