This is the second letter in a series of letters to the editors of our local weekly newspapers on the economic issues involved in this year’s presidential election.
II. Job Creation - Macroeconomic Policy
The principal way the federal government promotes economic growth and jobs creation is through fiscal and monetary policy. Economic growth and jobs creation can be promoted through fiscal policy by (1) providing funds to the states for infrastructure, education, health and public safety projects, (2) funding such projects directly, (3) increasing the number of contractors providing goods and services to the federal government and (4) expanding federal activities thus increasing the number of federal workers required to carry out these expanded activities and (5) cutting taxes. As long as the Tea Party controls a Republican majority in the House of Representatives, promotion of economic growth and employment creation through stimulus spending is very unlikely. I will discuss the economic issues surrounding the Tea Party in my next letter to the editor.
The republicans in Congress argue that the Bush tax cuts should be extended for both the middle class and the rich in order to promote job creation by small- and medium-scale businesses. The democrats argue that the Bush tax cuts should be ended for the rich. It turns out that only 13% of millionaires in the U.S. achieved their status through participation as proprietors or owners of small- and medium-scale businesses.
A large proportion of American millionaires achieved their status through income from rents and royalties that do little or nothing to stimulate economic growth or job creation. This information provides an excellent compromise for handling the Bush tax cuts.
The middle class and proprietors or owners of small- and medium-scale businesses would continue to benefit from the Bush tax cuts, but the other rich taxpayers would lose these tax cuts.
How do you determine who is an owner or proprietor of a small- or medium-scale business? If a person’s income tax return includes a Schedule C (Profit or Loss from Business), Schedule F (Profit or Loss from Farming or Fishing), or the taxpayer can prove that they own more than 5% of the beneficial interest in a partnership or 5% of the stock of a small or medium-scale enterprise they would be eligible to retain the Bush tax cuts.
However, don’t hold your breath for enactment of any relatively simple tax compromise like this. Both the republicans and the democrats are likely to hold firm to their ideological positions until the very end.
Economic growth and jobs creation can also be promoted through monetary policy by (1) increasing the money supply and (2) keeping interest rates low. The fed has kept the Federal Funds Rate near zero since 2008 and has announced plans to keep it low through 2014.
The Federal Funds Rate is the interest rate financial institutions charge each other for the loan of funds on deposit with the Federal Reserve. The Fed has taken other measures to keep long-term interest rates low. They have also provided an expanding money supply. Unfortunately, the Federal Reserve has shot its wad. There is little more that the Fed can do to stimulate economic growth and job creation.
What is the key to job creation? The key is demand. Demand can be divided into (1) consumers, (2) businesses and (3) export.
Some observers have complained that large American companies are sitting on $2 trillion in cash that they should be using to hire more workers. If you are making 1,000 widgets per month, but don’t see who would buy additional production of 500 widgets per month, you are very unlikely to invest in the extra machinery, equipment and workers required to produce an extra 500 widgets.
What is my conclusion from all this? It is that neither Mitt Romney nor president Obama is going to be able to do much to promote economic growth and job creation during the next presidential term. Since whoever is president is likely to have little effect on economic growth or job creation, job creation should not be the central issue of this presidential campaign.
Ed Smith
The Elk Ridge Economist
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