Conservative Myth: Uncertainty about Obama's taxes is causing businesses to not hire

Ok, let me start out by saying that I am certainly no economist but I’m pretty good at sorting out truth from fiction in the media and especially on the internet. I spent about 600 hours, 3 years ago, learning how to do that. I will admit that economics is one issue that I haven’t investigated anywhere near as thoroughly as some others, so I’m still an amateur. I do think I’m starting to learn a little about at least where the valid expert opinions are trending, however.

With that qualification, I would like to express my opinion about the current talking point going around in conservative circles that says the reason companies aren’t hiring is because they’re uncertain about what’s going to happen with corporate taxes because of Obama. If you have a contradictory opinion, please feel free to express it politely and knowledgeably. If you post insults or inflammatory rhetoric, I will almost certainly ignore you. I’m pretty much polite to everybody unless they’re impolite to me so I expect others to act in the same fashion on my blog.

I can’t stand this blatant myth that the conservatives are spreading around that businesses aren’t hiring because of uncertainty about what the government (actually they specifically blame it on Obama) is going to do concerning taxes. Anybody who actually runs a business knows that this is complete nonsense. This is not an actual economic theory put out by any reputable economist. I used to encounter this type of mythological thinking all the time when I would debate creationists. They would say something like, “Maybe the Biblical Patriarchs (Moses, Abraham, etc.) prior to Noah and the great flood, lived much longer because the water
that was going to cause The Flood, sitting above the atmosphere in a great shell around the earth, blocked ultraviolet radiation which caused less damage to their cells. Then they would spread this purely made-up story from person to person as if it were fact. Eventually, all the creationists would believe it as a proven scientific fact because it had been repeated so many times. This is exactly what the conservatives are doing with this “businesses are nervous about taxes” made-up story. (P.S. If you believe this ridiculous creationist myth, please don’t bother to leave a comment on my blog since you obviously know absolutely nothing whatsoever about science or logic).

Concerning this conservative economic myth, there is no evidence whatsoever to support it and it absolutely flies in the face of reason and evidence. Taxes are a trivial portion of a business’s expenses especially when you consider that there’s pretty much no chance that they’re going to fluctuate by more than a few percent. The CEO of my company explained to his employees why he laid many people off and split off the unprofitable portions of our company.

I think there are a lot of people in the United States who understand that the fundamental cause of the collapse of our economy was the collapse of Bear Stearns and Lehman Brothers which caused a panic in banks all over the world because they no longer knew who they could trust to pay back their debts any more. The result was a freeze of the credit markets. For a time, it became nearly impossible to borrow money.

I think there are also a lot of people in the United States who believe this situation was “cured” by the “bailout” that was started under President Bush and continued by President Obama. What they don’t realize, and our CEO told us, is that the situation hasn’t been “cured”. There has been a fundamental, and most likely permanent, shift in the way banks make loans. It’s now far more difficult to get a loan. They now require far more proof that your business is solid and profitable (paraphrased since I don’t recall his exact words). This has resulted in a fundamental and quite likely permanent change in the way most businesses operate.

You see, what our CEO told us, is that most businesses prior to the economic collapse operated on short term loans. You want to buy enough material so that you have enough in stock so that you don’t run out if there’s a spike in demand or you have a temporary supply problem. At the beginning of the fiscal year, you get a loan to purchase as much material as you need for the rest of the year, then you pay it back as you make sales.

Do you know why the Friday after Thanksgiving is called “Black Friday”? Because, traditionally, on average, that’s the day of the year when most companies pay back those short term loans and start earning profit. In other words, they get out of debt (the red) and become profitable (the black). The problem is that after the collapse, it became much more difficult to get those loans, so most companies shifted to a different business model. A model where they have enough cash reserves to pay for all of their stock up front.

So my company, similar to many others, sold off one of our product lines, spun off the unprofitable portions and laid off a lot of people in order to accumulate those cash reserves. They succeeded. In fact, the remaining American businesses also mostly succeeded and this year was the most profitable for American business in all of history.

What?! You say. How can they be so profitable when so many people are out of work?! The answer is, because they need the cash reserves to survive in today’s business world. In fact, most businesses still don’t have enough and if they’re given tax breaks, they’re not going to hire anybody, they’re going to put it in the bank (so to speak). That’s certainly my company’s plans.

On the other hand, if they need new employees because their demand increases (the amount of customer purchases they’ve received), “tax uncertainty” will play absolutely no part in their decision to hire more people. More purchases would increase their cash reserves (assuming they’re operating at a profit level and if they aren’t they won’t be in business much longer) so nobody would be nuts enough to not hire employees when they need them.

In fact, think about it. Try to imagine that you’re a business owner and somebody hands you a million dollars. No questions asked. No conditions. They just give it to you. Are you going to hire a bunch of new employees on the hope that people will suddenly start buying more of your product? Of course not! You only hire more employees when you need them because demand has increased. If somebody hands you a million dollars you’re probably going to “invest” it (i.e. gamble with it on the stock or other markets creating bubbles which crash and suck money out of your 401K).

Now it’s true that some businesses are in a position where demand has increased but they don’t have enough money to hire any new employees and can’t get a loan (especially after the economic collapse). In that case, tax breaks certainly would help because it may give them enough money to hire those new employees. The problem I have with this is, in today’s economy, if they haven’t already built up enough cash reserves to hire new employees when they need them, then they’re probably not going to last much longer anyway. In the previous economy, this almost never happened because loans were so easy to get.

Nevertheless, simplistic minded ideologies do not help us solve these problems, whether that ideology is “less regulation, less regulation” or “more regulation, more regulation”. You have to have people who can carefully look at legislation and make a good educated guess as to whether the regulation will help the economy or hurt it and, if it hurts the economy, whether the side benefits (such as morality) are worth the harm to the economy. In today’s political world, we have virtually nothing but idealogues in the Republican party. They have virtually become the Libertarian party which is purely ideological and virtually never applies a realistic, specific analysis to any problem.

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