‘It’s the demand side, stupid’

Robert Reich Jun 29, 2011

‘It’s the demand side, stupid’

Robert Reich Jun 29, 2011

Bob Moon: President Obama had a message for Congress today as he faced reporters at the White House. He challenged Republicans to go along with eliminating certain tax breaks for the super-wealthy.

Barack Obama: The revenue we’re talking about isn’t coming out of the pockets of middle-class families that are struggling. It’s coming out of folks who are doing extraordinarily well, and are enjoying the lowest tax rates since before I was born.

At the same time, the president urged lawmakers
to extend his tax cuts for middle-income Americans. He pressed Congress to raise the debt ceiling. And he says there’s an important way
lawmakers can help put more Americans back to work.

Obama: Right now, Congress can advance a set of trade agreements that would allow American businesses to sell more of their goods and services to countries in Asia and South America.

That may be one way to get more people back on the payrolls. Commentator Robert Reich has another idea: Work on increasing demand for goods and services here at home.

Robert Reich: What to do about raging unemployment? Many Republicans and a few Democrats are peddling supply-side solutions. Cut corporate taxes. Reduce the cost of capital. Cut the employer share of payroll taxes.

This is nonsense. The problem is not on the supply side.

Companies don’t need financial incentives to hire. They’re sitting on $1.9 trillion of cash. They don’t even know what to do with it all. If they wanted to use this cash to hire additional workers, they could. Instead, they’re buying back their own stock and buying other companies.

Nor is the cost of capital an issue. Capital is cheap. Companies can get bargain-basement interest rates on new loans.

Nor does it make any sense to lower the employer share of payroll taxes. This won’t create jobs. Payroll taxes are not deterring companies from adding employees.

Let’s get real: The problem is on the demand side. It doesn’t make economic sense for businesses to hire more workers unless businesses have more customers. And they don’t.

These days consumers are reluctant to buy. That’s because their real wages are falling, their home values are plummeting, they’re still under a huge debt load, and they’re worried about keeping their jobs.

Supply-side solutions have nothing to do with any of this. They’re like pushing wet noodles. The economy needs a boost on the demand side.

For 30 years now we’ve been hearing from “supply-side” economists say that if we reduce tax rates on the rich and on corporations — and keep the cost of capital low — we’ll get more jobs and growth. And the benefits will trickle down to everyone else.

Well, we’ve tried the theory out, and little or nothing has trickled down. Tax revenues are now 15 percent of the national economy. That’s the lowest in 60 years. And capital is cheaper than ever. But the economy is going nowhere.

Can I be blunt? It’s the demand side, stupid.

Moon: Robert Reich was secretary of labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America’s Future. Next week, David Frum. Send us your comments in the meanwhile — click on this contact link.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.