Personal and Economic Recovery

I had back surgery (successful) on Monday (once again, the lesson learned: piano movers are worth it).  Recovery is a tricky thing. One moment you think you are sharp and energetic. Another, like today, you sleep twenty hours in a day.

I caught bits and pieces of the debate on the radio yesterday.  Most commentators seemed to call it for Romney.  Debates in a Presidential race aren't so much won or lost, however.  They are pass/fail events, and this time around, no one failed.  If neither candidate fails (or both do), then they have little impact on the race.

The bits of the debate that I did capture were striking mostly for how much both candidates embraced a merchantalist, regulated mixed economy, welfare state.  Simple statements of principle were not in vogue.  This was a natural for President Obama (who also, wisely, embraced the moniker "Obamacare").  It was not at all a natural stance for Romney's political base.

The quality of the Presidential candidates' economic analysis left something to be desired. 

Probably least impressive point was a failure to challenge the notion that income taxes on business profits impact jobs, either in the debate or the analysis by pundits at larger. 

The case that business tax rates have an impact on job creation is quite weak.  The key point in economics is that incentives matter.  Your incentive to make a bigger profit, rather than a smaller one, is very similar whether the tax rate on those profits is 13% or 40%.  The incentive to hire more employees is independent of the rate of taxation on business profits.  You choose a profit maximizing level of payroll first, and then you pay taxes on that profit at whatever rate applies.  Payroll taxes directly impact the cost of labor.  Profit taxes don't. 

Profit taxes, instead, impact the desirability of investing in profit generating businesses.  But, at this point, a shortage of capital investment is not driving employment - businesses and banks are sitting on wads of cash and can borrow money at very low interest rates, and returns on capital investment are still tax favored, but aren't investing their capital in business because they don't see opportunities that are worth the risk involved in a capital investment.  Even when investment in government bonds provides a real rate of return that hovers between zero and negative, the bonds have many takers and private sector capitalists are having trouble providing investors with more attractive alternatives.  The incapacity of Wall Street to offer up investments that are more attractive than Treasuries is really rather pathetic.

Our tax code already heavily favors business spending on capital investments over payroll and job creation.  Neither candidate was willing to argue in favor of changing those incentives.  So, we are almost certain to continue to have a tax code that discourages job creation, relative to other forms of spending by businesses, for the next four years.

The only way that tax rates on business profits impact employment is via how the profits are spent.  If the tax rate is higher, more dollars are spent on government and government employment rises.  If the tax rate is lower, more dollars are spent on private sector goods and services (if not invested) and private sector employment rises.  It is not at all obvious that in late 2012, a marginal dollar spent on government generates fewer jobs than a a marginal dollar spent or invested in the private sector.  One of the main reasons that employment is recovering so slowly is that cuts in governent spending are resulting in the loss of government jobs.

Romney's pitch on the virtues of consolidating job training programs also rang sour.  Dan Quayle advanced a bill that did almost the same thing.  So have other politicians before him and after him.  None of these efforts has ever worked.  There is no reason to think that Romney's proposal would work this time around.