Brian Hamilton and I were debating—on CNBC—what’s really holding back hiring. He basically said it’s uncertainty regarding tax policy and I said it had more to do with consumer demand (ala this loop).
At one point, I noted that for months, small businesses have been saying the poor sales, i.e., weak demand, was their “single most important problem.” Though, to give the tax argument its due, I pointed out that in fact the poor sales line has been drifting down and is now about equal with taxes.
I believe Brian challenged me on these points so I said I had the data and here it is (see below), from the NFIBs survey of small businesses. (I know, seems rude to always dis the NFIB and then use their data, but whaddyagonna do?)
Note that in the bottom graph, as I stressed in the debate, poor sales has been the dominant problem for a few years (circled), though it’s come down significantly as the recovery has proceeded. The problem of taxes, on the other hand, has been trending flat, while regulation has been climbing.
While it’s obvious that resolution of outstanding federal tax issues—as in the fiscal cliff—would make for a better business climate, I find the argument that tax uncertainty is an important culprit re job creation to be awfully squishy.
First of all, it lacks evidence whereas the linkage between consumer demand and hiring is well established in economics. In fact, it’s the first principle of labor economics (demand for labor is derived demand, derived from the demand for goods and services employers produce and consumers/investors demand).
Second, it belies common sense. Do the following thought experiment. Suppose Congress woke up tomorrow, the scales fell from their eyes, and they passed a budget deal including smart tax policy which the President signed that afternoon (a huge fantasy, yes, but bear with me). At the same time, imagine real GDP growing at 1.5%, driven by weak consumer spending, which is in turn driven by relatively weak job and wage growth—(ok, that part you don’t have to imagine, though employment got a nice pop last month).
What employer is going to change their plans and kick up hiring based on the Kumbaya tax resolution, absent strong demand? It’s of course possible that future projects that appear less profitable at the margin could appear more so if tax rates were favorably tweaked, but that has little to do with near-term hiring. Moreover, the uncertainty argument does not imply that hiring will get a boost if taxes go down; it’s that hiring will increase if the tax debate is settled one way or the other.
Finally, this is all very tangled stuff. Taxes factor into demand, raising or lowering the after-tax incomes of taxpayers so there’s no clean break between uncertainty and demand in the first place.
Basically, I think the uncertainty folks may be coming from a Keynesian “animal spirits” place—the climate point I made above. I get that and agree. I’m just afraid that the resolution of outstanding fiscal questions by itself–absent better jobs and paychecks for the broad middle class leading to greater consumer demand—won’t get us very far.
Source: NFIB, link above.