Thinking Big On Unemployment

A caller to the Rush Limbaugh show today identified himself as a liberal who professed to be “upset” by talk of tax increases preventing businesses from hiring.  He went on to suggest that conservatives who were honestly worried about this should quit their jobs in protest of high tax rates.  He thought high unemployment was primarily a matter of greed on the part of business owners, who were just looking for excuses to trim their payrolls.  Rush had some fun with him over his casual assumption of knowledge about the nature of Rush’s business operations, and how he reaches decisions about hiring and firing.

Rush’s caller expressed a lot of dangerous, but all too common, misunderstandings about the nature of employment during his brief time on the air.  The first is the assumption that businesses are “not hiring.”  This is not true, and not acceptable even as a shorthand way of discussing unemployment.  Even last month’s horribly anemic numbers included 50,000 new jobs in the private sector.  That’s not enough to keep pace with population growth, or provide jobs for the long-term unemployed, but it simply is not true that “nobody is hiring.”

This is an important distinction, because it illustrates the unfortunate tendency of people to think about macroeconomics on the micro level.  The Small Business Association says there are 27.5 million businesses in the United States.  In 2009, they estimated that 552,600 new firms opened, and 660,900 closed.  The collective power of so many entities cannot be extrapolated from the relationship of a single business to its employees.  Sometimes you hear people sneer that a 10% tax hike or 5% increase in the cost of benefits wouldn’t make their company fire anyone.  This is like saying tidal waves are impossible, because you can’t knock down a building by splashing water in your bathtub.  The sheer size of the U.S. economy causes relatively marginal hiring decisions to have devastating impacts on the middle and lower classes.  Government making it slightly harder to hire, compensate, or fire employees translates into a lot of people sitting around and wondering why they can’t find work.

The idea that “greed” would keep business owners from hiring people is another dangerous fallacy.  Business owners hire people when they expand their operations.  They want to expand their operations.  Making 30% profit on a million dollars in sales is not as desirable as making 25% profit on five million dollars in sales.

If a business does not expand to meet demand for its goods and services, other companies step into fill the gap.  Suppose a shoemaker decides he doesn’t want to hire any more help, but the demand for shoes continues to increase.  He won’t be “causing unemployment,” because other shoemakers will step in to take that business.  In fact, the shoemaker who refused to expand might find himself crowded out of the market.  That’s why many entrepreneurs find “standing pat” to be dangerous.

High tax rates retard both supply and demand.  It’s harder for businesses to take on new staff, and their customers – many of whom are other businesses, owned by The Evil Rich – have less money to spend.  The cumulative effect is far more devastating than some Scrooge reading a newspaper article about his taxes going up and snapping, “Well, fine!  I just won’t hire anyone then!  I need that money for caviar!”  Remember that our government taxes virtually every aspect of commerce and production, and simply figuring out what taxes need to be paid is a significant expense, unless you happen to be immune to federal tax law, like Charlie Rangel.

President Obama once famously observed, “I think at some point you’ve made enough money.”  If enough people come to agree with him, we’ll find out what unemployment really looks like.  Hiring is a function of ambition – the desire to exploit opportunity.  A free nation bursting with technology and resources will have no trouble producing competitors to chase after opportunity on a level playing field.  It just doesn’t produce enough suckers willing to play a rigged game with ever-changing rules, whose winners and losers are sometimes chosen by fiat.