Daily Archives: September 3, 2011

A parable of economic demand

Imagine you have a small restaurant in a small town. In 2006 you have 8 employees and a stable business. But then comes the recession: a bunch of your customers loose their jobs and stop spending money at your place. Now you have less income and a lot of the time you have workers with nothing to do. You lay off two workers. Now you reach equilibrium, you’re making money, paying down debts or building up capitol, you can afford to hire new workers again but your current 6 employees are still keeping up with your customer flow perfectly well.

So now what? What kind of events would entice such a business to hire more workers? The economic position favored on the right, supply side economics, says that giving you tax breaks, improving the stock market, or outright giving you money will increase employment. But why would you use that money on hiring? Or even expanding your business, which is already drawing in all existing demand in your town for your product?

The key element here is demand. You aren’t hiring because you don’t need more workers to fill the demand for your product. And no matter how much money you save, get back from taxes or are outright given, there’s no business reason to hire more workers or expand unless you can find more customers who want to buy your product.

There are a lot of reasons to believe this is what is happening in the economy right now. The clearest, best reason is that companies are sitting on money instead of using it to hire or expand. Companies are hording cash, not using it.

The counter explanation to this is that companies are uncertain about the economy, afraid to use those resources because they think taxes or changing regulations will harm them. There are good reasons not to think this, but they’re complex, so I’m going to leave that be for now. The important point is that even if that is the case, any efforts to get more money in the hands of job creators (tax breaks in particular, any supply side efforts in general) is wasted, because they already have plenty of money. They are choosing not to use it to create jobs.