One of the core issues I feel many people overlook during this recession is the fact that businesses need more than just tax breaks and subsidies to create jobs. Even the most profitable companies have no need for more employees if their products are not selling.
Pretend for a moment that you own a highly profitable greeting card business. Although email and online gift giving has cut into your revenue, you were smart enough to trim your labor costs to an appropriate level. In fact, even though sales are down a whopping 30%, your profit margin has doubled due to less overhead and employee benefit costs.
Now all of a sudden the government is handing out incentives to companies who hire more than 100 new employees this year. The combination tax breaks and grants means you can hire new workers, pay them the same as your existing staff, and save 25% of the normal costs of employing these new workers. So what does that do for you? Absolutely nothing!
Nowhere in this scenario did your product revenue increase. Yes, you will be able to design and manufacturer new greeting cards at a reduced rate. And sure, you can hire new marketing and sales staff to push the products. But none of these options really generates the one thing you need to expand revenue – consumer demand. Unless more Americans physically go to the stores and begin buying more greeting cards then you are right back at where you were when the internet began to cut into your sales…an inefficient company.
That is the paradox the government faces when trying to create jobs. All of the billions of dollars they seem willing to put into job development won’t help much if no one needs to hire new workers. The recession has caused many of us to cut back on discretionary spending, and until we begin to buy more products there is simply no reason for companies to build more of them. I realize the government’s concept is to create jobs first so that people actually have money to spend, but should we be placing all our bets on the hope that people will buy?
As radical as George Bush’s Economic Stimulus Plan was, he had the right idea in that spending creates jobs. Overall spending by households who received stimulus checks increased by 3.5% and there was great anticipation from consumers on what they would do with the money. Certainly we have seen hard times since then, so it is clear the plan did not have sufficient long term effects. Nonetheless, the thought process was solid.
Now GW’s stimulus had a projected cost of $145 billion. Obama’s job plan is projected at $447 billion. If Obama’s plan passes, which one do you think will be considered more successful 20 years from now?
