Sunday, January 27, 2013

New Mexico Democrats Buy Into Supply Side Economics

New Mexico Democrats in the state legislature are looking around for ways to pay for Republican Governor Susanna Martinez' scheme to lower taxes on businesses. She wants to do that because next door neighbor Arizona taxes businesses less than we do.

The thinking behind it is laid out clearly in an article from the Santa Fe New Mexican. The problem is, the whole discussion is over how to stimulate an economy by what you do for the business sector. Lowering corporate income taxes is just more supply-side economics, a proven failure, and the reason we're in a prolonged slump. It's based on the notion that businesses will use the extra income to hire people. Think of all the talk you hear about lowering taxes on "job creators."

What? A businesses is going to use that extra money to hire people, who will make things, and then hopefully the business can sell those things? Right.

That's not even how business and the economy works. Businesses hire when they have orders they can't fill, or in more speculative cases, when they have determined to the satisfaction of investors that there is an unmet demand out there, but in all cases, hiring is driven by demand, not by giving business owners free money. They ain't stupid. Give them free money when there's no demand and the money goes into their pockets, as it's doing now. Give them even more, like New Mexico's lawmakers want to do, and even more will go into their pockets.

If you stimulate consumer demand, in New Mexico in this case, New Mexican businesses will have no problem finding ways to make money. And they will have no choice but to hire more people if they want to meet the increased demand for their goods and services.

(Note: A good case can be made that lowering taxes on businesses hurts job creation. When federal income taxes were at their highest, before Ronald Reagan, "job creators" had to plow their profits into expenses that were tax deductions. They spent money upgrading their businesses, and spent money on employee benefits and pay, and new hires, which are all deductible. Now, since taxes on their income are lower, they can just take it all as profit. Put it in their pocket. Which they do. And wealth inequality, and income inequality, are back at 1920s "Gilded Age" levels.)


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