Herman Cain doubles down

Part one in my Class Warfare 101 series: the funny things about business and taxes.

There are some things generally regarded as good in the business world: jobs, disposable income, and economic progress. So how do we get there? What's the path towards all three of those things?

It's complicated. A ridiculous oversimplification is that there's a vicious cycle between people buying things, leading to a need for more workers, leading to more people getting paid, leading to more people able to buy things.¹ It works in reverse too. As joblessness increases and people have to tighten beltstraps and don't spend as much, companies need to reduce their workforce.

Right now we're in one of those negative spirals. There are ways to get out of a down economy, and people with the power to do so (big business and government) have a vested interest in avoiding these recessions because both business and government need a consistent stream of income to function. The government has essentially two options: stimulus funds (which might also be called "throwing a bunch of money at a problem and hoping it goes away") or creating incentives for business to hire more. The latter take the form of tax cuts.

Enter Herman Cain. GOP hopeful, and businessman. In the recent GOP debate, he was asked the following:
"You -- you say that we can boost job creation by eliminating the tax on companies that bring back overseas profits to the U.S. But when we tried a tax break like this in 2004, companies didn't create jobs. They just paid bigger dividends to their shareholders. Why would it work this time?" (Source: LA Times)

Before I get into Mr. Cain's response, this brings up a very valid point. When government gives a tax break to companies, the companies *should* reciprocate by creating new jobs. Obviously, we can't force them to do it. But it is a real problem when you consider that it's not the jobless who are being helped.

Here's Mr. Cain's response:
"It'll work this time for a number of reasons, because I think you're only looking at a small piece of it. Remember, it is a combination of things that I indicated. If you just pick out one thing and try just to do that, no, that is not comprehensive.

When I talked about lowering the top corporate and personal tax rays to 25%, also taking capital gains rates to zero as well as suspending taxes on the repatriated profits. And here's the big one, make them permanent. Uncertainty is what is killing this company."

I'll break here for a bit to show what's going on. The line of reasoning is this:
1. The government gave a break to corporations, to help them make more jobs.
2. Corporations didn't make more jobs.
3. (Cain's response)I hear what you're saying, and I agree that both those things happened.
4. The reason is that corporations didn't make more jobs because there wasn't enough of a tax break given. The government wasn't business friendly enough.

That worries me. I understand that there is a tipping point for real effects to be seen, but the 2004 cuts were not insubstantial. We're talking about huge multi-national corporations here; even modest advantages should translate into job creation on a reasonable scale. I'll let Mr. Cain finish now.

"Now if a company were to decide that they want to take some of that money and pay a bigger dividend, so what, it is their money. The people receiving the dividends might be happy with that. Maybe that is the right thing to do."²

What should have been jobs for people in need was instead given back in money to people well-off enough to own stock. Not everyone has enough money to have a spare $5000, $10000 etc. to invest. In a recent survey, only 24% had more than 6 months salary saved up. That might sound like a lot, but we're talking emergency funds: the money you're only supposed to use when there's an emergency. Half of those surveyed didn't even have 3 months' salary saved up. (I do, but only because my salary is really low. Were I paid $24,000 a year, I'd be in that 50% who can't meet the 3 month's salary threshold)

As though it weren't a scary enough proposition, he wants to make this permanent. Immutable. A perpetual system which hasn't demonstrated it's going to help the people who need to be helped.

A better arrangement might be one where the government pays corporations only after they've created more jobs. The incentive is clear, the government can be held accountable, and everyone leaves happy: the corporations get their tax break equivalents, the unemployed get their jobs, the only loser is the taxpayer, right?

Er, no. This is one of those smart investments. People who need jobs in order to not just subsist, but to thrive will buy things. They'll put money in the bank. They'll consider buying houses, cars, TVs. The money goes back into the system, and makes people self-sufficient. Instead of a continuous stream of unemployment or welfare checks, a one-time investment ends that cycle. If anything, the taxpayer wins.³

Instead of backing a strong solution, Herman Cain is gambling with the economy, hoping that if he goes all in, that he'll be right. And he's playing with your money. The question is, is this a bet you can afford to lose?

1. You may ask, can that vicious cycle go on indefinitely? The answer is a qualified yes. Assuming there are more people to take these jobs, growth is easier. Looking at a world economy, the picture is ridiculously complex and is something I won't even begin to understand, and I won't pretend to be qualified to speak about it. In a hypothetical, sealed-off economy where there is population growth forever, the cycle *can* go on indefinitely. As population steadies, the way to "grow" the economy is in finding ways to keep the cycle flowing. If people keep spending what they earn, there isn't a "shortage" of funds holding the economy back. Left to its own devices, money will congregate in the hands of the people who are most advantaged by the system; this is only really a problem when there's minimal growth, or even negative growth.

2. I'm saying the real meat of his response ends here. The LA Times link shows more of his statement, but it's not anything that changes the tone of his answer

3. It's like this: Some one-time investments pay out over the long term. People who have real jobs that pay a real living wage become contributors, not recipients.