I hear about job killing tax increases on the wealthy, but not about job killing cuts in federal expenditures. Taxes on the top 1 percent and on business in general have almost nothing to do with employment. Several business associations were frank about the effect of a holiday from their contribution to FICA. It would be welcome, but it wouldnt cause them to add jobs because they cant do that until there is an increase in demand for what they make or provide. Demand for goods and services is what controls employment.
Where does demand come from? Not from the wealthy. Their taxes may affect their investment decisions, but not their spending habits. They can afford anything they want. Changes in taxes on businesses will have little effect on their demand for plant and equipment. Only a change in demand for what they make can cause them to invest in what they need to make it with.
Demand originates at the lowest tier of the economy, the retail level. It trickles up, from stores and restaurants to wholesalers, to fabricators and farms, to manufacturers of major capital goods and suppliers of raw materials. Nothing happens at the top of this chain that doesnt originate at the bottom the retail level. What controls that? People with money to spend on needed goods and services.
Here is where the reductions in federal expenditures come in, the ones at issue in the current budget negotiations. Those cuts would overwhelmingly come from social benefits like Social Security, Medicare and Medicaid, unemployment compensation and welfare programs. They would also come from programs that produce wages support for teacher, firefighter, police and other public service worker retention, and from stimulus programs. These benefits and wages are now spent mostly at the retail level. If Congress does adopt those cuts, as much as $100 billion dollars will stop being spent there this year. There will be a gross reduction in retail demand, and first level businesses will be forced to contract, to shed jobs. The drop in retail demand will surge through the economy, leaving production cuts and layoffs in its wake.
This is not what the economy needs. The fact is the only way to deal with the federal deficit is to outgrow it. The economy needs to expand fast enough to generate job growth and increase federal revenues at least at a 3 percent or 4 percent annual rate. It is now sputtering along at about 1 percent. A vigorous stimulus program aimed at the retail sectors customers is needed now, not reduced federal expenditures.