WASHINGTON, October 30, 2014 – Recent remarks by presumed Democratic candidate for President in 2016 Hillary Clinton indicate that she simply does not understand how economics, in a market driven economy, works. This is really scary, especially if she is successful in her bid to become President.
Just how bad is her misunderstanding?
Speaking in Massachusetts she recently told the crowd of listeners
“And don’t let anybody tell you that, you know, it’s corporations and businesses that create jobs.” She went on to explain that the old theory of trickle down economics has been tried and failed rather spectacularly. These statements cannot be further from the truth.
Regarding job creation, there are only two choices: business or government. Business creates jobs by expanding output to meet the needs of all sectors of the economy. The reality is that government should create an environment where business can easily expand. This includes allowing business to keep more of their income (used for investment purposes) by reducing corporate tax rates, removing barriers to expansion created by unnecessary and burdensome regulations and by reducing the cost to expand by removing requirements to provide specific benefits to employees like health insurance.
The data indicates that the jobs created by government to provide services that may or may not be needed by the public, are usually at above market wages. While supporters agree that this is good for the middle class, the reality is that it is good for the overpaid workers but terrible for the middle class who must foot the bill through higher taxes.
On the issue of trickle down economics, again the reality is that not only does it work, it works much better than any economic policy that government has implemented. In 1981 President Reagan lowered tax rates for all income earners, especially for those at the top. That created an investment boom that resulted in a 26 year economic expansion (except for minor hiccups in 1991 and 2001.)
By the early 2000’s unemployment was under 5%, inflation was kept low and the economic growth provided opportunity for all well-prepared Americans. The theory is simple to understand. By encouraging business to expand through lower tax rates and removal of burdensome regulations, the economy grows. As that happens, new jobs are created so that the previously unemployed or underemployed see opportunity and find jobs. Eventually everyone benefits.
Mrs. Clinton also said
“Don’t let anybody tell you that raising the minimum wage will kill jobs.” Of course raising wages, without a similar increase in productivity, increases the cost of labor and reduces the demand for workers. Usually business cuts back on the number of people hired by replacing labor with capital goods. That’s why, for instance, toll takers have lost their jobs and been replaced by automation. Or why most states allow consumers to pump their own gas. Or why orders at some restaurants are taken by a touch screen rather than a person. It’s simple economics, as the price of labor increases, the quantity demanded falls. Regardless of what some very learned and well respected economists say, this is a simple fact.
Mrs Clinton also believes some Nobel prize winning economists who tell her that raising the minimum wage will give those workers more money to spend thereby increasing total demand in the economy and encouraging growth. That too is a lot of poppycock.
While raising the minimum wage increases income and demand from those minimum wage workers, the question not answered is: “Where does that money come from?”
The answer is that it comes from higher prices, which reduce demand from those consumers who pay the higher prices. That means for every additional dollar that is given to minimum wage workers, prices rise a dollar which gives other consumers a dollar less to spend on other goods. The net effect is zero.
What is scary, is that Hillary Clinton may be elected president in 2016. If that happens and she implements policy consistent with her recently expressed views, the economy will likely end up with little or no growth and higher prices, a condition known as stagflation. We used trickle down economics in 1981 to end a stagflation problem. Since she believes it doesn’t work, we may be stuck in a bad place economically for some time.
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