There are two main problems in the U.S. economy:
- There are too few jobs
- Most of the jobs pay too little
This state of affairs has left the most important customers in the U.S. economy—the formerly financially healthy middle class—starved for spending money.
As any business executive will tell you, when your customers are hurting, your business is hurting. So most companies that do business in the United States are hurting.
Importantly, U.S. companies have the highest profit margins in history. So the problem is not that “corporate taxes are too high.”
U.S. companies also have gigantic piles of cash. So the problem is not that companies need cheaper capital or more cash with which to invest. (The problem is that the customers are hurting, so there’s no reason for companies to invest cash, because it won’t produce a return.)
So the challenge is how to fix this problem.
One of the popular proposed solutions is to “cut taxes” and “reduce regulation,” thus providing “job-creators” (generally used to mean “investors” and “entrepreneurs”) with an incentive to “create jobs.”
In reality, it is not investors and entrepreneurs who create jobs but a healthy economic ecosystem that creates jobs. But let’s leave that aside for a moment.
For now, let’s focus on one simple question.
How will cutting taxes fix the jobs problem?
And before you plunge in with your answer, please recognise that the “jobs problem” is not just a lack of jobs. It’s a lack of good-paying jobs.
Check out these three charts, which are based on data compiled by the National Employment Law Project.
The first chart shows the loss of jobs during the Great Recession classified by three income brackets— “Lower-Wage,” “Mid-Wage,” and “Higher-Wage”—followed by the gains in jobs in the same three categories since early 2010.
The message is clear: We lost mid-wage jobs, and we replaced (some of) them with low-wage jobs.
Here’s the same data in table form:
And here’s a composite put together by Double-Line Funds:
Again, the message is clear:
We’re losing mid-wage and high-wage jobs, and we’re replacing (some of) them with low-wage jobs.
So that brings us back to the question at hand …
I understand the theory about how cutting taxes and reducing regulation are supposed to create jobs: Reducing taxes means people will have more money to spend, which will mean more workers will be needed to produce the products and services to sell to them.
But why are these jobs going to be mid- and high-wage jobs?
Just creating “jobs” won’t fix the problem, because it won’t restore the spending power of the middle class. For this economy to become robustly healthy again, we need to create tens of millions of mid-wage and high-wage jobs.
How is cutting taxes going to do that?
NOTE: I will eagerly read any intelligent answers here, but I’m sceptical that cutting taxes will ever create millions of mid- and high-wage jobs. For what it’s worth, I also don’t think government deficit spending will create millions of mid- and high-wage jobs. I think the answer to our economic problem is Henry Ford’s answer: Our super-rich and profitable companies have to voluntarily pay their workers more. But, again, I’m eager to hear how you think lower taxes will fix the jobs problem.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.