For this month's Environmental Outlook: Ten years ago, Israel experienced a prolonged drought that forced the country to come up with a strategy to address water scarcity. What its experience could teach an increasingly water-starved planet.
As Washington squabbles over the nation’s debt, across the country Americans are hurting. Too many are either unemployed or under-employed. The private sector added nearly 2 million jobs in the past year. But cuts in government jobs took away from those gains. Today there are 7 million fewer jobs than at the beginning of the recession in late 2007. The U.S. unemployment rate is now at 9.2 percent. Many say deregulation and cutting taxes are essential to getting Americans working again. But others say government spending is needed – such as investment in infrastructure and technology. How tax and trade policies, government spending and advances in technology affect the U.S. job market.
- Tim Fernholz correspondent, National Journal.
- James Sherk senior policy analyst in labor economics, the Heritage Foundation.
- Lawrence Mishel president of the Economic Policy Institute.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. America's unemployment picture is not entirely dark. There have been some bright areas, as in manufacturing and restaurants. Both have seen jobs growth in the past year. But too many Americans remain out of work, and too many have been forced to take jobs that don't pay enough to support a family. We talk about what's happening in the U.S. job market and why.
MS. DIANE REHMJoining me in the studio, Lawrence Mishel of the Economic Policy Institute, Tim Fernholz of National Journal and James Sherk of The Heritage Foundation. We do invite your calls, comments, questions. Join us on 800-433-8850. Send us your email to email@example.com. Join us on Facebook, or send us a tweet. Good morning to all of you.
MR. LAWRENCE MISHELGood morning.
MR. TIM FERNHOLZGood morning.
MR. JAMES SHERKGood morning, Diane.
REHMTim, if I could start with you, Sen. McConnell's proposal on how to get around this deficit deal is on the front pages of every newspaper this morning. Talk about what he's proposing and what's likely to happen.
FERNHOLZSure. So Sen. McConnell is the Republican leader, and he is offering a plan that would basically allow the president to raise the debt ceiling himself. And it's a pretty cynical political calculation on Sen. McConnell's part. Basically, he's saying that he doesn't think it's going to be possible to get a big debt reduction deal in the next week-and-a-half that we have before the Treasury runs out of cash.
FERNHOLZSo rather than go through that messy process and suffer the political consequences, he essentially wants the Democrats and President Obama to shoulder the burden of raising the borrowing ceiling with a series of votes up through 2012 that he thinks is going to give him some political advantage.
REHMJames Sherk, a cynical political calculation?
SHERKWell, cynical and probably unconstitutional. The president doesn't have the authority to issue debt. Congress is trying to abrogate the responsibility. I mean, you can imagine if they passed a plan to say the president will propose a ton of spending cuts. And they'll -- it'll take effect unless we've got a (word?) majority. I mean, it's -- that wouldn't pass constitutional muster. And this probably doesn't either.
SHERKAnd in any event, it's completely irresponsible. What's he's trying to do is avoid taking responsibility and allow the current policies to continue with no change and not take the necessary steps to bring down spending and actually fix the problems that got us here in the first place.
REHMLawrence Mishel, his conservative base is certainly having real problems with his plan.
MISHELWell, the conservative base has problems with anything because they -- I think they live in another world that says that the deficit somehow got caused by something that President Obama did. We need to understand exactly where this deficit comes from. First and foremost, we have a huge recession. In a huge recession, people aren't working. Businesses aren't producing as much. They pay less in taxes.
MISHELWe have a temporarily higher spending for Medicaid, unemployment benefits, food stamps to help those who are in need. Secondly, the other reasons are we've been cutting taxes. And we have had two unfunded wars. We have a prescription drug plan passed by George W. Bush that was unfunded.
MISHELAnd the way to really understand this is the Bowles-Simpson commission, which proposed the deficit package, got the deficit to -- the debt-to-GDP ratio down to a certain amount in 2020. And it's called courageous, even though I don't think it is. You could get to the same place if we just didn't have the Bush tax cuts. That really tells you exactly where we got this. So we -- what this is is a political ploy.
MISHELIt fits with Sen. McConnell, what he said right after the election, which is his first priority is to make sure that President Obama is a first -- a one-term president.
SHERKWell, the long-term problem is what you have to take a look at here. If it was only a short-term recession and then things were going to fine after that, then this wouldn't be a huge debate. We could agree, you know, to the short-term borrowing. The problem is long term. Look at it a decade from here. You've still got deficits as far as the eye can see, but the recession is over in the projections.
SHERKTax revenues have come back up to where they were before, for about a sixth of the economy. You know, unemployment (unintelligible) come back down to its natural rate. But we're still running these enormous deficits because the federal spending is just skyrocketing. It's really a spending problem.
SHERKWhere the deficits are coming from over the long term is, you know, part of it is the spending Larry mentioned, like the prescription drug benefits and the wars. But it is a spending problem, and we need to -- it take steps to bring the spending down.
REHMAll right. And we'll move, now, on to jobs. I want to know, what about resolving this federal debt issue? Would it, in and of itself, create the confidence in the private sector to create new jobs, James Sherk?
SHERKWell, there -- it's not, as others say, a quick fix. There's a lot of reasons unemployment is high. Solving this problem isn't going to fix the fact we had a housing bubble. It's not going to change the trends we're seeing in manufacturing towards automation. There's not any one policy you can pass that, you know, a year from now, it's going to get us back to 5 percent unemployment.
SHERKIt would be great, but we just don't have a magic wand. But, that said, it would certainly help. What a lot of the Federal Reserve Bank presidents are saying -- that they're hearing from the businesses they talk to is uncertainty over what's going to happen for taxes in the future and just concern -- you know, are we going to wind up paying significantly more? -- is part of what's holding them back from hiring.
REHMAnd to you, Larry Mishel, this uncertainty is something people have been talking about for a year now. You know, what accounted for last week's totally bleak numbers?
MISHELThat's an important question. Before getting -- let me just summarize some of what's being said about the debt limit. We can have a tremendous harm to the economy if the debt limit doesn't go up and government has to scale back at spending, interest rates go up, et cetera, et cetera. Getting the debt limit raised is not going to be anything positive.
MISHELAnd I don't believe that getting a deficit reduction deal for the long term has much to do with getting jobs growing right now.
MISHELAbsolutely none. I mean, the only reason to do a big deficit deal, in my view, is if you are going to raise the deficit over the next few years with spending that can actually create jobs to lower unemployment, and then to reassure the market that you're dealing with the long term responsibly, you can do a big deal. But let me turn to the uncertainty. You hear that a lot, but there is no evidence for it. And let me just summarize what essentially is being said.
MISHELIf businesses are uncertain, and, therefore, they're not hiring, are they really saying that there are profitable sales to be made, that they are forgoing? Because there are -- is uncertainty. In fact, if you look at the evidence of what employers are actually doing, that doesn't fit the pattern. Investment in equipment and software has been growing very quickly. It's doing better in this recovery than under George Bush's recovery.
MISHELPrivate sector employment is growing faster in this recovery than it did in the last two recoveries. When you look at the survey of the NFIB, small business people, they say their prime problem is a lack of sales. And also, businesses, if they wanted to produce more, they don't have to hire any new people. They just have to add hours of work to their already-employed workers who are working far few hours they did before the recession. It doesn't fit the facts.
REHMTim Fernholz, I know you've been writing about this, following this. What difference could it make if, in fact, the debt limit were lifted?
FERNHOLZWell, as Larry says, the real issue with raising the debt limit is avoiding a potential catastrophe. But the real problem for jobs is a fiscal consolidation deal, that would lower the deficit, is likely going to hurt growth. When you have spending cuts, especially in the near term -- and that takes demand out of the economy -- that's going to economists from major banks, from universities, say, reduce growth and reduce jobs.
FERNHOLZAnd if taxes are increased, which the Democrats want to do, you're going to see that negative effect as well. When you look at fiscal consolidation, you get lower growth, and that's the real buy-in lawmakers are in right now. They want to deal with the deficit and the debt and reduce that overhang. At the same time, they want to get out of this recession, and the two are sort of contradictory.
SHERKWell, it's interesting. There's been a lot of countries who've had similar fiscal situations like us, where they've had to close their budget deficits. And researchers from Harvard have taken a look at this, Alberto Alesina. And what he's found is when you have those sort of fiscal consolidations that are all or almost entirely all spending cuts, then, actually, you've got better job growth, better employment growth. The economy does better.
SHERKWhen it's mostly -- or a significant portion of it is in higher taxes, the economy doesn't do as well. And it's not actually that hard to see why. I mean, the same survey that Larry was just mentioning, it's a monthly survey of small business owners. A quarter of them are saying that poor sales are their top problem. But the next two problems are 20 percent are saying taxes and 15 percent are saying government regulations and red tape.
REHMYeah, I want to stop you right there because, before we get to regulations, I'd like to better understand how getting rid of tax breaks for oil companies could or would affect Americans. Tim Fernholz.
FERNHOLZSure. I just want to make one point about the study that James just cited. I believe Mr. Alesina only found a few cases where fiscal consolidation actually resulted in growth. The International Monetary Fund sort of questioned that study.
FERNHOLZAnd when you look at near-term examples, like the United Kingdom and Ireland, where they have cut their budgets recently, their growth rates have gone down quite a bit. And debt rating agencies are saying, look, we're going to have to downgrade your debt if we don't see more expansion. On this question of tax loopholes, like the oil company one, that the Democrats have been pushing, it's not clear that that would increase jobs.
FERNHOLZThat's not really going to have an effect like that. What it would do, would it'd increase government revenue. And if you believe, like a lot of policymakers do, that you don't want unfair advantages in the tax code, you could see over time more economic growth come from having, you know, no distortions like those loopholes. But in the near term, the Democrats are talking about raising revenue.
REHMTim Fernholz, he is correspondent for National Journal magazine. Also here in the studio, Larry Mishel of the Economic Policy Institute and James Sherk of The Heritage Foundation. We'll take a short break. I see the lines are filled. We'll talk with our guests a little further and then take your calls. Stay with us.
REHMAnd welcome back. Three guests are here in the studio with me as we talk about job growth, what's happening, what hasn't been happening and what could happen with or without government help. Larry Mishel is president of the Economic Policy Institute. Tim Fernholz is correspondent for National Journal magazine. James Sherk is senior policy analyst in labor economics at the Heritage Foundation.
REHMWe've talked about some of the bright spots, what has happened in the economy with some job growth. But how are taxes -- high taxes -- holding back what's happening in job growth, Larry Mishel?
MISHELWell, it's hard to believe that high taxes are holding back job growth because our taxes, as a share of the economy, are the lowest in 50, 60 years. So it can't possibly be taxes. What we do know is that growth has been slow. And why is growth slow? Because we have, here, the aftermath of a financial crisis, the housing bubble, the stock market bubble where consumers have lost wealth. They've cut back on spending.
MISHELThey're trying to pay down their debts. We have a loss of demand. We have -- the total demand in the economy has only grown 3.5 percent over the last 3 1/2 years. You would expect it to grow by something like 10 percent. So we have too few people trying to buy things. And the solution to that is, in fact, not to cut government spending or raise taxes in the near term. The challenge is actually to increase the demand for goods and services.
MISHELAnd you can do that a lot of different ways. The president is talking about extending the payroll tax holiday on the employee side only, is talking about renewing the unemployment benefits for next year. Those benefits alone support spending in the economy that creates 700,000 jobs.
SHERKLook, I've just got to disagree. We've been trying to increase demand both through the stimulus bill, but also the Federal Reserve with monetary policy, and it really hasn't had an effect. I think you need to take a look at why unemployment is still so high. It's interesting. The layoff rate has fallen. So layoffs went up during the recession. But now, if you have a job, you're less likely to lose it than you were before the recession began.
SHERKBut the hiring rate, which plunged by about 20 percent when the recession started, has not recovered. Employers are only creating about as many new jobs now as they were when the recession began. What you want to do is create a climate that encourages business to hire. If you're a small business owner in the top tax bracket, then you're paying, basically, 40, 45 cents, depending on what state you're in.
SHERKEvery additional dollar you make is getting -- you're taking it out of your money to the -- to go to the government.
REHMAll right. Here's an email from Jack in Dickerson, Md. I'll be interested in your reactions. He says, "I'm a small business owner, and tax management is an integral part of managing my business. I do not feel tax increases will adversely affect the economic growth and job creation. Rather, they could enhance them. When I am looking at my bottom line, I have two choices. Number one, pay taxes, keep the profit.
REHM"Or, two, invest in equipment, much of which can be expensed to reduce taxes. When taxes are high, there's greater incentive to invest to avoid paying taxes. This increased investment will cause increased hiring down the supply chain." Tim Fernholz.
FERNHOLZWell, I think he makes a good point, and it also gets at one of the tensions in tax reform. Both parties have been talking about the need to make the United States a more competitive climate for business investment. And one of the ways they want to do that is lower the corporate tax code -- lower the corporate tax rate -- excuse me -- by closing tax loopholes.
FERNHOLZNow, the problem there is the same benefits this gentleman is talking about from investing in new equipment, those benefits would be taken away to lower the overall top rates. So is that better or worse for the economy? I think a lot of economists would say those lower rates would allow this gentleman to make business decisions based not on the tax code, but on, you know, what he thinks is the best choice. But, at the same time, you do lose some of those incentives.
REHMGo ahead, James.
SHERKUltimately, a business is only going to invest in new equipment or new machinery if they think they're going to make more money off of it later in the future. So, ultimately, let's say he buys a new machine, and he's becoming much more profitable. Well, then he has to pay taxes on those profits. But you've got 20 percent of small business owners say that taxes are their single greatest problem, you know, greater than poor sales, greater than anything else.
SHERKOne in five small business owners are saying that. And I think that's something you have to, you know, take pretty seriously if that's what they're saying.
MISHELI think it's very important that we -- when talking about jobs, I think that the media and economists talk past the American people. So I just want to get something pretty clear. Right now, the unemployment rate at the end of 2012 is projected to be 8 percent or more. Now, when you talk about jobs, what I want to ask people is what you're talking about. Is that going to change that projection so that it's not 8 percent, but it's 7 percent or 6 percent?
MISHELThe kind of thing that the Heritage Foundation is talking about, the Republicans, whatever it might be -- if it actually has that effect -- might affect job growth somewhat over the longer term. It will not move the dial on whether we have 8 percent unemployment at the end of 2012. Now, getting to the taxes, there's also a very weird sort of otherworldliness to the tax discussion, and that is the following.
MISHELThe conservatives and Republicans say that if you raise taxes, that hurts the recovery. But if you cut spending, it actually helps the recovery. So they're basically saying that if you take a dollar out of a rich person's pocket, it actually hurts the recovery. But if I put a dollar of unemployment benefits into a working-class person's pocket, it doesn't help the recovery. Now, that can't possibly be true.
SHERKSo who are these rich we keep hearing about? Instead of saying rich, you could say investors and entrepreneurs. And, yes, if you raise taxes on investors and entrepreneurs, that's a less favorable business climate for them. You raise taxes on investors and entrepreneurs, you're less likely to get them taking the risk of starting up a new business. Remember, the majority of new businesses fail.
SHERKYou know, most people who put in all that time and effort and money into a new venture don't see anything back from it. If you want them to take that risk, it's not a terribly great idea to have the government promising to take it.
REHMBut, you know, it's fascinating to me that during the Bush era, we -- and then following the Bush era, we were told that there would be jobs if we extended the Bush-era tax breaks. What happened, Tim Fernholz?
FERNHOLZWell, I think what you saw happen was that we were in a recession, and there was a resistance to raising taxes during a recession. And I think you're talking about at the end of last year, when the Bush tax cuts were said to expire. The president and Congress made a deal to extend them through 2012. That, economists say, is a pretty good idea in terms of keeping growth moving forward, but it is also fiscally unsustainable.
FERNHOLZIf you look at the projections of the Congressional Budget Office, you know, the revenue problem is as real as the spending problem. You really have two issues. You have health care spending, which is going up very quickly, farther than any -- faster than anything else. And you have revenue, which is at historically low levels. And, you know, in terms of talking about job creation, what James said is true.
FERNHOLZIt's important to look at how tax incentives are affecting small businesses. But no one is talking about raising taxes on small businesses right now. The Democrats are talking about closing loopholes that affect a lot of big profitable companies -- oil companies and things like that -- as part of the debt deal. And then we're looking ahead to the Bush tax cut debate that will be in 2012.
REHMAll right. I want to get to something you raised earlier, James, and that is regulation. What evidence is there that regulations are slowing job creation?
SHERKWell, one, it's what businesses are saying themselves. And that's not just me saying that. The Federal Reserve presidents are saying they're hearing the same thing. To quote Dennis Lockhart -- he's the president of the Federal Reserve Bank in Atlanta. And he says -- and I'm quoting him -- "We frequently heard strong comments to the effect of my company won't hire a single additional worker until we know what health insurance costs are going to be.
SHERK"More generally, our contacts cite a litany of uncertainties as a reason for wait-and-see posture towards expansion, spending and hiring. These include the longer term fiscal plan at the federal level, the extension of the Bush tax cuts and the effect of various regulatory proposals." I mean, this is...
REHMSo that last portion of his statement. And, of course, we're going to hear from Ben Bernanke today. Go ahead, Larry.
MISHELWell, what James is offering is what people are saying. We should look at what people are saying and what they are doing. In terms of what they're saying, the same survey that James is citing about people being worried about regulation and taxes, it goes back to 1986. If you look at the last six years of the Reagan-Bush era, their concerns were as high then as they are now. And some of that just...
MISHELAbout regulation or taxes, okay, even higher then than they are now. If you look what businesses are doing, are we -- do we really believe that that business owner who could sell something and make a profit won't increase the hours of work from people that are part-time to full-time to produce, to make a profit would not hire a temporary worker or even hire a worker on some kind of temporary basis not through an agency? That doesn't make sense.
REHMBut what does that have to do with regulation?
MISHELWell, the reason is that if -- they're saying they won't hire someone because they're afraid about the future. You don't have to make...
REHMYeah, but tell me about regulation and how you think regulation...
MISHELI think it doesn't play into it whatsoever.
REHMAt all. All right.
MISHELThis is a made-up, ginned-up political crisis by the Chamber of Commerce, which has been generating millions of dollars in research, in advocacy, trying to get down regulation. It has absolutely no economic basis behind it whatsoever.
FERNHOLZSo I think it's a mistake to think about regulation as just some overarching big category. You know, regulations are just government rules about anything. So there are specific regulations, like what the Environmental Protection Agency might put forward about emissions, where you might have an energy company that is going to be less profitable because they have to obey these. But you do get a benefit. You have healthier air.
FERNHOLZYour kids don't have asthma. Acid rain is going away, whatever. On the question of the health care law in particular, that's more complex because there are going to be rules. There is uncertainty about what businesses will have to pay. But, as Larry says, it's not clear that these regulations are affecting profitability so much that they would affect investment decisions.
FERNHOLZAnd there's also a point on this uncertainty debate, which is that Washington changes regulations all the time. And there's rarely a period where you can't look down the road two or three years and say, look, there's going to be a major tax change, a major regulatory change, something like that. So this is an environment that folks in business are prepared to deal with.
FERNHOLZThey will, of course, continue to advocate for laxer regulations, lower regulations because that's more profitable for them. But what the administration is trying to do is balance the public interest against the private. There's a lot of calculations that go into business investment and hiring more people.
FERNHOLZAnd it's not clear that new regulations imposed in the last year -- keep in mind that the health care law rules, the financial law rules are still being written. They're not even implemented yet. So it's not clear that that affected job creation in the last two years or the last 10.
SHERKWell, the question you have if you're a business is, do you take a risk and invest? It's not so much, you know, do I shut my doors today? I mean, for some companies, you raise the cost with these, and they'll shut the doors today. But the question is, do I open up a new branch? Do I expand? And that's going to be based on what you think is going to happen to you in the future.
SHERKAnd I think, especially Obamacare, there was a poll out of business owners yesterday that was showing that a third of the business respondents said that the new health care law was either the greatest or the second greatest problem they faced and a barrier to new hiring. I mean, that's a really big deal. They don't know what the health care costs are going to be, but they know they're going up.
REHMAre we still calling this Obamacare? Or is it the health care plan? Tim.
SHERKWell, that's just a political answer he's giving.
REHMWell -- no, no, no. I really want to know.
FERNHOLZI was going to weigh out to the -- I would say you can call it Obamacare if you want. I mean, people are going to call it what they want. He's associated with it. That's fine. But just on this point of health care costs, on this health care plan, if nothing was done, you would see businesses have huge health care costs. One of the big reasons they did health care reform was to make it cheaper and easier for businesses.
REHMTim Fernholz, correspondent for National Journal magazine. And you're listening to "The Diane Rehm Show." And we'll open the phones now, 800-433-8850. First to Wakefield, R.I., and to Tony if we can get these phones open. Tony, in Wakefield, R.I., I'm afraid it's just not working right now. So go ahead, James.
MISHELJust -- well, it's Larry.
REHMSorry. Go ahead, Larry.
MISHELThank you. I just want to -- what seems so otherworldly to me, this discussion of regulation in the abstract, is that we are in a largest, worldwide, you know, depression, a great recession, the greatest -- highest unemployment in 70, 80 years. And it's because of a financial crisis caused, in my view, from regulators who didn't do their job and regulations that weren't effective. And here we have people saying, somehow, the problem is regulation.
MISHELAnd they're the same people that, in my view, actually are responsible for this great recession, which is also the same reason we have the large deficit. So for people to turn around and say regulation is the problem, that their ideology and policies that dominated 30 years of politics in Democratic and Republican administrations just seems otherworldly to me.
MISHELWe -- I should also say, we've looked at actual regulations, including the largest regulation that EPA is doing, which is called the toxics rule, which will keep mercury out of the lungs of the people of America as power plants spew their waste. And that doesn't lose jobs whatsoever.
MISHELThere's going to be so much investment in pollution control equipment, that any higher costs in the -- from energy are going to be totally offset by new jobs created in protecting the people.
SHERKLook, there's no regulations we could have passed that would have prevented the asset bubble. I mean, Dodd-Frank -- none of the proposals that were out there would have stopped the investment in the subprime mortgages. Sometimes, you know, people in the economy make that mistake. That's why we got the tech bubble. People thought that the tech stocks were worth more than they were.
SHERKPeople thought that the subprime mortgages were more stable than they were because you had this housing bubble. I mean, that's not something -- there's not a government regulation wand that you can wave that's going to solve these problems or make them go away. What you can do is choose whether or not you're going to unnecessarily raise business costs.
SHERKAnd you've got things like the EPA right now proposing these regulations in carbon dioxide. We know that's going to make energy much more expensive if you're going to, essentially, try and implement these controls to regulations.
REHMI want to ask you about that, James, because I have been sitting at this microphone long enough to remember the huge protests we got from the automobile industry, first about seatbelts and then about airbags, and crying about the fact that such costs would be inflated and passed on to consumers, and it would make consumers stop buying cars and automobile manufacturers stop making cars.
REHMNone of that happened. And I just find myself wondering why we keep putting safety things into that kind of light.
SHERKWell, certainly, the cost of the safety regulations do get passed on to consumers. It's a question if this is, you know, worth the cost. And for something like seatbelts, I think, all of us, you know, would say yes. And, of course, that's worth the cost. But...
REHMWell, I don't think you would have 30 years ago. And we've got to take a short break here. When we come back, I hope we can open the phones. Stay with us.
REHMAnd welcome back. I have an email here from Tony who says, "I hear that there are upwards of 2 million jobs going unfilled in our economy. Number one, is this true? Number two, what are these jobs? Are they professional? Doctors, engineers, scientists, et cetera, skilled blue collar, construction needs, specialized training or labor, farm workers, et cetera?" Tim.
FERNHOLZWell, I think -- I can't speak to that specific number that you mentioned. I think it's clear that there are job openings going unfilled. And most of those would be jobs that would require more education, certain credentials. There certainly is a component of our unemployment problem that is structural. But you still see more job seekers looking for jobs than you have job openings. So that's not the entire story.
MISHELAbsolutely true. I mean, the big picture is that there are 4.7 unemployed for every job opening. And that is quite higher than the worst point in the last recession where it reached 2.8. So there's many more -- there's a game of -- a cruel game of musical chairs of people looking for work. The chairs are a job opening. And we have far fewer job openings in this recovery than in the last one.
MISHELYou need to create more openings.
REHMAnd one more email. Then we'll go to the phones. It's from Nancy who says, "I want a good education for my children, good roads to drive on, maintained parks, et cetera. Taxes paid for these things. I don't understand how people don't want to pay taxes, but expect services. Fortunately, in this economy, my family is among those who would have our taxes raised. That's okay. It's only fair." James.
SHERKWell, anyone who wants to send a check to the Treasury is very welcome to do so.
REHMI don't think that's the issue.
SHERKBut there's benefits provided by government spending and there's cause. And, I think, what people are saying is, yes, you got some essential programs. But the government's growing too big. The spending is growing too large. And they kind of burden us, putting on the -- on investment, on entrepreneurs, on job creation. I mean, if you're paying, as a business owner, 40, 45 cents on every additional dollar you make, I mean, that's quite a lot the government is taking out of your income.
REHMI want to follow up on that because when we get into this talk about taxes and job growth, the conversation comes almost exclusively down to small business. What about corporations? To what extent are they holding back and why? What's the difference between what corporations are doing and small businesses? Larry.
MISHELWell, the large corporate political agenda is always put forward and -- with the face of small business. And I think that's all you're hearing, pure and simple, full stop. Now, in terms of taxes, if you look at polls, you find nearly a majority of Republicans wouldn't want to see higher taxes, a clear majority of independents, and a majority of Democrats. It's really funny that we had the Bush tax cuts, which were not a demand of the American people.
MISHELWhen that -- those were passed, that was not in response to the public actually saying, we wanted that. Right now, what the public is saying is they would like to see a deficit reduction. They want to see it balanced. They'd like some combination of higher revenues and smaller spending. The whole idea that any change in taxes is somehow super-powered and is going to stop the economy in its track is totally a myth.
REHMAll right. Let's open the phones and go to Dallas, Texas. Good morning, Kent. You're on the air.
KENTHi. Thanks for taking my call.
KENTWonderful show. You're hitting all the nails on the head. As a 20-year business owner -- and I know lots and lots of mid-sized and large business owners -- you know, the taxes is something they complain about mostly, and this is my opinion, because of greed. They make more than enough money to live on, just in general. If they can make more money by hiring somebody, they're going to (unintelligible) that money, whether they pay 50 percent in tax or 10 percent in tax.
KENTThe taxes on your net profit, it's not a business expense, per se, and the regulations, you know, the -- I think it was James. I'm not sure. He's totally wrong, and no government regulation would have...
REHMAll right. I'm afraid we're losing you, Kent. Do you want to comment, James?
SHERKLook, again, the problem with taxes is you're taking a risk as a business. When you invest in starting up a new company or you're opening up an expansion, you don't know if it's going to succeed. It could be something like , you know, the new Coke, which, of course, was a disaster, or it could be something like Google, which was a tremendous success.
SHERKAnd so the question is, is it worth risking the money and the capital you have now in exchange for the reward you get after taxes? You raise the taxes, and there's less reward from a success. But you still bear all the costs of a failure.
MISHELRight now, the profits in corporations is 25 percent higher than it was before the recession. We have higher profitability now than we had, you know -- and basically, in this decade -- more so than in, you know, 30 years ago. The problem business is facing is not high enough profits or profit expectations. The problem is they don't have customers.
REHMHere is an email from Daniel, who says, "Is there actually any evidence that tax cuts and deregulation create jobs in recessions, or otherwise? I would think more jobs would be created when high demand makes a new job necessary, not when a business owner says, now that I don't have to pay as much or deal with as many safety standards, I guess I'll hire somebody." James.
SHERKWell, there actually have been studies that show that, that when you reduce the tax burden, then entrepreneurs are more likely to start up a new business, and they're more likely -- and they hire more workers when they do. Entrepreneurs (unintelligible) available or that they're imposed on them. If you're going to take more of their money if they're successful, then they're less likely to take that risk.
FERNHOLZI just want to note for context for all the listeners that the tax environment, right now, is more attractive than it maybe has ever been in the United States. We're still under the Bush tax cuts, which were lower than under the Clinton years, certainly lower than the Reagan years in the '70s and '60s. We also have a passel of business investment tax incentives as part of the stimulus package, and that tax deal, it still exists.
FERNHOLZSo if you're an entrepreneur, right now, you have the lowest tax situation, maybe in American history. Now, there are -- there's -- you're going to point out, I think, the Medicare tax increase is coming out. That's still relatively small. But taxes were, for the most expensive small businesses, 5 percent higher in the '90s.
REHMAll right. To Morristown, N.J. Good morning, Bob.
BOBGood morning. I have to say that the anti-tax comments I've heard -- and I've owned and run a small business for 35 years. The anti-tax comments comes from somebody who has never owned and operated a small business. It's preposterous. Give me a choice of making 55 cents on a dollar that I wouldn't have otherwise made, I'll take that deal any day of the week, and so will any other small businessman.
BOBThe other part of my comment is that we, as Americans, seem to have totally disconnected from economic reality. When you have an unemployed steel worker in Ohio voting for Republicans because he hates gay marriage, this is a man whose lost sight of his own self interest.
REHMAll right, sir. Thanks for calling. What about that, James?
SHERKAgain, they don't know that they're going to make the money. You take a risk, and you invest in it. If it succeeds, you get to keep whatever's left after taxes. If it fails, you lose everything.
REHMWell, but, you know, with so much of this debate focused not on whether you start up but on small business as it exists, it seems rather odd to focus so intentionally on small business. Larry.
MISHELWell, we should also look at a little bit of history here. We had a time in the Clinton first budget where he raised taxes, and Republicans said this was going to crater the economy. It didn't. We actually had the best job growth over the last 30 years in that period that ensued. Then you can look at the period when Bush cut taxes, cut capital gains taxes, taxes on dividends, cut taxes on the high-end earner, the -- and we had the worst recovery of the post-war period.
MISHELWages didn't grow one penny in real terms, in inflation-adjusted terms. It was the worst period of job growth, but it was a very good period for profits. So our experience is not that cutting taxes is a magic elixir. It absolutely isn't.
REHMAll right. To Jim in Tysons Corner, Va. Good morning.
JIMOh, hi. Yeah, thank you. It -- I think big part of the confusion here is, you know, we've got a great panel, but, timely, I don't think any of you have ever run a business. I have two small businesses, and I provide consulting services to small businesses. You also have to figure out what's a small business. There's a huge difference between somebody who has five employees in a small business and somebody who has 100 employees in a small business.
JIMThose small businesses that have over 50 or 75 employees where all of these regulations start to kick in, regulations and taxes make a huge, huge impact on them. You know, yeah, you know, I talk to our business people. We're fine with, probably, you know, taxes over $500,000, increasing the rates on that, but also making the corporate tax code seen, so that -- drop that rate down to 20 percent, get away with all the deductions.
JIMBut to hear Obama up there talking about corporate chats and oil companies' special advices, it's -- that provides no confidence to people who really understand what's going on because it shows that the guy just has no clue. You know, you'd have to -- it takes 500 years of the corporate tax break to solve this issue. And to say that increasing costs on a business that has 100 employees -- which is still considered small business.
JIMAnd I think that's what a lot of people get confused about is, you know, a dry cleaner, yeah, it's a small business. But so is a small manufacturing plant that has 50 or 75...
REHMAll right. Larry.
MISHELI think it's interesting that we've now been 50 minutes into this discussion. We really haven't talked much about what I think actually creates jobs. And this discussion is hijacked by the constant business agenda over the last 30 years about deregulation and lower taxes. You know, and in -- which is -- which, I think, is totally not based on evidence.
REHMSo what do you think creates jobs?
MISHELI'm going to -- what a great question, Diane.
MISHELWhat a great question. Well, I think we have to do things that are going to actually create a lot of jobs and lower the unemployment rate over the next 18 months. We can do this by renewing the unemployment benefits, which gives money to people that are going to spend it. It's the most effective thing according to the Congressional Budget Office.
REHMBut that's not going to create jobs.
MISHELIt will create jobs.
MISHELBecause when you give money to people to who are unemployed and they spend it, they go out into their drug store. They go out into their supermarket. They pay their mortgage. They go out and buy things at the department store.
MISHELThat makes businesses give people something, you know, to produce for to sell. They then hire people. They then hire. Then they order supplies.
REHMOkay. So increasing or extending the unemployment rate. What else?
MISHELAnd same with the payroll tax holiday. We need to do -- we can do infrastructure. We can modernize our schools. We can do things -- right now, one of the biggest problems in America is that the state local governments are cutting backward, losing jobs in the public sector. For every job lost in the public sector, there's another job lost in the private sector. Now, preventing that would really help us move forward.
FERNHOLZWell, I think, I mean, Larry is talking about essentially creating a virtuous cycle that you want to see in the economy, where more folks are spending, more people are getting hired. And that's what the president tried to do in the stimulus plan, for instance, which economists think had some affect but largely wasn't large enough. And for policymakers right now, the issue is that, one, Congress, where House Republicans are really setting the agenda, is not concerned about jobs.
FERNHOLZThe issue is the debt and the deficit. Policymakers aren't talking about this, and the administration has basically given up convincing Congress to do the kinds of proposals that Larry suggests.
REHMTim Fernholz of National Journal magazine, and you're listening to "The Diane Rehm Show." Let's go now to Leesburg, Va. Hi there, Peter. You're on the air.
REHMYes, sir. Go right ahead.
PETEROh, hi. Sorry. First of all, excellent show as always...
PETER...especially on this topic. I wanted to ask about the -- one of your guests about the role of the stimulus because it seems to me that the evidence is so strong that the stimulus had a huge positive impact in one thing, the rate of unemployment back in 2009, and that there's a very good argument that can be made, that, right now, we're seeing pretty much the end of the stimulus in various areas, the end of subsidies to governments, state governments so that they're laying people off, that the new layoffs are largely caused by the end of stimulus, the end of the stimulus for housing buying and so on.
PETERAnd the arguments for more stimulus to deal with these jobs should be really, really strong, and then long term, isn't the case that -- by -- if the longer we have a recession, the more the deficit is going to grow for that reason?
REHMAll right. Tim Fernholz.
FERNHOLZWell, I think the caller makes a great point, which is that the stimulus did, in fact, improve the economy, improve economic growth. And a lot of the sluggishness we're starting to see in the economy now is because it's running out. And people have pointed out that the U.S.'s borrowing costs right now, for us to get more money to do that to run a deficit, are historically low.
FERNHOLZPeople still have a lot of confidence despite what's going on with the debt ceiling in U.S. treasury bonds. But, you know, again, you have this issue where the long-term debt issue, long-term health care spending is really dominating in the minds of Congress, particularly in House Republicans. And the House Republicans feel like they have a mandate to talk about smaller government and cutting spending.
SHERKThe stimulus has been a failure by the administration's own measures. They predict, if we pass the stimulus that we'd have 6.5 percent unemployment right now. Without any stimulus, we'd be at 8 percent unemployment. Well, we passed it, and we're at 9 percent unemployment. And the reason is, if you're a business owner -- let's say the government's been giving you new money on, say, your solar panels.
SHERKWell, if you're a -- someone who uses these solar panels, you know the stimulus runs out in two years. Why in the world would you build an additional plant? You might, you know, work your workers on overtime, hire a few more guys to the margins, but you're not going to invest in an entire new plant when you know the entire thing is going to run out in two years. It doesn't have any permanent effect on increasing hiring.
FERNHOLZWell, just to know, you know, there are plenty of empirical examples that counteract that. Alcoa is part of the stimulus. The big aluminum company made huge investments in new plants because, you know, they wanted to take advantage of the opportunity to make those investments cheaper. And then when the economy recovered to be -- have that advantage, they'd be able to sell more.
FERNHOLZSo you did see some of those stories. You know, it's not cut and dried. And, frankly, the stimulus package was not well-designed in terms of instituting those kinds of permanent changes. But the evidence is that we saw that happen. Now, the fact is it under-performed what the administration forecast. They were wrong about that.
FERNHOLZBut that doesn't change its effects.
REHM...one final email from Dennis in Dayton, Ohio. "I had 34 employees in 2001 at the Clinton tax rates and was profitable. I have 14 employees now at Bush tax rates and am barely able to have any profits to pay taxes on. Taxes as the number one problem for small business is a bunch of hooey. Let me make more profit, and I will gladly pay more taxes." Just something from Dennis in Dayton, Ohio. Want to thank you all, Larry Mishel, Tim Fernholz, James Sherk, and thanks to all of you for listening. I'm Diane Rehm.
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