Thursday, September 02, 2004

Canine Economics

Although Newsweek has apparently given up any pretex of unbiased jouranlism (even USA Today has the common sense to put a disclaimer at the bottom of Moore's column), this is actually a pretty good article regarding the employment issue though it probably wasn't intended that way. While it is inclusive of a quote from the Brookings Institute that the outsourcing of jobs overseas issue is greatly exaggerated , it claims ignorance to the faster than expected increase in productivity productivity rates which explain a slowdown in job creation.

An increase in productivity rate is a normal part of the business cycle.

X number of employees are producing Y number of goods (Z number of goods per employee)

Market declines, layoffs occur, company not willing to reduce output

X-1 employees produce Y number of goods at rate of Z+1 per employee

The productivity increase is actually a function of the declining market. As alluded in the article, companies are unwilling to hire new employees until they know that the market will support the increased production. Due to the increased productivity, the market for the products will have to be better than it was before the decline in order to justify the hiring of additional employees which also helps to explain why employment figures are lagging indicators of the economy.

All this makes me wonder why all the democratic furor over tax breaks for corporations. It is mainly when a company is profitable that they will hire employees which is why coporate profitability is also included as an economic indicator.

This is certainly a rather simplistic model and not all inclusive by any means. There are obviously other forces such as technological advances at work here too, but the big question is how much effect does the president really have on this cycle? Disregarding the fact that it is congress that actually sets fiscal policy in this country, not the president, and that good corporations will always find ways to be profitable, one might argue that Kerry and the President arguing over the economy is like two fleas arguing over which direction the dog is walking. They might be able to bite him on the ass every now and then to get him to jump, but at the end of the day, they're just along for the ride.

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