SANTA CLAUS THINKING IS NOT THE SOLUTION

Santa Claus is a wonderful fiction. He allows people to see the world as they'd want it to be, but there comes a time in life when that fiction no longer works and folks have to face reality. Facing reality though is not an easy task. Fictions like Santa Claus may not be true, but oftentimes people become so comfortable with their fictions that they cannot distinguish what is real from what is not. Fictions can also blind people from the true nature of things, and that's not good, especially in times of peril when recognizing reality is most critical.

Today, America faces a severe economic crisis. Tens of millions of Americans are out of work, many for so long that their unemployment benefits have expired. Millions more have given up hope of ever finding meaningful jobs. For those individuals and the families who depend on them, the peril is here today, and now is not the time for wishful thinking or wonderful fictions.

Behind the jobs debate in America is a fiction peddled by a number of our politicians. It's a fiction that plays like Santa Claus, and it goes like this: If you lower taxes on the wealthy and reduce government regulation on businesses, jobs will flow like the Biblical land of milk and honey. It's an attractive fiction, and many have heard it repeated so often they've come to believe it as Gospel truth, but belief doesn't equal reality. Here's why.

During each of the eight year of the last Bush Administration, federal taxes on the wealthy and corporations declined. Government agencies headed by Republican appointees of President Bush systematically dismantled many regulatory structures so that on the day Bush left office, there were less federal regulations than the day he took office. How did business respond to this reduction of taxation and regulation? They responded by cutting their workforces and shipping tens of millions of American jobs overseas. How did wealthy investors respond to lower taxation? They responded by investing in those same companies that were reducing workforces and shipping jobs overseas. If it sounds like I'm criticizing businesses and wealthy investors, that's not my intention. In reality, both were acting prudently. Let's consider why that's so.

A business operates to generate profits. If job creation enables a company to generate higher profits - great, but companies do not create jobs in a vacuum. They create jobs when demand for their products or services increase. Conversely, companies shed jobs when those demands decrease. Take The Bon Ton stores, for example. In response to the 2008 economic downturn, Bon Ton executives laid off 1,150 employees in the beginning of 2009. In order to remain viable, the company took the prudent and necessary step of reducing its workforce. The move wasn't popular, but it was a good business decision.

If it were true that cutting taxes and regulations produce jobs, the Bon Ton would have been hiring workers in January of 2009 instead of laying them off, because the lower taxes and regulations they were enjoying would have convinced them to hire more workers. But that's not what happened. The executives at The Bon Ton saw a drop off in demand for their products and they wisely cut workers so their company would survive. The Bon Ton will start hiring again when demand for their products goes up – probably at the start of the Christmas buying season. Lower taxes and less business regulations did not prevent Bon Ton layoffs. The drop in consumer demand was the driving force.

Next, consider a wealthy investor. The goal of an investor is to make money. Typically, that means investing in companies that are posting profits, paying dividends and/or gaining value. In difficult economic times, the majority of those companies are like The Bon Ton, companies that have significantly cut their workforce to remain viable. If it were true that cutting taxes and regulations produce jobs, as soon as word spread that The Bon Ton was cutting its workforce, investors would have deserted that company because the fiction says that investors create jobs, but that's not what happened. When The Bon Ton executives dramatically cut the number of its employees, Bon Ton stock, which in November of 2008 was as low as ninety cents per share, started an upward run that eventually climbed to over seventeen dollars per share in April of 2010. Those lucky enough to ride that investment wave made a substantial profit, but they didn't create any jobs.

Bank of America is another good example. It's one of the largest, if not the largest of all U.S. banking corporations. Its profits have plummeted over the past several years and pulled its share price down along with them. Investors have shied away from buying Bank of America stock. A week or so ago, news that the banking giant is undertaking a massive layoff of 30,000 employees immediately boosted the bank's share price, and no doubt its bottom line, and investors once again signaled a willingness to purchase Bank of America shares. That's because prudent investors invest where the profits are, and in this economic era, that means buying into companies that are downsizing, not hiring.

A corollary to the fiction that investors create jobs is the notion that if we reduce taxes on wealthy investors, besides investing, they will spend more on products and services. Supposedly, that increased spending will create the need for more jobs. On the surface, this notion sounds plausible, but the reality is just the opposite. Consumer surveys conducted during the current economic downturn have consistently shown that America's wealthy investors did not reduce their level of spending. That's not a knock on the wealthy. They had sufficient money to maintain their standard of living and they did so, which in all honesty probably kept the economy from getting worse than it is. However, because wealthy spending never dropped off, there's no reason to believe that wealthy American investors are itching to embark on a major shopping spree, if only their taxes were lowered. Few people become wealthy by spending foolishly. The wealthy invest their money instead of foolishly spending it, and as I've shown earlier, they invest in companies that are making money, not creating jobs.

If businesses and the wealthy aren't creating jobs, what's left? Another fiction– evil government spending!

The arguments against government funded job creation are essentially twofold: (1) it invites waste and fraud, and (2) it adds to the national debt. Both arguments contain a measure of truth. Government spending does expose taxpayer dollars to a degree of waste and fraud. Where money is involved, those predisposed to manipulation and greed will follow. There's also no denying that increased government spending today would add to America's national debt, which is a serious problem that needs to be addressed. Neither argument, however, justifies our government sitting on the sideline doing nothing.

Imagine for a moment that you are the captain of the Titanic. The boat is sinking. You issue an order to have all staff report to the lifeboat stations to assist with boarding passengers. The first mate turns to you and complains, "But Captain, if all the staff reports to the lifeboat stations, there will be nobody left to prevent third class passengers from stealing the gold utensils in the first class dining room. And if we order staff that are off-duty to report now, we'll have to pay overtime and the company is already in financial trouble." Do you suddenly countermand your order? Of course not! The urgency of the situation demands extraordinary intervention.

The same applies to America's economy. Government funded job creation is the only viable choice for placing our nation's economic engine back on the road to recovery. We cannot rely on the fiction that wealthy investors and businesses will do it instead, if only their taxes and regulations are lowered. It never worked that way in the past. There's no reason to think it would in the future, unless of course, you believe in Santa Claus.