Mountain Views News          Saturday, November 13, 2010

10

LEFT TURN/RIGHT TURN

 Mountain Views News Saturday, November 13, 2010 

Indirect Effects

HOWARD Hays 

As I See It

GREG Welborn

There’s no real need to focus on the results 
of the 2010 elections, but there is a fairly 
important campaign issue that warrants 
some serious attention. The focus in this 
election was overwhelmingly on jobs and 
the economy. Nationally and statewide, 
voters were trying to decide who would do 
the best to create more jobs, and often times 
their thinking was muddled by the false and 
deceptive claims of the candidates.

Carla Fiorina was defeated, at least to some 
extent, because it was claimed she “shipped 
jobs overseas”. Likewise, many voted 
Democratic because they believed that more 
stimulus and government spending would 
create jobs and improve the economy. These 
are two sides of the same coin and evidence 
a misunderstanding of what really creates 
jobs.

Let’s take the case of government spending 
and the stimulus, since it’s the easier one 
to dissect. While true that government 
spending can create a job, it is not at all true 
that government spending will create more 
jobs than it destroys. In other words, the 
net effect of government spending is at least 
neutral, if not negative, in how many new 
jobs it creates.

To understand this, let’s look at a simple 
example to illustrate both the direct and the 
indirect effects. Say that Uncle Sam decides 
to buy more computers for one of its offices. 
It places the contract with HP or Dell, and 
that company likely will have to ramp up 
employment to meet the new demand. The 
money it receives goes in large part to paying 
the salaries of the new workers. 

But the government has to get that money 
from someone, either in the form of taxing 
someone or borrowing from someone. 
Well, if the government giving money to 
a computer manufacturer creates a job 
here, doesn’t it stand to reason that the 
government taking money from someone 
eliminates a job there? You see, the person 
who is taxed would have spent that dollar 
somewhere. Whether the person was going 
to visit a restaurant, buy a car or paint his 
house, he was going to spend it somewhere. 
Wherever the money would have been spent 
would have sustained a job at the restaurant, 
car dealership or paint store. But since that 
money has been taken by the government, 
the person will no longer be able to spend it 
and there will be a job loss at the restaurant, 
car dealership or paint store.

You can’t have this both ways. You can’t 
argue that government spending creates jobs 
but somehow government taxation doesn’t 
decrease a job. This is a fairly common error 
in economics. It’s easy to make because we 
all tend to see the direct effects and forget 
about the indirect effects. The press doesn’t 
help matters either. They typically send 
a camera crew to the new or expanding 
computer manufacturing facility, and we all 
see more people walking into their new jobs. 
But the camera crew can’t possibly show up 
where the job is lost, because nobody knows 
where that is. The person who was taxed 
doesn’t announce to the world or even tell 
the IRS on his tax form where he was going 
to spend the dollar that was just taxed away. 
The analysis isn’t changed if the government 
borrows instead of taxes to get its money. 
Money taken away in either form decreases 
employment somewhere.

Because we don’t see the indirect effects, 
many of us think that government spending 
increases employment and thus boosts the 
economy. It doesn’t do either of these. The 
only thing government spending does is to 
shift a job from one place 
to another at the whim of 
the government.

 Now let’s turn our attention 
to the claim leveled against 
Carly Fiorina. Somehow, 
she conspired to ship jobs 
overseas by deciding to 
have some components 
made in China instead of in the U.S. Here 
again, though, we are blinded by the direct 
effects and can’t see the indirect effect. The 
bottom line is that Carly couldn’t decrease 
employment in the U.S. if she wanted to.

The direct effect of making parts in China 
is pretty obvious. Someone in China gets a 
job to make the part, and the news crew can 
easily film it. It’s also true that someone who 
was making the parts in the U.S. is now out 
of a job. So much for the direct effects. But 
there is so much more to consider. First of 
all, Carly Fiorina must have saved money by 
making this decision or she wouldn’t have 
made it, right? So instead of giving $100 to 
someone in the U.S. to make a part, she’s now 
giving $80 to someone in China to make the 
same part. But Carly still has $20 left over 
and will spend that somewhere. Perhaps 
she will now go to another restaurant or 
buy another car or paint her house again. 
Whatever she chooses to do with the $20, it’s 
going to increase employment somewhere 
in the U.S. We just don’t know where, but 
at this level of the analysis, it’s not $100 of 
employment that’s left the U.S., it’s only $80. 

So what, you’re probably saying. There’s 
still a net job loss in the U.S., right? Wrong! 
Ask yourself the following question, why 
would someone in China accept $80 in U.S. 
currency to work all day to make a part for 
Carly Fiorina? The answer is that they will 
eventually use the $80 to buy something in 
the U.S., or they will trade it to someone 
else in China who intends to buy something 
in the U.S. Whether the $80 comes back 
immediately or goes to the Bank of China 
who lends it out to someone else who uses it 
to buy something American, the fact remains 
that the $80 will come back into the U.S. 
And when it does, a job will be created. We 
don’t know where. Perhaps China Airlines 
will use it to buy airplanes from Boeing. We 
can’t possibly know where it will go, but we 
do know that it has to come back. 

 The direct effect is obvious. The indirect 
effect is almost impossible to see, but it’s 
always there. Jobs are lost somewhere, but 
jobs are gained somewhere else. The net 
effect is not negative. Carly Fiorina could 
no more prevent the money from coming 
back into the U.S. than fly to the moon, and 
she therefore couldn’t possibly ship jobs 
overseas.

The last point to leave you with, however, is 
the efficiency factor. The examples above 
are not simply equal trades between jobs 
somewhere in the U.S. and somewhere else 
in the U.S. The simple fact is that when 
governments spend money, they typically 
waste it, needing more money to get stuff 
done than if the money had been left in 
private hands. So, for those who believe 
in more stimulus or more government 
spending, you’re actually getting less every 
time you give the government more.

About the author: Gregory J. Welborn is a 
freelance writer and has spoken to several 
civic and religious organizations on cultural 
and moral issues. He lives in the Los Angeles 
area with his wife and 3 children and is 
active in the community. He can be reached 
at gregwelborn@earthlink.net.

 We've had time to try and 
make sense of the election 
results. Now we'll try and 
make sense of the Republicans.

The list of mid-term results 
over forty years that Susan 
offered last week shows voters 
re-electing presidents after having given 
a House majority to the opposition only 
two years' prior. This could mean voters 
agree with an administration's goals, but are 
impatient to achieve them. Maybe there's 
discomfort in having one-party dominance 
over two branches of government. Or, it 
could be a sign of Republicans' success in 
realizing that enough voters will fall for the 
same spiel, campaign after campaign, no 
matter how discredited by the historical 
record.

 The goal of the Republican leadership is to 
serve those who bought them their seats, and 
continue the most dramatic redistribution of 
wealth since the 1920s. As Ronald Reagan's 
former Budget Director David Stockman 
explained on CBS News' 60 MINUTES, "In 
1985, the top five percent of the households, 
wealthiest five percent, had net worth of $8 
trillion, which is a lot. Today, after serial 
bubble after serial bubble, the top five percent 
have net worth of $40 trillion . . . The top five 
percent have gained more wealth than the 
whole human race had created prior to 1980." 
This, while the other 95% remained stagnant, 
or fell backwards. He notes that this year's 
Wall Street bonuses, awarded those who two 
years ago wiped out the savings of millions 
of the less-exalted, are announced at $144 
billion - the highest in history.

The Bush tax cuts "should be extended 
for everyone, especially for the upper end 
where lower taxes translate directly into 
new investment of capital which translates 
into jobs!!", wrote Greg last week. The Wall 
Street Journal stated that "high taxes interfere 
with natural human creativity and drive". 
That was thirty years ago, just prior to the 
first Reagan tax cuts.

 Shareholders did fine in the 1980s, but 
blue-collar wages sunk, with median family 
income stagnant. The dynamic in our 
economy changed from the postwar model 
of shared prosperity to wealth funneled to 
the top 5%. Two incomes became necessary 
for a middle-class household. By 1983 we 
had the largest peacetime deficit in history. 
Relative to the size of the economy, both net 
investment and savings dropped.

To partially make up the difference, Reagan 
turned to the middle class and hiked payroll 
(FICA) taxes. The rich got a huge break in 
the 1980s; the bottom 40% ended up paying 
a higher tax rate in 1988 than they did in 
1980.

By the time George W. Bush took office, 
Republicans were confident that because of 
short memories, voters would again fall for 
the tax-cuts-mean-jobs line. Bush doubled 
down on the Reagan tax cuts, hedge fund 
managers used the windfall to gamble on 
foreign currencies and bet on the failure of 
collateralized securities, while private equity 
firms closed factories, parted out the remains 
and sent jobs overseas. The rest of us 
suffered the worst economic downturn since 
the Great Depression.

Lest we forget, businesses 
hire not because of tax cuts, 
but because of middle-class customers with 
money in their pockets to buy the goods 
and services those business offer. When all 
the wealth goes to those who already have 
plenty, those customers won't be there. So 
why do Republicans argue that adding $700 
billion to the deficit to lavish more breaks on 
the richest 2% would bring a result clearly 
at odds with the historical record? Because 
their corporate sponsors expect them to, 
and consultants advise that enough of us are 
dumb enough to fall for the argument yet 
again.

It's hard to make sense of the fact that while 
polls show voters' main concerns are jobs and 
the economy, Republicans appear to believe 
we're most concerned about preserving the 
right of insurance bureaucrats to override 
decisions made between ourselves and our 
doctors, and to drop kids from coverage once 
they smell a "pre-existing condition".

As quoted in the San Bernardino Sun, Rep. 
David Dreier suggests insurance companies 
have recently raised premiums because 
of health care legislation that won't be 
fully enacted for another 3-4 years. He'd 
probably suggest the increases we've seen 
over the past forty years since the HMO act 
was passed under Nixon can also be blamed 
on "Obamacare".

"We will be pursuing the reform ideas that 
we believe actually will bring down costs - 
tort reform, the ability to purchase insurance 
across state lines, and the creation of small 
business pools - and we hope that President 
Obama will give them a second look", says 
Dreier. As pointed out by Ezra Klein of the 
Washington Post, the "four planks" of the 
House Republican Conference (the three 
mentioned by Dreier along with enabling 
states to enact their own reforms) have 
already been given that "second look", and 
were in fact incorporated in the Senate bill. 
According to the Senate HELP Committee, 
the final bill included 161 Republican 
amendments, the product of "six bipartisan 
working groups" that "met a combined 72 
times" and "30 bipartisan hearings on health 
care reform" since 2007.

 As far as "bringing down costs", we can look 
at where "tort reform" has already been tried. 
In Texas, studies show that although there was 
a drop in malpractice premiums, insurance 
premiums for consumers continued to rise - 
in some cases at a higher rate than in areas 
that hadn't enacted the "reform".

It's hard to make sense of Rep. Dreier, and 
Republican colleagues, repeating talking 
points advocating "ideas" be incorporated 
into legislation that already incorporates 
them, or hoping to "bring down costs" with 
measures that have been shown to have the 
opposite effect.

According to the Center for Responsive 
Politics, David Dreier raised $1,008,978 over 
the last election cycle in what is considered 
a "safe" district. He's collected nearly 
$600,000 over the past ten years from the 
health, insurance and pharmaceutical 
industries for his services.

Now it's starting to make sense.


LETTER TO THE EDITOR


CITY OF SIERRA MADRE

NOTICE OF PUBLIC HEARING

The City of Sierra Madre gives notice that the City Council will conduct a public hearing to consider adoption of Ordinance 
1312, establishing Sierra Madre water rates for Fiscal Years 2011-12, 2012-13, 2013-14, and 2014-15.

DATE AND TIME OF HEARING PLACE OF HEARING

City of Sierra Madre City of Sierra Madre

City Council Meeting City Council Chambers

Tuesday, November 23, 2010 232 W. Sierra Madre Blvd.

(Meeting begins at 6:30 p.m.) Sierra Madre, Ca. 91024 

At the Public Hearing, the City Council will hear and consider oral and written testimony from any person interested in the 
proposed Ordinance. 


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