Monday, May 14, 2012

Obama’s Economic Fallacy: The Not-To-Do List

Small Business Goals, Rewards and Incentives

* By: Larry Walker, Jr. *

“Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic.” ~ Lewis Carroll *

In his latest weekly address, Mr. Obama outlined a mirage of goals, rewards and incentives which he says Congress ‘must’ act upon immediately. But for the most part, what he proffered are just more of the same tried and failed policies, conjured from the same line of illogical reasoning we’ve heard, time and time again, over the last four years. Therefore, what Mr. Obama coined as a “Congressional To-Do List” should rather be endorsed as the official “Not-To-Do List”. Why? Well, let’s test the logic of just one item on the, so called, 'To-Do List'.

Mr. Obama said, “Third, Congress should help small business owners by giving them a tax break for hiring more workers and paying them higher wages. Small businesses are the engine of economic growth in this country. We shouldn’t be holding them back – we should be making it easier for them to succeed.”

In order to understand why Mr. Obama’s argument is fallacious, one must understand what an argument is. Very briefly, an argument is an attempt to persuade someone of something, by giving reasons or evidence for accepting a particular conclusion. It consists of one or more premises followed by a conclusion. In a logical argument, the premises support the conclusion. When we place Mr. Obama’s argument in its proper order we arrive at the following:

Premise 1 – Small businesses are the engine of economic growth in this country.

Premise 2 – We (the government) shouldn’t be holding them back – we should be making it easier for them to succeed.

Conclusion – Congress should help small business owners by giving them a tax break for hiring more workers and paying them higher wages.

No one in their right mind would disagree with either premise. Yes, small businesses are the engine of economic growth in the USA. And no, the government shouldn’t be holding us back, but should rather get out of our way, and off of our backs, so that we may succeed. However, the premises Mr. Obama presented do not support his conclusion. Will the act of offering or failing to offer the reward of tax breaks to small businesses, that hire more workers and pay higher wages, make them any more, or less, the engine of economic growth in America? Will the act of passing additional governmental laws, rules, regulations and loopholes make it any easier for small businesses to succeed?

As a small business owner myself, I can state first hand, that offering my company a reward for hiring more workers and paying them higher wages won’t help my company in the least. That's because nowhere in my mission statement will you find the stated goals of hiring more workers and paying them higher wages. How many small business owners do you know that are in business for the purpose of hiring more workers and paying them higher wages? I’m in business to provide a top quality, affordable service, and to hopefully make a profit in the process, not to hire more workers and pay higher wages.

In my world, hiring more workers and paying higher wages are by-products of increased demand. But since demand is still a far cry from where it was in 2007, why would I suddenly alter my goals toward hiring more workers and paying them higher wages? If demand were to suddenly increase, I might be forced to hire more workers and/or offer higher wages, but I would not do so to receive a deficit-financed government reward. If, and when, I decide to hire another employee, the decision will be solely based on demand. But as long as the economy remains in its present lackadaisical state, if enacted, Mr. Obama’s proposed reward will wind up just like the 17 other so called tax cuts he has offered to small businesses over his failed term – another waste of paper and ink. If anything, what small business owners lack is an incentive to succeed, not more rewards for jumping through narrowly defined governmental hoops.

Goals, Rewards and Incentives

In order to understand how illogical Mr. Obama’s proposal is, one must have an understanding of goals, rewards and incentives. A goal is simply the purpose toward which an endeavor is directed. And while a reward is a positive reinforcement granted after the performance of a desired behavior, an incentive is an expectation of reward, offered in advance, in order to induce action or motivate effort.

Goal: The purpose toward which an endeavor is directed; an objective.

Reward: The return for performance of a desired behavior; positive reinforcement.

Incentive: An expectation of reward that induces action or motivates effort.

In the matter at hand, an incentive would be something offered upfront to motivate small business owners to reach their own goals. But what Mr. Obama has proposed is to reward small business owners after they achieve a government-imposed goal. According to Mr. Obama, the measure of success for a small business lies in the number of persons it employs. What’s wrong with this theory? The main problem is that it fails to align with the realistic goals of most small businesses. Following is a list of goals for my small business. As you can see, hiring more workers and paying them higher wages isn’t on the list.

  1. Offer top quality services at affordable prices.

  2. Make a profit.

  3. Control costs.

  4. Maintain sufficient demand to remain viable.

  5. Meet all current obligations with current revenue.

  6. Payoff existing debt without incurring more.

  7. Build and maintain a prudent reserve.

  8. Achieve moderate growth, in-line with current resources.

Hiring more workers and paying them higher wages might be Obama’s goal for business owners, but what business has he ever run? Common sense dictates that hiring more workers and paying higher wages are by-products of successful business practices, not primary objectives. It is only when small business owners meet their goals that business activity, hiring and wages increase. So instead of offering a reward for something low on the priority list of small business owners (not even on my list), Congress could do better by offering an incentive to help small businesses reach their true goals. Number one on that list is, indisputably, a reduction of individual income tax rates.

Lower Individual Income Tax Rates

Like me, since most small business owners are taxed at the individual level, lowering individual income tax rates will support small businesses in the following ways:

  1. Helps small businesses keep prices level by not forcing them to raise prices to meet higher income tax obligations.

  2. Enables small companies to maintain the same effective profit margin, in the present unstable economy, without raising prices or slashing expenses.

  3. Makes it easier to control costs without raising prices, or laying-off existing workers.

  4. Helps small companies stay in business in the face of lower demand, which is the by-product of oppressive government taxing and regulatory policies.

  5. Allows small businesses to meet current obligations without incurring additional debt.

  6. Enables small companies to pay down existing debt without incurring more.

  7. Allows small companies to build prudent reserve accounts to meet obligations in the face of future business cycle downturns.

  8. Helps small companies achieve moderate growth in-line with existing resources.

In addition, lowering individual income tax rates will enable increased consumer demand for the products and services offered by small businesses, since a rate cut would apply to everyone across-the-board. Lower income tax rates are therefore a win-win for the economy.

Who asked you anyway?

The only one asking for tax breaks for small businesses that hire more workers and pay them higher wages is Barack Obama. No small business owner that I know has requested any such nonsense. But on the other hand, everyone that I know would benefit from the incentive of lower individual income tax rates. If we can’t agree on this, can we at least agree not to raise individual income tax rates?

Raising tax rates on small business owners on January 1, 2013, which is what’s really on the table, will not help them reach their goals, nor will it achieve Mr. Obama’s fallacious goal. Raising taxes will rather have the opposite effect. Even if the proposed carrot on a stick, tax breaks for those who hire more workers and pay higher wages, is offered, the pending tax hikes will negate that reward, leaving both those who take the bait, and those who don’t in jeopardy.

Arbitrarily hiring more workers and paying higher wages, in a stagnant economy, will force small businesses to raise prices on existing customers, and raising prices, without regard to demand, will have the effect of reducing demand, as customers seek lower cost alternatives. The resulting drop in demand, in the face of higher costs, will lead to further price hikes, in order to meet current obligations. In effect, pursuing the third item on Mr. Obama’s ‘To-Do List’ would land most small businesses – out-of-business – in double-time.

I am frankly sick and tired of all the special interest gimmicks conjured from the illogical mind of an amateur. What Mr. Obama ought to do at this point is simply surrender the keys, and let someone who knows what they’re talking about manage the economy. That’s what I call a logical conclusion.

“Companies are not charitable enterprises: They hire workers to make profits. In the United States, this logic still works. In Europe, it hardly does.” ~ Paul Samuelson

Related:

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again

Obamacare’s Effect on Small Business

Picture via: Christ, My Redeemer

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