Businesses are not social welfare organizations. They are not organized to provide jobs, education or anything other than the goods and services for which they receive compensation. To maximize profitability, businesses cannot be expected to incur costs for anything—including labor—that they do not need in order produce the goods and services they sell or to manage their operations. Consuming more than they need for their key functions (broadly defined) is a wasteful use of resources that could be better utilized by other nodes of the economy. Successful businesses devote a good deal of attention to cost containment so as to maximize profit.
That is why Progressives should not be looking to government to “reward” businesses for “creating jobs” by doling out tax breaks. Smart businesses optimize their operations so as to create the most profit per unit of input, and they only hire people when they figure that additional workers will help them maintain or increase profit. It makes no sense for a business to make a commitment to a worker that depends on the availability of an artificial and potentially temporary economic factor such as a tax break if the level of expected profit does not justify the hire.
This is particularly true for the small businesses that provide the bulk of the jobs in the American economy. A person who operates a small business is likely to prefer doing all the work—sales, marketing, producing, packaging, distributing and administering--operating the small business entails and keeping all the profits. A person operating a small business is not likely to hire a new worker until it becomes clear that the new worker will enable the business operator to increase sales to a level sufficient to cover the cost of the worker and return additional profit.
While we should expect businesses to manage their costs aggressively, there is a limit. Nothing less than the outcome of the Civil War established the principle that businesses cannot manage the cost of people the way they manage the cost of paper clips and other overhead. Since the end of the Civil War, we have insisted that while business may vigorously seek profit, those profits may not be earned through, among other things, the employment of children, the neglect of worker safety, the degradation of the environment and the payment of wages below what society considers to be fair and decent.
In every one of these cases, society imposes additional costs on businesses for the welfare of the society as a whole. Businesses sometimes complain that such costs make their products less profitable, requiring them either to raise their prices in order to recover costs and profit or, in the extreme case in which costs and profit cannot be recovered, discontinue production entirely. Both of these, they argue, hurt the community at large.
In the former case, a business must decide whether to absorb the additional cost imposed on it by social policy or pass those costs on to the society as a whole in the form of higher prices. Higher prices will affect demand or they won’t. When demand is not affected, the circle closes. Society demanded certain standards and agreed to pay for them.
When the circle doesn’t close and prices don’t rise in line with cost, consumers are saying that the increased cost exceeds the value of the product or service. In that event, the business must decide whether to stop providing the product or service or to allocate the loss among its stakeholders. Assuming that the additional cost merely reduces the business’s gross profits, the business must decide which of its stakeholders must bear the loss.
During the New Deal era of the last century, social policy tried to ensure that workers would get a fair share of the profits their labor generated by encouraging the creation of unions and the use of collective bargaining. At the collective bargaining table, a union’s function was to protect workers, as much as possible, from having to absorb the lion’s share of any loss.
Unions still have that function today, but they are far less powerful and can’t shield workers from loss to the extent that they once could. Today, we privilege capital and management, and the result has been a huge increase in the level of income and wealth inequality over what existed until about 1980 and the beginning of the “greed is good” Reagan era.
Progressive economic policy begins where the union movement of the last century left off. It seeks a fair division of business profits among all stakeholders by neutralizing the role that trade policy, tax policy, labor policy, and antitrust policy have played in shifting power and wealth from the many to the few.
Progressive economics focuses on demand and not supply as “greed is good” economics does. Increasing demand encourages businesses to hire more people, and as more people get hired and the slack in the labor market disappears. As businesses compete for employees, wages increase, automatically shifting income and wealth back into the hands of the poor and the middle class.
Progressives call for government to increase demand by investing in things we all need, such as infrastructure, health care, research and development, education and social insurance. That’s why Progressives are never ashamed to call for more government spending and the taxes required to pay for it.
Over the next few years, if Progressives want to take power back, they must do it by advocating for a fairer economy. Progressive policies such as higher minimum wages shift more of business gross profit into the hands of the people who actually do the work. Smarter tax policy could make it more advantageous for businesses to divert resources away from bloated executive pay packages and toward innovation, business expansion, and employee financial security.
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