McCain, government and Logic 101

One thing's been bugging me about the John McCain ad that I see every time I turn on the Olympics. It's the line that says Barack Obama is "for "higher taxes and more government spending, so, fewer jobs."

How does higher taxes and more government spending automatically lead to fewer jobs? Let's break down that claim, forgetting what Obama actually does and does not propose, for a moment.

The second half is easy to dismiss. When the government spends more money they spend it on something. Either they buy stuff or they hire people to do stuff. Either way, you end up with more jobs. Either the government hires more people directly, or the companies the government is buying more stuff from (airplanes, buildings, health care) hire more people to produce it.

Okay, what about higher taxes? Shouldn't the government taking more money from businesses and consumers leave them with less to spend, forcing companies to lay off workers?

Not necessarily. I've watched as thousands of people have been laid off in the newspaper industry over the past years. The industry is not losing money; many papers retain double-digit profit margins. So why are papers firing workers? Because their fat profit margins are getting smaller, and Wall Street demands growth.

A generation ago, when the top tax brackets exceeded 70 percent, instead of the current 32 percent, investors didn't care so much about short-term profit. Many wanted "blue chip" stocks, ones that would retain their value over a generation -- stocks like newspapers, which remained profitable year after year, even though the profit margin didn't grow all that much, if at all. If investors moved their money into short-term, slash-and-burn companies, high tax rates meant that they wouldn't keep much money today, and the company's failure would mean they'd be left with nothing for tomorrow.

When Ronald Reagan and a right-leaning Congress slashed income and capital gains tax rates a generation ago, the equation changed. Long-term sustainability was out, and short-term profits were in. So what if a company wouldn't survive brutal job cuts? Get your profit now, cash out and leave some other sucker holding the bag tomorrow.

Now, what would happen if the government raised capital gains taxes, taking more of the profit when investors sold stocks? What if it increased taxes on the richest investors, ones making more than $1 million a year? What if the government used higher taxes to punish short-term investors and reward long-term ones? Would companies quit firing so many workers to satisfy Wall Street's demand for immediate growth?

Maybe. That's how higher taxes can lead to more jobs in the U.S. economy, not fewer. Look at what happened when Bill Clinton and a Democratic Congress raised taxes in the 1990s. We got the longest expansion of the U.S. economy in our lifetimes. And real wages, adjusted for inflation, grew for the average worker for the first time since the 1960s.

McCain's ad perpetuates a logical fallacy that anything which expands government must be bad for the economy, simply because it makes government bigger. If Republicans hate government so much, why do they spend so much money trying to be a part of it?

Robert Niles also can be found at http://www.themeparkinsider.com