Why Can’t Mainstream Media Connect the Economic Dots?

Politicians and journalists sure seem to believe that voters have the attention span and reasoning ability of a two-year old. Convinced that we are unable to hold multiple concepts in our minds long enough to judge how they fit together, you can count on being barraged with disconnected appeals to raw emotions.

Nowhere is this more apparent than in the way Washington concocts its complex tax and regulatory policies, and in the media’s childish analysis. As dumb as they think we are, do politicians really believe that they are smart enough to fine tune the economy, counting on their media enablers to justify ham-handed interventions through sound-bite politics?

Consider the balance between capital and labor.

Every day, corporations evaluate investment alternatives that make tradeoffs between man and machine. Do we put more workers on a second shift or buy capacity-boosting equipment to increase the output of our existing workforce? Do we hire more people to bring a part of our supply chain in-house or invest in software to monitor suppliers’ product quality and delivery performance? Do we risk entering a market dominated by legacy providers burdened with expensive union workforces, investing in a modern new factory in a right-to-work state, or instead play it safe and just hire more salesmen to increase market share in our existing business? Do we bet on an increase in demand by building up inventories, stockpile cash for a rainy day, pay the cash out in dividends to shareholders, or hire more lobbyists?

Unless Washington succeeds in leading us into Mussolini-style public-private fascism, corporations will always have choices that politicians cannot control. Policy makers can try to lure them in one direction or another, but most company managers are perfectly capable of holding multiple concepts in their minds to judge how best to pursue their interests over the long term.

For example, government policies that make employees more expensive artificially tip the balance away from hiring and toward investment in technology and capital equipment. This allows corporations to get more output from fewer of people. Yet in the name of helping the working man and with the applause of the media, Washington continually lards on mandated employee benefits, such as Obamacare, and other onerous employment regulations that do exactly that.

Low-tech service businesses that rely on unskilled labor offer inexperienced young workers, including those with little formal education, their first step into the world of employment. Raising the minimum wage prices the most vulnerable out of that job market, hurting the very people the sound-bites claim to be helping. Yet even Mitt Romney has fallen into that trap, proposing that the minimum wage be atomically adjusted for inflation. With this kind of “help” youth unemployment will soon approach that in Europe.

Recent reports indicate the same kinds of distortions emanating from tax policy. Although the U.S. has one of the highest statutory corporate tax rates in the developed world, currently at 35%, few corporations actually pay that rate. In fact, total corporate federal taxes in fiscal 2011 reportedly fell to 12.1% of U.S. earned profits. How can this be?

Look no further than the congressional sausage factory. With broad bipartisan support, a temporary “bonus depreciation” tax cut was enacted that allowed companies to write off investments in capital equipment in one year, rather than depreciating it over the life of the equipment. Unsurprisingly, this lured cash off of balance sheets, helped to barely inch GDP growth into the positive numbers, and was very popular with the business community.

But no one knows whether this burst of capital investment will produce the “best” outcome for the economy over the long run-whatever that means, and to whom. The politicians that passed the law certainly don’t. We can be sure, though, that their complex machinations produced a different outcome than if they simply reduced the corporate tax rate to a more internationally competitive level, say 15%, while eliminating all loopholes and special deductions, allowing the market to guide decisions on how to allocate resources. Doing so would incidentally increase total corporate tax revenues, an outcome you think would appeal to a government constantly in arrears. But what politician has the courage to stand up to the sound-bite attacks that would surely follow a call to reduce tax rates on “greedy” corporations?

OK, so courage is in as short a supply as brains in Congress. Yet while howling about unemployment, how can politicians justify a higher overall tax rate, coupled with special “bonus depreciation” and other write-off goodies, over tax simplification, even though this tilts the playing field against labor? Of course, getting out of the way means vastly reducing the incentives that generate campaign contributions – a horrifying thought for most members of Congress.

Politicians may be right that voters don’t have the attention span to figure this out, and the media analysts who are supposed to inform them are largely to blame. After all, look at the tempest kicked up last week when most analysts reporting on Mitt Romney’s “I don’t care about the really poor” gaffe couldn’t even get to the end of a paragraph to make a judgment. Given the idiotic commentary this remark generated, how can we rely on media pundits to examine multiple tax and regulatory policies through the lens of their actual outcomes, rather than their emotional tenor? Is it any wonder voters are misinformed?