Serious Economists Don’t Listen To Business Managers

One of my favorite economics quotes comes from the late Paul Samuelson:

“We learn more about people’s preferences by observing their behavior than by listening to what they say.”

The reason I bring up this quote is because it’s particularly relevant to David Siegel’s recent diatribe, in which he threatens to fire some of his employees if Obama is re-elected. In Siegel’s own words:

“If any new taxes are levied on me, or my company, as our current President plans, I will have no choice but to reduce the size of this company. Rather than grow this company I will be forced to cut back. This means fewer jobs, less benefits and certainly less opportunity for everyone.”

Of course, as Paul Samuelson’s quote suggests, it doesn’t matter at all what Siegel says he will do in the future. The fact is that Siegel is a business manager. Business managers reduce or expand their workforces when they see greater demand for their products and services. Presumably, Siegel wants the government to reduce taxes and cut spending. In the current environment, in which the private sector is still debt constrained and in which a significant exchange-rate depreciation is off the table, a drop in government spending will only further weaken demand. This means that Siegel would be forced to reduce his workforce following more cuts in government spending, irrespective of what he “says” he will do in the future.

Siegel may not know it, but if the government decides to tax people like him more and use the funds raised for high-return projects, such as investments in education and infrastructure, then Siegel would probably end up hiring more workers, not less. The logic is simple. Siegel has a very low marginal propensity to consume, meaning that he doesn’t spend a large portion of his earnings. If the government taxed Siegel at a higher rate and then put more money into the pockets of teachers and construction workers, who do have high consuming habits, then it would boost the demand for the products and services that Siegel’s firm sells. This, in turn, would force Siegel to hire more workers to keep up with the growing demand. Additionally, Siegel may benefit from this development, too, if the higher demand were to lead to higher profits for Siegel’s business.

In short, Siegel has his economics badly confused. Fortunately, serious economists can disregard everything he says about the future; because serious economists care about what business managers do rather than what they say.

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