Tuesday, August 07, 2007

Link: Chicken-and-egg economics by Caroline Baum

Aug. 6 (Bloomberg) -- If companies keep hiring, the economy will hang in there just fine.

There's something counterintuitive about that proposition, and repeating it often enough (it's one of economists' favorite palliatives) doesn't make it true. I mean, businesses don't hire out of the goodness of their heart or to earn humanitarian awards. Quite simply, they hire people to produce the goods and services consumers want to buy, hopefully turning a profit in the process.

Companies would prefer to do it all with machines, which don't get paid holidays, a lunch hour or sick days (well, maybe some mechanical downtime now and then). Industrial equipment doesn't need health insurance, complain about the boss or file sexual harassment suits.

Most businesses, however, can't function without humans, at least not yet. So they hire the minimum number of workers they need to earn the maximum possible profit. It may be crass, but that's how it works.

So what to say when you read comments that distort the natural order of things?

For example, following news on July 27 that the U.S. economy expanded at a real 3.4 percent rate in the second quarter, up from 0.6 percent in the first, an economist told the Wall Street Journal that ``the real risk for consumer spending is if for some reason companies slam on the brakes and stop hiring.''

In other words, if businesses just keep adding to their payrolls, the consumer will keep on spending his wages. The catalyst in this model is business hiring.

Cluck, Cluck....

Read the entire piece here. I simply love her style of writing, that too articles in Macro Economics. Highly Recommended.

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