Though Americans' frustration is understandable, punitive measures will just make matters worse

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As unemployment remains stuck above 9%, Americans are becoming impatient. It's hard to blame them: profits are growing among for many large corporations -- so why aren't they hiring? This is beginning to cause anger towards corporations that appear to be in good health but aren't bringing on additional workers. Should firms be hiring more aggressively?

Gerald F. Seib has a column today at the Wall Street Journal warning that the sort of populist anger like we're seeing from the Occupy Wall Street movement could soon target big business. Indeed, it already appears to be headed in that direction. He writes:

By almost six to one, voters said corporate chiefs had done more to hurt than to help the economy--a worse rating than accorded the president, congressional Republicans or Democrats, labor unions or lawmakers affiliated with the tea party.

Similarly, the Gallup poll found earlier this year that 62% of Americans want corporations to have less influence in America, up from 52% a decade ago.

Hiring Responds to Expectations, Not Demand

So why aren't businesses hiring if profits are good? You often see "poor demand" or "poor sales" blamed. But are sales really so bad? Here's a chart showing inflation-adjusted consumer spending versus employment since 2006:

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This pretty much explains why people are so angry: consumer spending is actually about 1% above its December 2007 peak. Meanwhile, employment is 4.5% lower. Why hasn't employment returned if spending has? Hiring is based on expectations, not current demand.

We are seeing firms so reluctant to hire because they have grim projections for the next few years. In 2007, they hadn't realized just how ugly the future would be. So they essentially had more staff than they needed to satisfy future demand. That led to layoffs. Until businesses feel that the future will be as bright as they thought it would be back in 2007, they aren't likely to bring their workforces back up to 2007 levels.

Once you understand that businesses are hiring little due to pessimism about the future, you might begin to sympathize: most Americans agree that the economy looks bleak. So is it really fair to blame firms for not bringing on more workers? If growth prospects are weak, shouldn't hiring be weak too?

So Let's Not Hider Growth

Seib responds to this frustration felt by many Americans by worrying that anger could eventually result in "surtaxes, even more regulation, trade barriers and restrictions on the flow of capital." Such measures would make job creation even more difficult.

In fact, we already appear to be witnessing this in action: just look at last summer's financial regulation bill. The layoffs on Wall Street are ongoing. Banks are facing higher costs, some of which will be passed on to customers, others will restrain growth, and some will force firings.

No punitive measure on corporations will encourage hiring. They will cut "excessive" profits by either seizing some of them directly or by cutting them through new costs. With less money going back to shareholders or being held as cash, firms will have less capital with which to invest once they begin to feel better about the direction of the economy. Hiring in the future will then be even slower.

It's important to remember that firms love growth. If they saw the potential for growth in the near- to medium-term that more hiring would help, then they wouldn't hesitate bringing on more workers. They don't see that growth potential. That's the problem. They want to be in a position to rationally hire more workers, just as unemployed Americans want to be hired. But if they do so prematurely, then they'll just have to lay them off again or will operate inefficiency and in some cases for a loss. Those outcomes would make everybody worse off.

Image Credit: REUTERS/Jessica Rinaldi

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