Arnold Kling:

What a recovery will look like will be a profit recovery. … our Marxist conditioning leads us to berate profits. If ever we needed profits in our economy, it’s right now. From third quarter of ’07 to third quarter of ’08, wages and salaries rose 3 percent; profits fell 9 percent. Profits are the most cyclical part of the economy. The capitalist system runs on profits. We can’t have profits continue to fall and have a recovery. So we need more profits.

Another reason we need more profits is we are not running an economy on credit anymore. That’s just a fact. You can try to promote lending and beg banks to lend but we are in the process of deleveraging and if businesses are going to expand, it’s not going to be by borrowing; it’s going to be by expanding using profits. And so we need a profit-driven recovery. That’s where things like using the employer contribution to the payroll tax would be perfect. Ordinarily, in a full-employment economy, if you cut the employer contribution to the payroll tax, in order to compete for workers, firms would just raise wages to compensate so that there wouldn’t be much net effect. In fact the benefit would all go to workers. But in today’s economy with unemployment, the cut in the employer contribution to payroll tax would actually flow through into profits. It would also increase labor demand, because it would make labor cheaper to hire. So that would be helpful.

But most importantly, it would increase corporate profits, and that would lead to more investment, and it would use the decentralized-process of the market to figure out where skills are needed and where the next growth opportunities are, rather than having Washington say: “Well, the next growth opportunity is to build school classrooms or roads and bridges or green projects.” Let the market decide where the resources are used most productively.

ALSO: Listen to entire Cato podcast with Kling for an excellent discussion of the flawed thinking behind the notion of a government multiplier.