or: Why the Republicans are wrong about all of the above...(apologies to Douglas Adams)
There seem to be two schools of thought in Washington these days: Those that think that government intervention in the economy is the answer, and those that think it is the problem. Republicans have long held onto the belief (well - at least since the Reagan days) that if government stays out of the way of The Invisible Hand of The Free Market (cue heavenly chorus) then all of our problems in the economy will be resolved. The Democrats think that the problem with the free market is the human factor, with greed that results in monopolies and dubious ethical behavior. Let's dig a little deeper...

It was Reagan that introduced the notion that cutting taxes would magically reduce the deficit. The rationale was that if rich people had more money, they would create jobs and thus the income taxes on the new low wage earners would somehow more than offset the taxes lost from the rich, and reduce the deficit. It didn't make sense then (George Bush the Elder properly referred to it as "voodoo economics"), and it doesn't make sense now. In fact, after cutting taxes, Reagan had to raise them again.

Along with the fantasy math is the false notion that rich people create jobs. Why would they? They're already rich. Jobs are subject to the same driving forces as "the free market": supply & demand. When there is a demand for a product or service, there will be a job to create and/or deliver that product or service. If a company has more orders than they can deliver, they will hire more people. If they are meeting the orders they have, there is little incentive to hire, even if they can afford to. If they need money temporarily to hire, they don't seek out rich people - they borrow from the bank.

The converse of that is that when they have more staff than necessary, at some point they will likely cut employees. This is what happened in 2008. When the economy crashed, people and companies stopped spending money. With orders dropping, companies no longer had a reason to maintain staff levels. This resulted in the dramatic rise in unemployment.

Unfortunately, this is a vicious spiral. When a person gets laid off, they dramatically curtail their spending. This affects other companies, who then have to lay off employees, etc.

The trigger for the crash involves credit. A company's cash flow is rarely steady. There are good months and bad months, and at the end of the year they look at the numbers and plan for next year. If a company is lucky, they have cash reserves for the slow months. A lot of companies, however, play it a bit closer. They count on available credit, dipping into it during slow months, and paying it back during flush months.

When Wall Street and the banks were teetering on the brink in late 2008 / early 2009, the credit available for companies dried up. This caused companies to suddenly get conservative with their spending, because now they had to rely on their own cash reserves to pay their employees during lean months. This helped cause the aforementioned economic crash, as companies stopped spending, causing economic distress for their suppliers, and so on down the line.

This is why the hated bailout for banks was necessary. Making credit available was vitally important to ensure that companies could operate. Unfortunately, the bank bailout pushed through in the waning days of the Bush administration did not come with the strings attached to force banks to provide the needed credit.

This meant that the Obama administration had to goose the economy from the other end. Using the laws of supply & demand, they made funds available for "shovel ready" projects, so states and localities would hire workers and contractors to do work, knowing that the employees would be spending most of their paychecks, thus creating the demand that would create jobs in the supply chains. It seems to be working, but unfortunately not dramatically enough to prevent huge losses for the Democrats in the 2010 elections.

Another ongoing problem with the current state of low taxes is the division of wealth. When taxes are low, those at the top are inclined to amass as much wealth as possible. As we've seen already (and as income statistics show), that wealth does not "trickle" downhill. The rich have gotten richer, the poor have gotten poorer, and the middle class is disappearing. What can be done to ensure that money gets in the hands of those that will spend it, thus driving the engine of our economy?

The answer is counter-intuitive: raise taxes, especially on business profits. In a carrot/stick scenario, this is known as "the stick". So what would the carrot be? The best incentive would be tax incentives for companies that invest in their infrastructure, including hiring new staff. If a company knew it would be penalized with taxes for profit-taking (and giving big bonuses to the upper management), and could instead save on their taxes by updating aging equipment, rehiring, or retooling, they would likely do the latter. This would put money in circulation, resulting in more jobs, and more taxes to drive down the deficit.

But wait - didn't I say that companies won't hire just because they have money, if they don't have a need for that employee? Well yes, but... Most companies today are struggling to operate with reduced staff, with employees often doing two jobs, or working long hours. They would gladly hire staff, but are concerned about money. If a tax incentive sweetens the deal, they would likely take the plunge. As the economy improves, they will want to hold onto their best employees, so overworking them is not in the company's best interests.

In addition, companies that choose to update equipment, software, and retool manufacturing are putting demand into the product supply chains, and those demands will need to be fullfilled by working employees. That will result in the suppliers hiring, and those new employees will be buying personal products and paying taxes, resulting in more jobs, more tax revenue, and - once again - lower deficits. This is also a spiral, but in the desired direction.

Tax rates are lower now than they were during Reagan's presidency when unemployment was rebounding from a high. Tax rates are lower now than they were during the Clinton presidency when we were actually running a budget surplus, paying back debt from previous deficits. Lower taxes - despite assurances from the Republicans - have made matters worse, not better.

The answers of course means that the government would need to raise taxes and interfere with The Free Market (cue heavenly chorus), something that is anathema to Republicans - which is why they are wrong about jobs, taxes, the deficit, and the economy.