Thursday, March 11, 2010

Another Link Between Financial Collapse and Labor Usage

I have emphasized that an asset price collapse can reduce labor usage because those assets serve as loan collateral, and when the collateral values fall lenders are induced to "discriminate" in their loan collection: namely to collect primarily from businesses and households that are successful, and effectively forgive those who are not. This acts an an implicit tax on success, and causes business and households to have less revenue and income than they would otherwise.

Another possible link is that business asset values determine corporate tax liabilities. When assets values fall, the IRS effectively owns the asset at the margin, and the corporation has no reason to nurture it. I read an example of this in AOL's business (HT: Professor Perry): it looks like some workers at Bebo can expect to be fired solely because of the corporate tax code.

1 comment:

DWAnderson said...

In essence, the first paragraph seems like it is just a restatement of the proposition that limited liability entities provide a subsidy for failure. Your reverse formulation is that this is like a tax on success. If your point is something different, I don't see it because lenders (whether secured or unsecured) seek to maximize their return on each loan independent of any other loans in their portfolio. True, they charge a higher rate than they otherwise would because of the risk of bad loans, but this is just an effect of having limited liability borrowers.