The objective of business is profit. Profit creates employment, retail and wholesale orders, manufacturing, and growth — all of which contribute to a healthy economy.

But profit depends upon consumer spending. And consumer spending depends upon employment and fair wages.

Rather than stimulating economic activity, Act 10 created massive layoffs and lowered wages and has led to more sluggish economic activity in the state.

Here’s why: Suppression of collective bargaining equals wage suppression. Wage suppression equals suppression of purchasing power. Suppression of purchasing power equals lower profits.

Reposted from Econbrowser by permission from Professor Menzie Chinn.

Consider the following graph, with both series (coincident series for economic activity) normalized to 2011M01=0.

Figure 1: Log coincident economic indexes, both normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author's calculations.

One series pertains to the state I live in now (Wisconsin), and has pursued a policy of spending cuts and tax cuts skewed towards high income groups. The other is the state I lived in before coming to Wisconsin (California). It dealt with the serious fiscal problems it faced in part by cutting spending, and by raising taxes. Interestingly, both states had new governors taking power in January 2011 (Walker in Wisconsin, Brown in California). And in both cases, one party holds power in both houses of the legislature, as well as holding the governorship -- Republicans in Wisconsin, Democrats in California.

Wisconsin has a proud history of prosperity through hard work and innovation. Wisconsinites are ready and willing to learn skills and put them to work. Our state also has a proud tradition of leadership in manufacturing, food production, and innovation in turning the results of medical, biological, and environmental research into valuable products. As our economy shifts from resource extraction and heavy industry to a high-tech future, Wisconsin can again take the lead in building an economy that benefits all workers and their families.

We can restore Wisconsin to economic strength with policies that reward innovation and “in-sourcing.” Family farms, small businesses, tourism, Great Lakes-centered enterprises, and UW-system patents generate prosperity that stays in Wisconsin. We need to stop rewarding out-sourcing, foreign developers grabbing our farmlands, and the legalized blackmail that happens when a company demands tax incentives and still moves jobs out of state or overseas.