Sunday, November 28, 2010

Daddy, Where Do Jobs Come From?

A repost of a classic in that unemployment is still around 10% and I'm guessing some of you might like jobs about now.

Jobs, it seems is becoming a very important issue as we seemed to have shed 5 million of them recently and are on the precipice of the worst recession since 1929. But fear not, for our president elect has a plan and it’s quite simple;

“More jobs.”

Yes, that’s about it, we’ll just “create” more jobs.

Now 3rd grade logic would tell you something is wrong. You can’t put your finger on it. Maybe you can’t full explain it. But you have this twingling sensation in the back of your head that you know something just ain’t right. That it ain’t as simple as;

“Just creating more jobs.”

It’s the same kind of twingling sensation you got back in school when you said, “Well why don’t we just print off more money.”

You intuitively knew something had to be wrong with that solution, but you perhaps couldn’t explain why. And thus it’s the same thing with Barack’s plan to create new jobs.

His idea for this massive infrastructure (and Keynesian) investment gives us all the same twingling sensation in the back of our heads. Why, if it was that simple, to just build roads, bridges and splurge more on education, what were we getting all worried about in the first place? Why are the stock markets so low? Why don’t we create jobs right now today? And so, since we all intuitively know it can’t be that simple, let me explain why. Let me explain to you where jobs come from.

Jobs come from one thing; demand.

Demand for goods and services currently existing or yet to exist. For example I demand food, a good that already exists. I also demand a hovercar and a clone of Jennifer Anitson, a good and service that have yet to exist. Regardless, if the product or service exists or can be created, and there is demand for it, then there is the potential for jobs to be created.

But demand must be met with supply and here is where the actual jobs are created. In order to supply these goods and services an entrepreneur or a company must hire people to help provide those goods and services. This includes everybody from the head of the company managing the firm to the suppliers, vendors, laborers, admins, marketers, accountants and anybody else required to bring these services to reality. However, there is a key element to make this all happen and that is profit.

Oh yes, that “evil” profit.

For you see, no entrepreneur, nor company, nor corporation is even going to bother going through the trouble of setting up the venture in the first place unless they are actually paid for it. And before you start berating these “evil capitalists” to have the temerity to demand recompense so that they may earn a living, you might want to look at yourselves in the mirror because no laborer (let alone you) is going to work unless they are compensated too. So just accept the fact we’re all financial whores, not out of evil or greed, but because it’s necessary for us to live and survive.

Regardless, immediately we see a problem with, not so much Obama’s infrastructure plan, but his fiscal policy in that he is going to raise taxes on not only the rich who employ the majority of people, but also corporations. Envy them and hate them all you want, increasing taxes on them will lower the incentive for them to invest, let alone start a new venture in the first place. And with the rapidly integrating global economy, if they really do have a great idea, why would they set up shop here in the first place? Ireland has a 12.5% corporate tax rate. Dubai has 0%. Russia has a flat tax. And “communist” China has a 20% corporate tax rate.
The good ol’ US o’ A has a 39% corporate tax.

So even though we haven’t addressed Obama’s specific infrastructure jobs creation plan, it’s quite possible other parts of his fiscal policy will impair it or destroy more jobs than it creates, simply because it destroys the incentive to create jobs in the first place; profit.

As for the specific plan itself, it’s not an issue of whether it will create jobs as much as it is a question at what cost.

Understand that to finance this infrastructure plan Obama has two choices; taxation or borrowing. And both options are going to cost jobs as well as efficiency.

In taxing people (no matter how “rich” they are) that takes money that would have been invested or spent anyway which would have created jobs as well. So if you tax the “rich jewelry dealer” an extra $50,000 so 2 employees in Obama’s Civilian Conservation Corps can pour concrete for a bridge, that’s all fine and dandy except for the fact the jewelry dealer now had to lay off his assistant and his admin to compensate for the cut. Congratulations, you created a big fat zero net new jobs.

Borrowing is no better in that the money borrowed by the government to finance the infrastructure jobs creation plan could have been borrowed by a company, an entrepreneur or even an individual to be used to create a new company, expand a factory or just plain spent, all of which would have created jobs too. Congratulations. You not only borrowed money and destroyed as many jobs as you created, but you’ve managed to increase interest rates as well! Thanks!

But the real cost is this, and is often the forgotten about or never-thought about aspect of economics, and that is efficiency. Specifically, as it relates to production.

If the money was left in the hands of the people, the people could then spend or invest that money as they saw fit and to their best benefit. Allowing people to make their own decisions as to how to expend their resources is the best way to make sure the goods and services produced in the economy are those that most benefit the people and increase standards of living the most. Of course, people make mistakes. The sickening, gluttonous binge of using one’s home equity as an ATM machine which has brought upon this financial crisis in the first place is a perfect example where the people will make mistakes. However, for all their flaws, recessions and depressions, free markets, ie- the people have historically been proven to be the best determinants of what to be produced.

Governments have not. And herein lies the flaw in Obama’s advisor’s plan; taking massive amounts of resources either through taxation or borrowing, takes money out of the hands of individuals and puts it in the hands of government. People now no longer get to decide what to spend their now dwindling resources on, and are instead forced to spend it on roads, infrastructure, and schools they may not need.

Now people may rightfully point out that things like roads, bridges, infrastructure, etc., are hardly foolish investments, and they’re right. But again the question is at what cost? Who would be better judges of how to spend this money and who would do more to help the economy out of recession;

A handful of bureaucrats and former Fannie Mae and Freddie Mac advisors now consulting a no-real-world-experience-president-elect determining what the best use of your money is?


300 million Americans who are intricately familiar with their own personal financial situation and the problems/opportunities they face?

This is where the real costs come in that what determines our standards of living is whether we use our resources efficiently to produce the goods and services we NEED. We just promised $700 billion (more like $2 trillion) to bailout those same Harvard ef-ups who ran Wall Street and the government into the ground. Could the people not have used a $700 billion tax cut? Would that not have solved our little economic growth problem? No, we’re stupid, we don’t know what we’re talking about, now shut up and give us the money.

Obama’s infrastructure plan is no different (although, I will admit spending the money on bridges and roads is infinitely wiser than bailing out Ivy League deadbeats). We don’t know what’s best for us. You don’t need that money. Give it to us and we’ll build shinny new roads and bridges. Just what you wanted. No, not that new icky gross Pontiac Solstice that would ACTUALLY HELP OUT DETROIT WITHOUT A TAXPAYER BAILOUT. No Captain, that’s not what you want. You want an addition to the elementary school named after Barack Obama where a newly hired teacher will brainwash…errr….I mean “educate” the children about the evils of capitalism…errr…I mean “global warming.” That’s what you want.

It is this that is the true cost to this Keynesian nightmare. The loss of productivity and efficiency causing American’s standards of living to go down. Not because of a loss of jobs (for I’m optimistically assuming this infrastructure plan will ONLY destroy one job for each one it “creates”) but because the stuff we’re producing with it is not what the American people optimally want.

And finally, permit me a third point.

I know building bridges, though not optimal, is not a waste of money.

I know roads, albeit not optimal, are not a waste of money.

But notice how education was thrown in there?

Please. Please, just stop with the “we don’t spend enough on education.”

It’s a sickening lie and you’re not fooling anyone. By every measure, every stretch of the imagination we spend WAY TOO MUCH on education and the fact education is part of Obama’s jobs creation plan shows me just how inefficient this plan will be. Bridges, fine. Roads, fine. But more money for education would be on par with bailing out the losers of Wall Street and sub prime deadbeats.

Alas, appetizing as new roads and bridges are, it was the inclusion of education, above all else, that made me supremely confident the stork will not be bringing any new jobs to Obama with his little infrastructure plan.


Anonymous said...

So if you tax the “rich jewelry dealer” an extra $50,000 so 2 employees in Obama’s Civilian Conservation Corps can pour concrete for a bridge, that’s all fine and dandy except for the fact the jewelry dealer now had to lay off his assistant and his admin to compensate for the cut.

Obama is talking about raising income taxes. Since employees are a fully deductible cost, at any marginal tax rate less than 100% the tax rate will have no effect on the employer's ability to afford an employee.

As to bridges and roads, you don't expect these dollars to be spent on "evil" things like that, do you? No good liberal like Obama would stand for it. Government prefers spending its infrastructure dollars on worthless public transit projects while the roads rot, then they can use their failure to maintain the roads as the pretext for raising taxes, most of which will be diverted away from the roads into more transit projects.

Anonymous said...

Bravo, Captain. It looks like you're channeling Bastiat, reminding the idiots of what is seen and what is not seen.

"Obama is talking about raising income taxes. Since employees are a fully deductible cost, at any marginal tax rate less than 100% the tax rate will have no effect on the employer's ability to afford an employee."

Income tax incidence is a matter of the relative elasticity of the employer and employee. While the employer's costs are tax deductible, the employee effectively gets a wage cut and must be offered higher wages to entice him to the same position. Employers are not completely insensitive to labor costs, as you seem to be implying here.

Anonymous said...

re: "the tax rate will have no effect on the employer's ability to afford an employee."

A cost is a cost is a cost. Taxing income means less consumer spending. End result - doesn't matter who you're stealing money from - is less jobs.

Dustin May said...

Hey Capi Cap! So, I have a question that has been bothering me for some time. I live in Detroit and I constantly hear about all the jobs that will be lost unless the government bails out the Big 3. Granted, if one or more automaker were to go out of business the job losses would be the short term. What I've been hearing is anywhere between 1 million and 3 million jobs lost. I also know that in the longer term someone will come around and buy up the factories and R&D facilities and use the labor talent in the area to start another car company and/or other new enterprises (that would be great to diversify the economy in Michigan). However, how does one quantify the job creation over time from these new enterprises? Is it possible? I'm tired of the myopic view of the car company management, Congress, and the media.

Dustin May

CBMTTek said...

I think it could be just dandy to create a new CCC. Get the deadbeats that are doing pretty much nothing but collecting a check every month, pack them up, and send them off to a camp for 6 months or a year, where they will actually do something to earn that monthly stipend.

Oh, wait. People being forced to move for work? Does not really sound like the American way to me. The Government should ensure that I can make a decent living without inconveniencing myself in any way.

Oh, and what about Davis-Bacon, and their minimums on construction wages? Surely, the great and powerful wizard can make that go away, can't he?

Let's not leave out the unions, either. Imagine the drop off in campaign donations if suddenly the Local W14A was not working on a bridge job in their state!

Sarcasm aside, there may be one thing that you may be overlooking here. If (that's a big if), IF this money is actually spent on rebuilding the nations infrastructure, these construction projects will create more then just the construction jobs. In addition to the workers themselves, there are the catering trucks, the local taverns, the tool suppliers, the gas stations, etc... surrounding the construction site that will see an increase in business for the duration of the project. Rebuilding a bridge or interstate interchange, 10 year project. That is a pretty big boost to that areas economy.

Of course the above does not consider the effect on areas that do not get one of these infrastructure projects. They will probably lose jobs. Perhaps not as many as are gained from the construction, perhaps more.

Captain Capitalism said...

What "labor talent?" You mean all the lazy UAW workers who bitch and whine when they don't make $73/hour?

Nobody will set foot in Detroit, let alone Michigan. Why should they? The government and the people hate businesses. So if you mean 1-3 million jobs lost in the US, most certainly. But I could also see whatever jobs remain in Michigan being lost as well.

You're best bet would be to move out of that state.

Anonymous said...

What really screws us is Obama's tree-hugger/leaf-licker leanings. When Cap talks about creating jobs, what I see is that we have to create US jobs by eliminating overseas jobs. We have to start doing things ourselves rather than pay others to do it. As far as I can see it, that means all the industries that the enviro-nuts hate, like timber and mining and agriculture.

Well, they are already screwing over agriculture by doing everything they can to eliminate native sod being turned into new farm land (even though food prices are way up. Screw 3rd world kids, it's the ducks we are really worried about).

If they would let the timber and mining industries fire back up, there would be all kinds of jobs created. CREATED, not shifted or traded, or anything like that. AND, since they have been run so far into the ground, they could be created without massive unions running them into the ground.

As it is, the only job creation it looks like he might be into is the peace core.

Anonymous said...

The thing that will really bury us is Obama's pandering to the tree-huggers/leaf-lickers.

The best way to create jobs in the US is to take away jobs from other countries. What happens when Dad loses his job? Well, for one thing you darn well stop eating out at restaurants. You start cooking at home.

We need to quit ordering out for stuff from other countries and start doing it ourselves. And the easiest of things to quit ordering would be commodities.

We NEED to start cutting our own lumber and mining our own gold and growing our own dang food. We need to open the mills and mines that closed down. And we need to open them to let workers but not unions in.

Because if we don't do it through industry, it might not be too long before families are supplementing their pantry with a few spotted owls.

Of course, this will probably all happen at about the same time the Jennifer Aniston clones hit WalMart.

Anonymous said...

Oooooooh, turns out it's not my dial up connection deleting my posting at allll. There is just a bit of a delay before showing up.

That's how this durn internet thingy works.

Anonymous said...

Employers are not completely insensitive to labor costs, as you seem to be implying here.

I'm implying no such thing. I was pointing out that if (for example) an employer's marginal tax rate increases from 30% to 50% their labor costs stay exactly the same, because labor is deductible. The employer's tax rate has no effect on the employer's ability to afford labor, which is the opposite of what the Captain implied. Whether the wages demanded by labor will increase in step with the incidence of income taxes directed at labor is an entirely different question.

Anonymous said...

Wonderful post. Good economics. Should be required reading for all deadbeats who think they understand economics.

Anonymous said...

We need to quit ordering out for stuff from other countries and start doing it ourselves. And the easiest of things to quit ordering would be commodities

Why should we do that? If you care about our future wealth, the principle of comparative advantage says we should not do that.

Anonymous said...

An increase in marginal tax rates certainly does affect the ability to afford an employee.

An increase in marginal tax rates reduces the rate of return for an employer on labor and on the risk inherent in that labor. For the same amount of labor, the employer now makes less money, and the logical decision will be to cut back on labor to try to raise the rate of return or to reduce the risk associated with the new rate of return.

By reducing the return you have reduced the value of the labor used to produce that return.

Bike Bubba said...

Nice "dance track" of Bastiat's "that which is not seen." Seems that you didn't get through to Randian, though.

Here's a further attempt; money is "fungible," Randian, meaning it can move from one place to another. So you take fifty grand out of your jeweler's income, YES, you have just taken money that could have been used for his business.

Or hiring a gardener or maid for his home, or investing in someone else's business (creating capital). Either way, you have still put someone out of a job with your tax hike.

Got it?

And going chapter 11 will not put millions out of work. That's not how bankrtuptcy court works at all. Rather, it simply gives companies a break vs. creditors and such while restructuring is attempted. Northwest Airlines, U.S. Steel, and many other big employers have all gone Chapter 11 without putting lots of people out of work.

Hot Sam said...

No, Randian, that's not right either. Taxes on capital also have an effect on wages and employment because capital and labor are productive complements. In fact, because labor supply is inelastic, more of the burden is shifted onto labor than owners of capital.

Income taxes or corporate taxes both put at least some burden on workers, reducing employment and lowering wages received. Both taxes also affect employers, reducing output and profit. Payroll is not fixed - it is sensitive to changes in taxation.

Only a lump sum tax on workers or firms can be 100 percent avoided by the other party.

johngf said...

Welfare/benefit cheques are also Keynesian, but our governments have been paying these in the good times as well as the bad.

I also keep thinking when Gordon Brown says that he and Alaister Darling are doing exactly what all the other 'advanced' nations are doing (but better, they might claim) that sometimes, yes, everybody is wrong and the best thing is to do nothing and maybe come up with a better plan tomorrow (or the next day). Arg. I just thought of Yvette Cooper. Her public pronouncements are equally as bad as her husband's. When Ed Balls was in the Treasury team he argued that clear data were wrong and his policies were right. Now he's Secretary of State for Families, Schools and Children.

Yes, the circle is now complete.

One last thing. You said there must be demand and supply. This is true, but it would be better to think of value. Someone has to produce something I value. Apple is the best example. They are increasing market share by providing things people value. Their hardware is essentially the same as many Dell and HP computers, but people don't camp out to buy an Inspiron 1520.

Anonymous said...

Lets suppose for a moment that the employer's higher labor costs are completely offset by a tax deduction or a tax credit of some kind.

The revenue generated by this is zero, but we do get more paperwork to deal with so there's still a cost.

Basically, the government can't take stuff from people without those people losing the stuff the government took. There's no way around it, no matter how obscure you make the tax code or how you structure the incentives.

Anonymous said...

Economics have nothing whatsoever to do with this Captain. Obama doesn't care what it costs nor do his flunkies.

They are merely trying to shut the rabble up for now. Hopefully the economy will recover in time to repay the bills...but that will probably be the problem of somebody else. All he needs is enough time to loot the treasury, fill his pockets, and stick it to Whitey and he is good to go.

The fact that he was able to pin this disaster on the repubs is proof of how stupid the American electorate really is.

Hot Sam said...

Randian is exactly right about trade. We are better off by specializing and trading according to comparative advantage. That requires, though, UAW high school dropouts to actually acquire more human capital to remain relevant or take a job cleaning hotel rooms.

A rising standard of living is defined by shipping low wage, low skilled jobs elsewhere. 'Buy American' is a 200 year throwback to the failed economics of the mercantilist system.

HeatherRadish said...

Get the deadbeats that are doing pretty much nothing but collecting a check every month, pack them up, and send them off to a camp for 6 months

You know the only people who will sign up for a "new CCC" are going to be the people who'd sign up to work a normal job, right? As soon as anyone collecting a government check gets handed a shovel, the screaming about their civil rights being violated starts--racism, sexism, ageism, religion, some made-up disability. SCOTUS will find the right to a free ride in a penumbra, and the whole program ends.

Silver lining: It'll be fun to watch assorted white liberals and race hustlers thwart Obama's plan to change America. Heh. Morons.

Anonymous said...

I don't understand why you think that the private sector would use that tax money, used to create public sector jobs, to create private sector jobs themselves. Take this hypothetical situation: tax money is used to give thousands of umemployed nurses jobs, or the tax money is used by a business for a new TV advert. The advertising firm hired, is in more demand than it can provide but manages to squease them in. Therefore, the private sector hasn't, created any new jobs.
Also, consider how tax money could give small incomes to many in need as opposed to a lump sum given to a newly hired marketing director. That marketing director may end up failing to improve the business. So that tax money that instead, was used to pay a new marketing director, did nothing for the business nor the economy.

Captain Capitalism said...

Anon, do you even know what you're talking about or are you guessing your best with the marginal college education you've receive, blatantly short of an education in economics.