There is one subject that is universally agreed upon with the mid-terms upon us. The economy is job one. The other major issues on the plate like health care, cap-and-trade and immigration are all based in economics. Of course, jobs are at the heart of the economic debate. The initial estimate for GDP in the last quarter of fiscal year 2010 is 2.0%. Likely it will be revised downward per normal with the 2nd and 3rd revisions down the road. Regardless, it is an anemic number given the normal post-recession recovery rates. We need, at minimum, 3.5% merely to account for the expansion of the labor force due to population expansion. 100,000 to 125,000 is the generally agreed upon rate of new jobs required each and every month to meet this standard. So while the country is technically growing and out of recession since June of 2009, the growth is actually negative when you consider the floor isn’t zero to start with.
How to create 500,000 jobs each month as a minimum is where we need to be looking. That may sound like a lot, but when you must provide jobs for the 15 million unemployed as well as the job growth required due to population growth, it’s really not. Not to mention the underemployed which is a very subjective number. However, those people are in competition for full-time jobs and must be accounted for. The BLS (Bureau of Labor Statistics) puts the estimate at over 26 million underemployed.
So let’s do a little math. 26 million underemployed plus 15 million unemployed plus the approx. 1.5 million jobs required annually for population expansion is how much? A lot! What if our economy were to suddenly take off and create say, a million new jobs each month. Awesome! Great, all would be fixed in short order, right? Well, you’ve got the 41 million unemployed and underemployed plus the 1.5 million each year this takes. Around 4 years time should do it. Now, in light of the fact that we just lost another 95,000 last month, who in their right mind believes that we can even get to that level for one month, let alone for 4 years straight? Well…crickets…I didn’t think so.
That is why this election is so important. To continue with the misguided attempts by the Fed and Washington to create jobs via stimulus and artificial manipulation of the money supply and interest rates is not only not working, it’s making it worse. Give the Democrats two more years to keep trying, and the hill to climb to get back out will truly be a mountain. This is the basis for this post. The type of job created matters. Only one type will work. Private sector jobs that create wealth. The Fed has a mandate to attempt to create full employment. The only tools at their disposal are ways to manipulate artificially. The markets must function under true supply and demand to function properly. Otherwise, we have perpetual boom/bust cycles instigated by the Fed. And they always fail in their attempt at creating full employment.
We don’t want private sector jobs created under government subsidy. This offsets the wealth creation. Of course, all public sector jobs fall under this category. A British economist came up with a theory on this called the Ricardian Equivalence. In short, it says that government subsidizing requires a pay now or pay later trade-off. Pay now with debt (selling bonds) or pay later with tax increases. This is why a government or government subsidized job cannot create wealth. The taxpayer picks up the tab one way or the other. It’s also known as ‘crowding out’. Debt or taxes remove capital from the private markets. Creating ‘busy work’ jobs just for the sake of creating jobs is actually harmful to the private sector and thus the creation of wealth.
Some economists will argue the virtues of any job at all in the interest of full employment. They will argue that unemployed people’s skills erode rather quickly and re-hiring them at a later date is much more difficult. A true statement. They will also argue that a person receiving government assistance has value because they spend that money on living expenses and still pay taxes on it. True again, but not on the value angle. This has the equivalent effect of ‘crowding out’. It’s wealth redistribution. Taking tax dollars from contributing earners and giving it to non-contributing workers is merely shuffling money. It doesn’t add to the pie. And it creates a social issue as well by creating a class division. Productive earners whose tax dollars go to subsidize non-productive earners aren’t happy. Such is the state of welfare. The haves get tired of propping up the have-nots.
We need to look at the value of a job. Since the government is entrusted with responsibly spending our tax dollars, which is better? Providing benefits to an unemployed worker such as unemployment, welfare, food stamps, etc. or providing subsidies to the private sector to hire a worker and avoid the assistance payments? This is the question bandied about in the circles of those who love to spend our tax dollars. The problem is they are asking the wrong question. It shouldn’t be an either or on how to spend tax dollars at all. Neither scenario creates private sector jobs that create wealth.
This is a big government question. We keep asking which direction government should be going in which to save us. The left and right argue their versions of the same evil. Government cannot, never could and never will be able to create jobs that create wealth. Anything they do must be offset with a bill. Maybe we pay it now through higher taxes or maybe we pay it later by accumulating debt. But it must be paid and this cancels out the gains.The only exception that could be argued would be the benefit of keeping one employed so their skills don’t erode. The labor pool has a limited number of highly skilled candidates. These people are needed for the higher producing jobs that do create wealth. But it’s a trap. Subsidize to keep them employed in the highly skilled, good paying jobs and you still have the bill to pay which offsets the wealth. They keep their skills sharp, but they are wasted on non-wealth producing job. There simply is no free lunch here.
The only way to go is for government to stay out-of-the-way as much as possible. Infrastructure style projects that open up new markets where none previously existed are the only time they should be involved. The caveat here is that demand must exist already. What the government is doing with green energy doesn’t qualify here. The demand is being filled by existing power sources. Green energy is seen as a better alternative to fossil fuels and nuclear power, however, this is an issue of public debate and not insufficient supply. We are mixing social type issues with economic here. Some see it as our duty to save the planet. This is an ethical choice. Only if there were insufficient supply to meet our demands would the government instigating development make any sense. We lack infrastructure here in the U.S. to meet our oil and gas needs due to drilling moratoriums in place. This is simply a matter or relaxing regulations. Do so and the private market would step right in to create the infrastructure. Without government subsidy. That’s the path to follow.
Government can incentivize markets without cost in this manner. This will lead to the private market expanding and creating new jobs. Jobs that create wealth. Wealth because they open new markets, attract new investment and actually expand the pie. You must make the pie bigger to create wealth. This is where you must do your research when deciding who to send to Washington. Don’t elect those who are merely fighting over how to spend your money. Send those who are trying to let you keep your money.