Job Creation: It takes the Right Environment

Job creation is probably the most important issue in the November elections.  What policies should be implemented to insure the creation of jobs?

Most folks don’t understand how or why we got to the high rates of unemployment.  But, only with that understanding, an understanding of what happened in the competitive economic environment that has made the U.S. uncompetitive and rocketed its unemployment rate into the stratosphere, will Congress and our economic policy makers be able to choose the correct path.

The answer is simple: it is a matter of cost.  It just costs too much to produce most goods in the U.S.  And, while the Congress and the Administration regularly demonize those private sector companies that produce their goods in lower cost countries, it is clear that the government itself is a huge part of the problem.

Over the past 20 years, the federal budget has grown at a compounded annual rate of 5.6%; that number is 6.8% over the past 10 years.  But, disposable personal income grew at a much slower 4.8% annual rate over the 20 year period and an even slower 4.5% annual rate over the last 10 years.  The implications of this data are that 1) taxes and fees have increased the costs of private sector businesses; 2) the ever growing government, by its nature, expands its span of control over the lives of its citizens through a rapidly expanding set of rules and regulations, all of which raise the cost of production.

Over the last two decades, the growing uncompetitiveness of  U.S. private sector business was obvious, as production facilities moved south of the border or overseas, and the lower cost countries like China, So. Korea, Mexico, Thailand, etc., began to emerge as economic centers.  While this was obvious, the ultimate impact on the U.S economy was masked by two bubbles, first the dot.com bubble, followed immediately by the housing bubble.  Both of these bubbles were enabled by excessively easy monetary policies.  And during this period, fiscal policy steadily marched toward structural deficits.  With the false sense of prosperity caused by these bubbles, there was no sense of urgency to reverse the trends.

Nevertheless, the bursting of the bubbles has unmasked two significant economic issues:  1) Overtaxation – the U.S. has one of the highest corporate tax rates in the world, and is one of a handful of countries that taxes its citizens on their worldwide incomes instead of the income made within the country.  In addition, the U.S. has relatively high income taxation coupled with state and local income, property, and sales taxes, various business fees, and a 15% payroll tax burden (not to mention the cost of other benefits paid for by many businesses). Business owners, looking for high returns on investments, move production to lower cost areas to avoid many of these onerous costs; 2) Over regulation – every Congress produces ever increasing regulations; state and local governments are no better.  And no regulations, no matter how worthless, ever go away.  For example, it costs the private financial sector significantly more to administer “backup withholding” (i.e., W-9s) than the cash generated for the government.

In addition, today we appear to have rogue government agencies that make their own laws (for example, the EPA does not appear to consider the cost/benefit in its rulemaking), compete in the private sector (the FDIC is now encouraging foreclosures on viable projects in order to maximize the return to itself – see Moral Hazard at the FDIC, TheStreet.com, August 4, 2010 and Reform is Needed at the FDIC, TheStreet.com, September 22, 2010), and transfer/redistribute private sector resources with strings attached, less the inefficient costs associate with bureaucracy (for example, The Department of Education has overseen the deterioration of American education with the imposition of non-productive and often nonsensical requirements on monies granted).

Besides the agencies, each Administration makes its own “law” through “Executive Orders”, sometimes just to satisfy a lobby.  For example, the ban on the reprocessing of nuclear waste by President Carter helped throttle the U.S.’s nuclear power program, and has contributed to its foreign energy dependence.  The most recent example of this is President Obama’s order closing deep water drilling in the Gulf of Mexico, an order that could cause much more economic damage than the BP oil spill itself.

The combination of the false prosperity caused by the bubbles, and the deterioration of the education system, has left the job market in disequilibrium.  By that I mean, there appears to be many available high paying jobs that go unfilled because there are not enough skilled or educated people in the ranks of the unemployed.  In fact, the unemployment rate among college graduates is 4.5%, less than half the 9.6% national rate.

What I have been discussing are long term issues, ones that will take years to resolve if, and only if, the high cost and the education issues are resolved.  Unfortunately, the U.S. is a country that demands immediate satisfaction.  So, the desire to fix the issue as rapidly as possible has led policy makers to opt for a weak dollar policy, i.e., a fall in the value of the dollar relative to the currencies of the major trading partners.  If this were possible, it would result in a reduction in the cost of production in the U.S. relative to the rest of the world because a unit of a foreign currency could now buy a greater quantity of American made goods. (What is ironic is that Congress raises the minimum wage, then, via a weak currency policy, effectively offsets the increase!)  But, despite the nice theoretical framework that a weaker dollar will increase exports and thus domestic employment, this won’t work in a dynamic system.  That is, the result of a weakening dollar is dependent on the reaction of the trading partners.  If the U.S. were some insignificant economy in the world, like, say, Grenada, no one would react if it weakened its currency.  But, the U.S. isn’t, and its trading partners are not going to let jobs in their economies migrate to the U.S.  So, their reaction to a weakening dollar is to weaken their own currencies to keep their relative cost advantage – and, thus, we have what appears to be “a race to the bottom” in the currency arena (and thus a spike in the price of Gold).  The reluctance of the Chinese to revalue the RMB (currently pegged to the dollar) is a good example.  A revalued RMB means less exports and more imports for China’s economy, thus stimulating jobs for those exporting to China and hurting China’s industries that produce for exports.  Because the trading partners will react, any attempt to weaken the dollar to gain exports is a zero sum game.  It leads to protectionism (e.g., recent U.S. tariffs on Chinese tires have recently been countered by increased duties on U.S. chicken exports to China), not to increased economic activity and more jobs.

The only way to increase manufacturing jobs is to increase production efficiency, either through lower costs, natural advantages (i.e., cheap natural resources), or a technological break through (which only lasts for a short period until the technology is disseminated to the rest of the world).  If costs are lowered sufficiently, manufacturing companies will choose to locate their production facilities in the U.S., thus creating jobs here.  No other policy trick will ultimately work.

In the end, the road to economic health and job creation is a long one that requires patience and political will.  For policy makers, this means lowering the costs of production in the U.S. via lower taxes, less regulation, a policy aimed at low cost energy, and a reformation in the delivery of education.  By their actions, I don’t think the policy makers in D.C. get this, so we are likely to have another round of the same old policies that simply don’t work.

Robert Barone, Pd.D.

October 5, 2010