Thursday, October 30, 2014

Hillary Hysteria & Job Creation

I have no idea what Hillary was talking about here, but the question of job creation is greatly misunderstood on all sides, and of much importance to us all.

It is often said that entrepreneurs and small businesses are the "job creators" in the economy. But if all an entrepreneur does is cause consumers to shift their spending from Dell to Apple, or from Panera to Chipotle, have we added new jobs to the economy? Are we also counting the lost jobs that resulted from the shift in consumer preferences?

  • Does Tesla create jobs if GM loses them? 
  • Do robotics manufacturers create jobs if factory workers lose them?
  • Can businesses really create more jobs in the whole economy by themselves? 
  • Can the government also create jobs?

Well, of course businesses create jobs in the sense that entrepreneurs and innovators and business managers are working diligently to provide a product or service that the public wants or needs, and when they are successful and grow they can hire more people. But in the aggregate (across the whole economy), businesses don't create new jobs simply by wanting to hire people or make more stuff. There has to be growing demand for their product. 

For a business, new jobs can originate from two main sources:

  1. Investors or banks inject funds for the business to hire people, build a factory, make a product, etc. in anticipation of the business selling enough in the future at profit such that they get a return on that investment. Investment funding is temporary and must be replaced by sales or it will quickly run dry. 
  2. The business has sales and based on forecast growth they add staff and expand to meet anticipated or actual demand.

Now where do these sales and this anticipated future demand come from? The consumer's ability and willingness to spend (let's ignore exports to keep this simple). So how do sales grow?

1. Consumers get into debt to spend (remember the Clinton years!)
2. Consumers spend their existing savings ('dis'-saving)
3. Consumers spend more of their income and save less (living on the edge)
4. Consumers have more income so they can spend more while still saving (healthy growth)

At the end of the day, new jobs are added and sustained in an economy not by tax cuts for corporations, but by customer demand for goods.

When the economy stagnates and real incomes keep falling and debt levels are already high, businesses won't invest and grow as they don't see the forecast for demand increasing. This is the situation we have been in since 2008. 

This is where outside injections of income into the economy (we call that a government "deficit" - a poor choice of words for a positive flow of money into the private sector) are critical. This can take the form of tax cuts (ideally aimed at spendable income, not wealthy savers), various welfare payments, direct hiring of the unemployed, and direct investment in useful areas (R&D, infrastructure).

So yes, businesses individually might create jobs and are essential to the system of innovation and capturing/shaping consumer wants and needs...

...but no, businesses themselves don't 'create' more jobs in our economy in the aggregate - that always comes from more people spending more of their incomes (or debt) which stimulates businesses into hiring. Capitalism runs on sales.

The Minimum Wage

The minimum wage seems to be a focal point of Hillary's message. She is arguing that a higher minimum wage will result in more jobs and less inequality, pointing to her husband's term as an example (never mentioning the excessive private debt build-up that fueled that economic boom, and subsequent crash). 

The usual reaction from the other side is that supply and demand 'laws' teach us that rising minimum wages will result in more unemployment as businesses can't afford the higher costs and will have to lay off low-income workers. Of course, this 'law' assumes that the "wage market" is already in perfect equilibrium, and that all prices & wages are perfectly flexible (adjusting to any sensitive movement of the other), which never occurs in the real world, but we'll ignore this for now. 

In reality, there's some truth to both sides. 

To the extent that current minimum wages are below a level considered livable, it may be that the current wage is lower than the equilibrium wage in the imaginary world of supply & demand curves - i.e. raising it might not lower demand for labor.

But more importantly, to the extent wages can be raised by shifting corporate profits to workers, and the workers have a higher propensity to spend (which they usually do), then the economy could see an increase in total demand (savings of businesses/owners fall and consumption by low-income workers increases), stimulating growth & more jobs.

On the other hand, if margins are tight, profits are slim, and a small increase in wages results in more layoffs than can be overcome by the increased wages/demand, then the higher Minimum Wage law might have a negative effect on demand and jobs.

It's not a given either way, as the politico blog hysteria would like us to believe.

A false choice?

What is always missed in this debate is that there is another, much preferred option: the job guarantee. If we simply eliminated involuntary unemployment by having the federal government cover the cost of work at a living wage (locally offered & administered), we would simultaneously eliminate the Minimum Wage debate, end unemployment, dramatically reduce welfare dependency, and make the biggest dent in poverty and its related social ills we've ever seen. 

Oh, and it would also happen to create jobs through restoring growth in the private sector economy!

So before you argue against a Minimum Wage increase on economic grounds, consider that it's not so black & white as many claim. Rather than believing we're helping people by fiddling with this policy, we should instead all turn our attention from such endless debates and really solve the underlying problem of unemployment and living wages. 

Ask your elected officials if they support and job guarantee, and if not, vote for those that do!