Wednesday, July 21, 2010

Job Creation versus Job Destruction

Copyright 2010. Paul Mladjenovic. All rights reserved.

We all want to see more jobs. As soon as possible and for everyone that wants a job. And even though I have touched on this subject before, it is an important topic that needs further attention.

At both the public and private levels, the talk is about “jobs” and doing “everything we can to create jobs” but the great tragedy is that federal economic policy makers (and many state level economic policy makers) simply don’t understand how to create jobs and are in fact enacting policies that destroy jobs. The reason why these policy makers are harming job creation and spurring on job destruction is really quite simple:

1. They have never run a business.
2. They have never met or managed a payroll.
3. They have never worked in the private sector.
4. They have never created goods or services.
5. They were educated by people with no business experience or knowledge.
6. Many are ideologues that understand politics but not real economics.

In addition, these same decision-makers don’t understand (or don’t care to know) the difference between “private jobs (VERY necessary) and “public jobs” (funded by private jobs!).

With that said, let’s try to clear the air about how jobs get created and how they get destroyed.

Point#1: Understand why “private jobs” are more necessary than “public jobs”.
Many politicians and bureaucrats crow about how government allegedly “creates jobs”. But the ONLY jobs created by government are public jobs and the ONLY way these public jobs are created is by destroying (inadvertently I will add) private jobs. Private jobs provide tax revenues that help to fund public jobs. \

When the government adds a “public job” (such as an administrator, fireman, teacher, policeman, soldier and so on), it must first get the resources from the private sector (via taxes or government debt). This, in turn, crowds out the resources to create a private sector job (retail, manufacturing, etc.). As private jobs shrink due to government growth and public jobs increase due to more spending by government, you set into motion a dangerous dynamic that is unsustainable long-term.

The bottom line is that more private jobs are necessary if we are serious about a healthy economy and a sustainable government budget. So how are private jobs created?

Point# 2: the first and most important job is the entrepreneur.
The first and most important job (from an economic policy point of view) is the entrepreneur. This is a small business person that is the starting point of all business. The entrepreneur is a risk-taker that is seeking profit by providing (or hoping to provide) goods and services for a profit. Profit is CRUCIAL for business start-up and expansion. Without profit, there is no incentive to start and grow a business. For those that vilify the idea of profit, they miss this point entirely and forget that Profit is the key to a healthy, growing economy that ultimately creates the private jobs that are necessary for a healthy and sustainable government sector.

When an entrepreneur reaches profitability, then job creation becomes necessary for the enterprise to keep growing. In the world of supply and demand which many policy makers keep ignoring, the entrepreneur is the visible and necessary engine of “supply”(production). We must remember that supply and demand are embodied in the functions of “production and consumption”.

Consumption (demand) is VERY easy since all of us have wants and needs. We all want more stuff! The trick is…production (supply). Production is very, VERY hard. Don’t believe it? Become an entrepreneur and start a business from scratch! You will quickly find out that it is both risky and hard work. When I teach my home business seminars, I usually advice my students to start part-time from home if possible.

When the entrepreneur succeeds, the hard work and risk does not end. Managing an ongoing business in today’s economy (mostly devastated by short-sighted, blunderous trillion-dollar government policies!) is a risky and difficult endeavor. Getting and keeping employees while satisfying customers and government rules, regulations, mandates and a plethora of business and payroll taxes is VERY difficult.

Therefore, if legislators and government policy makers are truly serious about “getting the economy back on track” and “job creation”, they must make every effort for business start-up, growth and expansion (again, this is production) as EASY AS POSSIBLE. Lower the costs and barriers of entrepreneurship and business expansion!

This includes (but is not limited to) tax cuts, regulatory reform and cutting the red tape, paperwork and bureaucratic hurdles that usually stymie business start-up and development. Cutting (or better yet abolishing) corporate taxes would be a huge boost for business expansion and private job creation.

Unfortunately, government at this moment is unwittingly (purposely??) enacting job destruction policies. Right now, public employees are paid far more than private employees for comparable work and if you do the math, you will see that every 2 public jobs created destroys at least 3-4 private sector jobs. Whether we like it or not, the bottom line is that government (rightly or wrongly) siphons money, jobs and resources from the private economy. Should taxes go up in 2011 (as scheduled), this will only shrink the private economy and accelerate private job destruction.

Point# 3: Private jobs lost today end up with public jobs lost later on.
As the private economy shrinks, this, in turn, will mean less tax revenue for the federal and state governments. Also, as the unemployment ranks swell, that means more government spending on unemployment benefits and public assistance. That results in growing government budget deficits and expanded government borrowing. If and when this continues, this will inevitably be unsustainable and will result in a painful economic crisis.

Those “public jobs” that were created earlier will then start disappearing as well. The resulting scenario will end up being very similar to what has happened throughout history (Greece is only the latest example).

What readers should consider:
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