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:
The more self-sufficient you are the better. I tell all my readers, clients and students that a business (easily done in your spare time from home) should be considered an economic necessity. It is also why I am self-employed and why I teach about starting a home business. Whether you are unemployed or not, you should launch a business in your spare time. The current economic situation is warning you about this right now!

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Thursday, July 15, 2010

Forecasts for the Economy and Financial Markets 2010-2012

by Paul Mladjenovic

Copyright July 2010. Paul Mladjenovic.
All rights reserved.
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Good or bad, everyone likes a forecast. Usually, forecasters like to issue them at the end or the beginning of the year but I thought that now would be a good time to review past forecasts and issue some new or updated ones.

Entering the fray with forecasting can be a dicey pursuit. No matter how confident you are about the outcome of your prognosticating, the unknown variables can pop up at any time. As much as possible, I embark on forecasts that I believe are not an “if”…but a “when”. I may get it wrong in the short-term but the final outcome is in the long-term.

One of my first essays with forecasts was in the Spring of 2004. In that piece, I had seven specific forecasts. What were they and how have those forecasts fared? Here they are along with my commentary (keep in mind that they were made March 2004).

1. The Dow will go below 6,000.
As of July 2010, this one was wrong. Or was it? The Dow hit a low of 6,500 in March 2009. Not quite 6,000 but this was “close enough”. It was very dicey to forecast the Dow since I believe (along with many others) that the Federal Reserve and the Treasury have been known to intervene in attempts to “manage” this widely-watched barometer. When I made the forecast in 2004, the Dow was much higher and few expected it to fall that drastically. In the world of hand grenades and horse shoe tosses, this one was close enough.

2. The dollar will drop at least another 25%.
This one came true by early 2008.

3. Gold will hit $1,000 an ounce.
This also came true in early 2008.

4. Silver will hit $50 an ounce.
I was way off on this one but I will consider this forecast as a “work in progress” since I ultimately expect it to hit (and exceed) $50. I think that it should have already passed $50 but I am sure that if you have followed the great research by Ted Butler and David Morgan, you will understand that the silver market has been greatly hampered and that has caused silver to be grossly undervalued. In any case, After six long years, this forecast will have to be officially considered a miss (for now!).

5. The real estate/ mortgage bubble will pop.
This is a “big hit”. I even did seminars in 2005 about what to do to avoid the troubles (or profit from) the popping of the biggest real estate bubble in history. The wreckage from this major event sent shockwaves through Wall street and many financial markets worldwide. The real estate market will not have a healthy recovery for at least a few years.

6. We will have a severe recession.
This is also a hit; the recession that became termed “the Great Recession” actually started in December of 2007 and was not considered technically done until 2009.

7. We will surpass 2 million bankruptcies & foreclosures.
This forecast was also a “hit” as we passed 2 million bankruptcies and foreclosures in 2007.

Of the 7 forecasts, 5 were very accurate, one was very close and one was not. All things considered, not a bad forecasting record. When you add in the public forecasts from my national seminars (such as the sub-prime crisis and the commodities bull market), the accuracy rate is actually much higher.

In 2008, I did another forecast article and provided 6 forecasts; here they are again:

1. You will see an inflationary depression that will be evident by 2010-11.

2. Unemployment in the private sector will soar into double-digits by 2010.

3. State and municipal governments will be federal bailout candidates during 2010-2011.

4. Commodities will start the next leg of their long-term bull market starting in 2009.

5. We will see oil hit $200 as Peak oil becomes obvious to all during 2009-2012.

6. International conflicts over natural resources will hit the headlines during 2009-12.

As you can see, most of the forecasts made in 2008 are still “a work in progress”.

Forecast #1 is halfway here; the depression is here and the second part of the forecast (inflation) will be coming with a vengeance. Stay tuned.

On Forecast #2, the official unemployment rate did hit 10% but it recently fell to 9.5% due to statistical shenanigans. Keep in mind that another (more accurate) unemployment rate (the so-called U-6 rate issued by the Bureau of Labor Statistics) is still in the neighborhood of 17%. That is definitely depression-level!

For Forecast #3, this is coming to pass right in front of our eyes. States like California and Illinois are fighting off bankruptcy and hundreds (thousands?) of cities, towns and counties are struggling with solvency issues. Many of these municipal governments have received federal “stimulus money” but technically consider this as “bailout money”. Consider this forecast (at this point) a “hit”.

In Forecast #4, I predicted that commodities would turn around in 2009 after the drubbing they took in late 2008 and this forecast is generally a hit. Commodities may pull back in the short term and do lots of zig-zaging but the bottom line is that fundamentals are solid and the long-term bull market is intact. Seeing this market turn into a mania is a matter of time.

In Forecast #5, I made the call some years ago that oil would hit $200 but it had peaked at $147 in the summer of 2008 before plummeting to about $32 during late 2008-early 2009. It has since recovered and (as of early July 2010) it is in the $75-$79 range. This forecast was a “miss” in 2008 but I consider this new forecast to be a “work in progress” as I expect world-wide oil demand (and geo-political factors) to push the price of oil to $200 by 2012. Stay tuned on this one.

In the last forecast (#6), wars over natural resources have not officially broken out…yet. but a struggling world-wide economy coupled with belligerence from hostile governments ranging from Venezuela and Iran to Russia and other countries is a potent and dangerous state of affairs. As the world population continues to sky-rocket and natural resources continue to dwindle, a major conflict will come about sooner or later. Again, stay tuned.

Here is a partial list of my forecasts (the full list appeared in this month’s Prosperity Alert newsletter):

1. Gold will head to $2,000 and beyond during the next three years
2. Silver will hit $25 during the next 12 months and soar to $100 by 2012
3. Oil will be $100 by 2011 and onward to $200 by 2012-2013.
4. IF THE TAX CUTS EXPIRE…we will have a “greater depression” start by 2011.
5. The Federal deficit will hit $2 TRILLION during 2011-2013.

Can these forecasts be wrong? Sure. Anything is possible. However, I try to stick to events that have a near-certainty of happening (again, events that I believe are a “when”…not an “if”). It is not a case of wishing any of these things. We don’t wish for hurricanes but they will happen and you do have to ready for them.

What should people do to give themselves greater financial safety in the coming months and years? Keeping this in mind, I did a new audio program entitled “Financial Firewall”. There are many things that you can do to either protect your money (or even profit) from the events that are unfolding now or are coming. Start preparing before the next crisis hits.

Paul Mladjenovic is a CFP, national seminar leader and the author of “Stock Investing for Dummies” and his website is www.RavingCapitalist.com. He is the editor of the free newsletter Prosperity Alert and his newest audio-book is “Financial Firewall: How to Protect your Money & Investments in the Age of Financial Chaos”.