September 7, 2012


Filed under: Psychology and Politics — psychpol @ 10:47 pm

Anybody else confused about the issue of job creation? 

What isn’t a question is that we have too few of them. In fact, only 63% of eligible workers are currently employed, the lowest rate in the modern era. The overall unemployment rate, when part-timers who wish to work full-time and those who have simply quit looking are factored in, is now an astounding 14.7%. That is 23 million of us. You and me.

We hear the politicians debating whether government or the private sector creates jobs. This seems to be a major point of contention between the presidential candidates, their parties and voting bases.

The truth is that both entities can create jobs. So, let’s look at the issues involved because they directly affect many of our  lives. The more understanding, the better.

A government can create a job if it has the revenue to do so. There are two possible sources of that revenue. The first is taxes generated by those who are employed, or who have assets that yield some kind of non-sheltered, and therefore taxable, income. The second is by borrowing the money to hire a worker at either the local, state or regional level of government. That’s it.

The private sector can create jobs via a corporation or an entrepreneur such as a small business. The latter represents 80% of all American businesses. If capital is available in the form of profit or loans, then that business may hire a worker if it wishes to grow and the demand for products and services exists to do so. If that business is not growing, it may maintain its workers, or terminate the employment of some or even all.

As we might guess, significant consequences exist for both paths. So, let’s examine the outstanding effects.

If the government hires a worker, then it must pay that individual using capital from one of the above two sources. That worker is unlikely to generate revenue for the government. The exceptions would be a worker whose  job is to detect excessive costs and fraud in government programs, and who then takes action to save taxpayer dollars. This is not revenue as such, but it may reduce government spending via lower costs.

The other case involves a worker whose job is to distribute government dollars to private ventures via loans, If those businesses make a profit and repay their loans, the government may receive revenues, either through loan interest or the hiring of new workers who pay taxes.

This is a basic element in the debate regarding  job creation. The right says that government workers may provide a valuable service such as defense or social welfare, but they do not create a long-term, productive job in terms of revenue that exceeds the cost of employment.

Such jobs, the argument goes, may result in more borrowing to cover spending for that worker. In addition, jobs such as regulators may have a negative impact on the market. The right concludes that regulation may discourage businesses from hiring by blocking their activities, and thus reducing their potential profits, and subsequent hiring of new workers.

The left says that government workers provide a valuable service to the citizens, and are therefore needed to monitor activities which may be harmful or beneficial to us. Examples would be food safety, education, health care and defense.

They refer to the distribution of government dollars as investment in our economy. Such dollars are seen as required by the government to provide essential services for the citizens. Thus workers must be hired.

The question of the day involves getting the 37% of our workers back into the job force. A sense of economic stability and prospects for the future are essential for individuals and families to thrive. 

Improvement in job creation would provide more tax revenue, and theoretically, less borrowing. The latter is true if free spending and corrupt politicians will show fiscal restraint.

Such economic growth would seem to benefit the government, the private sector and, ultimately,  the citizenry.

What are the reasons private enterprise would hire new workers? The common argument states that businesses must first have confidence in economic conditions and government. Level of uncertainty regarding the future is important.

There must be a demand for their products and services. There must be the prospect of a reasonable return on capital. There must be a tax structure that encourages capital expenditures and expansion.

Should these conditions occur, it is argued, then more workers will have long-term  jobs in the economy. Businesses will grow, forcing more hiring. Tax revenues will increase. And prosperity will be a possibility for the maximum number of citizens.

The issue of tax rates is hotly debated by the candidates. What are the ideas?

The left argues that those making over $250K per year should pay higher rates. although the current Democratic proposal will reportedly (Congressional Budget Office) transfer 60% of the new tax burden to middle class citizens as defined by income.

Nonetheless, without even considering the additional tax loophole issue, upper income citizens are seen as having a free ride while others struggle. They are not paying their fair share, thus depriving the citizens of some benefit.

The right argues that upper income earners are more likely to spend their money, either on consumption or expanding their businesses. This is said to be a positive for the broader economy, and therefore will stimulate the hiring of new workers.

The idea is that if more money is available to businesses, they are more likely to use it for the benefit of many via distribution of proceeds (dividends, higher wages, better benefits) and new hirings.

The other hotly contested issue involves government spending.

The left defines this as investment, with this including better services and new workers being hired to provide them. Thus, borrowing becomes less of a concern because it produces positive benefits for all of us in the form of education, social services, health care and protection of the citizenry.

The right argues that excessive borrowing by government, perhaps with the benefit of hiring new workers, will inevitably harm the private sector via higher taxes, and harms the average citizen by devaluing our currency. The dollar in my pocket buys fewer goods and services.

They note that economic expansion is historically driven by private sector growth, resulting in the expenditure of additional capital, use of profits for business growth, and the hiring of more workers.

The solution to job growth probably involves an emphasis on private sector health, with controlled government spending and the use of tax revenues by the government for the benefit of all.

If the belief is that the private sector and profit are somehow evil and can’t be trusted, there will be a tendency to punish it via overregulation and increasing tax rates. These sap confidence and discourage investment.

Furthermore, rising tax rates discourage the return of several trillion dollars now sitting overseas, back into the private sector

Currently, the US has the highest corporate tax rates in the world, and they are scheduled to increase in January of 2013.

Thus we hear concepts such as the “fiscal cliff,” in which the economy collapses from the weight of government debt, higher taxes and a constricted private sector.

If the belief is that government spending is somehow evil and can’t be trusted, then the economy will constrict  in the short-term as spending cuts are implemented.

Fewer government workers will be hired. And fewer services will be available for the citizens because tax revenue will have declined, mandating more borrowing and a vicious cycle of debt.

We are witnessing this budget contraction in many of our cities today. Less revenue from taxes produced by a healthy private sector mandates less services to the citizens.

While borrowing has been a historical stopgap in this process, many cities are now unable to borrow. Their credit ratings are lowered, and therefore they must pay higher interest rates to those who are willing to risk the purchase of their municipal bonds.

Like all government spending, without an equal amount of revenue , this transfers debt to subsequent generations. They have no voice in this process.

The national debt in the US is now $16T, up from $9T at the end of 2007.

On balance, it appears that a healthy private sector provides the solution to our economic woes. This further creates a fiscally healthier government that can extend services for the benefit of all.

The current legislative logjam in Washington, fueled by irresponsible politicians, appears to be negatively impacting both sectors. Thus, today, we see continuing unemployment at unacceptable levels.

The presidential candidates and their parties offer very different views of how to solve the jobs issue. It is in our interest to understand, as with babies, how jobs are made. We need as many jobs as possible to solve the struggles faced by unacceptable unemployment rates for our fellow citizens.

The social cost of this is staggering  in terms of personal suffering,  economic uncertainty and loss. We would be wise to find a better way, and very soon.


1 Comment »

  1. A good column that explains basic processes, political positions and a likely direction for creating jobs and a healthier economy.

    Comment by paulie — September 8, 2012 @ 5:26 am

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