Washington Cannot Invent Jobs

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WASHINGTON – With John Maynard Keynes once again in the most favorite list, and in a prominent place, America started believing again not only in the virtuous, in fact infallible, power of public spending as a key tool to jump start an economy in a serious recession but also in the idea that Washington has the ability, indeed “the duty”, to create jobs and thus a good living for millions of unemployed. According to this view, Washington, not the (failed) market, “creates economic opportunity”, and all the good jobs that come along with it.

This mistaken belief whereby “jobs” are somehow an independent variable that can and should be politically willed, regardless of circumstances and market conditions, would be bad enough in ordinary times. But now it is tantamount to someone being on drugs and believing that they can actually do what they fantasized about during their trip. If there is a time in which the Government, try as it may, cannot possibly create the millions of jobs people demand, it is the present one.

Government cannot create jobs, especially in this environment

Look at our almost unprecedented disaster. As a consequence of a horrible recession, we have historically high unemployment, (close to 10%, not counting the millions who have given up and thus are no longer counted, and the millions forced to reluctantly accept part time work, because there is nothing else available). While the basic American economy, although greatly diminished, is still somehow alive, the job market literally fell off the precipice. This is because the epic employment downturn is due to a dramatic, fundamental retrenchment and downsizing of an economy (and the employment that it created) that for several years had grown in large measure thanks to the steroids of crazy levels of consumer spending with money borrowed from imaginary home equity, itself fueled by a housing bubble. This is why the picture now is so different from past cycles of growth and recession. This is a historic retrenchment. The jobs tied to the sectors that catered to overspending are gone –for good. This is the main difference between this massive jobs loss and others caused by the more “normal” business cycle. Here chucks of pseudo-economic activities justified only by overspending have melted, never to come back again. Period.

The end of the consumer binge and its consequences

Indeed, from one day to the next, Americans discovered that, not only they are not rich, (housing values having collapsed); but that they are also deeply in debt. Being deeply in debt, millions of Americans can no longer happily spend as they used to, counting on drawing cash from ever increasing home equity to pay the bills. In fact many cannot spend at all. Some of them stopped the party because they have no jobs; and millions more, while lucky to be employed, because they have huge debts and they will need years to repair their domestic balance sheets. As consumer spending constitutes about two thirds of the US economy, the collapse of spending with the consequent collapse of all the economic activities fueled by that level of spending means that this rate of joblessness cannot be temporary.

We still want jobs

But if we insist with the silly belief that Washington can and should fix problem caused by what is in truth an epochal transformation of the basic components of the US economy and that it should do it fast, this popular wisdom translates into a real political calamity for those in power, in this case the Democrats. Indeed, as it is assumed that it is entirely within Washington’s powers to create jobs in the wasteland caused by the total collapse of large swaths of an economy that existed only because it catered to excessive consumption, the inability to magically produce new employment appears to be governmental ineptitude. The perception of ineptitude in turn allows those who are left hanging to be upset with their leaders; in this case the Democrats who happen to be in charge during this rather horrible predicament.

The complicity of the experts

And the pundits fuel this misconception –that is the crazy idea that the government can and should create jobs— by advocating more aggressive jobs creation programs; and by prognosticating that, unless President Barack Obama can bring down the unemployment level, his party will take a beating this November at the mid-term elections; while his own chances of re-election in 2012 would be greatly diminished.

So, the pundits who are in general sympathetic to the administration proclaim with passion that the White House has to do “more”, indeed “whatever it takes” to allocate funds, invent programs and projects to create jobs. In other words, creating jobs is regarded as a “political imperative”. As to the quality and sustainability of the jobs…well…who cares about that. This is about getting as far as the next election, this is about saving one’s political skin. This has nothing to do with the real economy.

It is all a political game

By the same token, the political opponents, the Republicans, are salivating. They see an ongoing bad situation and gleefully proclaim that it is entirely the fault of the Democrats, the party in power, obviously incapable of fixing the problem. Their perspective is equally dimwitted and myopic. The worse the economy, the better their chances to regain political power. And the long term economic health of America? Oh well, that’s for the economists to figure out….Here we do politics. (And we wonder parenthetically why is it that opinion poll after opinion poll now indicate that a majority of Americans have lost confidence in their government’s competence and ability to take care of the people’s business?)

Given the way in which the “experts” have framed the debate, we are reinforcing the totally misconceived and wrong belief that the White House “runs” the US economy, that President Barack Obama is the CEO of America Inc. and that we are right to judge his economic performance on key issues, such as his ability to create jobs.

What Government can and should do

True, enough, it is a fact that the Government has significant influence on the economy. What is wrong is to believe that the Government “runs the economy” and that it is entirely within its powers and its mandate to create viable economic activities where none could otherwise exist. In truth, the Government can create a policy environment that can make economic activities easier or more difficult. Through taxation, strong or light regulation, labor laws, laws on liability and tort, speedy or slow processing of permits and licenses, government –central, state and local– can create a more or less business friendly environment. This much is true. But meaningful economic activities have to have a self-sustaining base. And the jobs that they create have to be based on the profitability and hopefully the future expansion of the activity itself.

Washington can create a better environment for investments

Simply put, it is a true mental distortion to say that “we need jobs” ands so Washington has to get busy creating them. Of course we need jobs. But first we need meaningful economic activities that, in turn, will generate jobs. First we must identify real opportunities; then we need the entrepreneurs who will exploit them, (hopefully within a public policy environment that will enable rather than impede business), and then we shall have, as a consequence, (assuming, and this a big assumption, the availability of the right mix of skills), more jobs. From this vantage point, job creation is a positive byproduct of a good economic environment in which viable and sustainable opportunities are exploited. So, we start with a money making proposition in mind. If this is successfully pursued and exploited, well, jobs will come along as a necessary consequence.

Make work does not work

But if we say that government has a sacred duty to create jobs, regardless of circumstances, because massive unemployment creates very negative social and political consequences, then jobs creation becomes a political imperative to be pursued irrespective of the underlying economic fundamentals. In so doing we divorce jobs from the creation of meaningful economic prospects. Mostly for political reasons, we want to push government to resort to gimmicks and magic in order to create jobs regardless as to their long term viability. While this is theoretically possible, the hard reality is that any “job” that is not tied to a productive activity eventually becomes a drain on scarce resources.

Make work

“Make work” schemes have been tried countless times. Sure enough there may be an immediate feel good effect. Idle people do something. They collect a pay check. They contribute to fuel consumption, thus helping other sectors of the economy by increasing demand for food, services and so on. But, in the end, if the jobs are not sustainable because the “make work” scheme is just that: “make work”, then the whole thing will eventually unravel with the only net effect of having added to public expenditures in order to set up the whole money losing, misguided machinery.

The old sectors are not coming back

While it has many causes, including of course the credit crunch resulting from the massive financial upheaval that we are still slowly digesting, the problem of the unusually high level of unemployment in the US, and the almost unanimous forecasts that it is going to take quite a long time to reabsorb the millions of idled people, is directly tied to an economy on steroids that inflated demand for service jobs. These were jobs filled by people who were catering to the absurd levels of consumption of millions of Americans who were happily piling up debt, spending all the money they thought they had and then some.

The party is over

Now we know that the party is over and that the consumer binge is gone.  Simply stated, most people no longer have discretionary money. Furthermore, millions for years to come will be engaged in the painful effort of trying to repair their horribly damaged balance sheets. This means they will be forced to save in order to pay back the bill of the party that ended so badly in 2007-2008. This process will go on for quite a while. So, it is inconceivable that the jobs that were supporting the consumers craze will come back. The overgrown financial industry and all the hangers on that were feeding from the housing bubble will not regain the old size any time soon. Those jobs are gone. Likewise, retailers will stay anemic. Closed restaurants will not reopen and those that did not go under will adjust to a diminished traffic, thus doing with a smaller staff.

What can Washington do?

So, the grim picture before us consists of decimated sectors, (hence the massive layoffs), and would be consumers with little or no cash. How do you fix this? Well, the only way is to look at what may be other sectors that hold the promise of future growth. And so we talk about “green jobs” and renewable energy and the like. All this is good. And this is an area where public policy can do much more to create the appropriate enabling environment that improves market conditions for fresh investments and innovation that can become commercially viable. And this is a key area where Washington can be rightfully blamed for not doing its work properly. Not because Washington is not creating the jobs; but because, so far at least, it has failed to create the public policy environment that would convincingly signal to business that there is indeed real money to be made in alternative energy because, as a nation, we have turned a page and we are now committed to a post-carbon economy.

Let’s get serious about a post carbon economy

In fairness, there is a lot of stirring and buzz about this and that opportunity in the energy sector. But not enough. We cannot even put on the table a meaningful tax on gasoline or other carbon byproducts. And yet a real tax on gasoline would send the signal that it does make sense now to seriously invest, as opposed to dabbling, in alternative sources for transportation fuel.

Even in the best case it will take a long time

Anyway, let’s make it clear that even a clever, well crafted green economy high tech plan –and we really need one– could not possibly produce fast, noticeable effects in terms of jobs creation so that all the Democrats will reap the political benefits come the mid term elections this November. These things do take time. But at least this would be a serious attempt to use public policy tools to signal to the markets that there is real opportunity in emerging sectors, so that real capital will be directed there.

Otherwise, the clamoring for “jobs” will be what it always is, an emotional, populist cry stemming from the belief that employment can be created by political fiat, regardless of economic fundamentals. For whatever it is worth, let us remember that in the old Soviet Union, technically speaking, there was full employment. The State took care of everybody. And we know how that story ended. 

 

 

 

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