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Creating Jobs

May 29, 2012
Economics, Politics

I watched the Sunday news shows yesterday, since I was out of town this weekend. And the argument I kept hearing from the Obama representatives on different channels was this:

1. Mitt Romney touts his major qualification as his experience in the private sector working for Bain Capital.

2. But private equity companies like Bain don’t have the goal of creating jobs — it’s only about creating wealth and profits for its investors.

3. Therefore, Mitt Romney doesn’t know how to create jobs better than President Obama.

This entire argument hinges on point #2 above. In a speech in Iowa, Obama said of private equity companies: “The people who work in these firms will tell you that’s [creating jobs] not their goal.”

I don’t know any economist who would disagree with that. The goal of a private company is almost never to create jobs — that’s the goal of stimulus programs that spend other people’s money to dig ditches or create unneeded alien defense forces. To Obama, a company that doesn’t try to create jobs is a horrible thing. In fact, private companies have an incentive to try to downsize, streamline, cut labor costs, and actually reduce labor. For shame! The government should be the ones creating jobs because they can pick and choose and have “smart” growth and an “economy that lasts.” To see how well that’s worked out so far, read this brilliant piece by Kim Strassel.

President Obama seems not to have noticed that private companies have existed for decade after decade in this country, and have done remarkably well at creating jobs. Not because that’s the stated goal, but because the only way someone can bring a new product to market is to start a business, and those businesses inevitably need people around to help with all kinds of things, from janitorial services to clerical work to manufacturing to website design. Even when sectors of the economy fall away, new ones spring up. We lament the loss of manufacturing jobs or textile jobs, but what about the growth in medical implants, web design, and a host of other industries that employ people in jobs that 20 years ago weren’t even imaginable? If you told people 10 years ago that firms would hire people to manage their Twitter accounts, and pay them well to do so, they’d think you were from another planet. Is the goal of a company who hires a Twitter manager to create a job for that person? No — it’s to increase profits. Oh, the horror!

When my father started his construction business a few decades ago, he didn’t wake up one day and say, “I want to start a business so that I can employ some people.” He said, “I want to do something I’m good at, that will help provide for my family.” Creating jobs for others was incidental. His business was successful because he put in a lot of hours and didn’t cut corners. Now at least a dozen people depend in large part on my father’s business for their income. Private companies don’t start out trying to create jobs, but despite that, they are remarkably good at it.

The argument happens at the consumer end also. I don’t set out to create jobs when I decide which goods I’m going to buy. If I did, I’d buy the most expensive things I could and buy lots of them, so I could create all kinds of high-paying jobs for everyone around me. No, I do the exact opposite, and if you’re rational you probably do too. I look for the best value for my money, which sometimes means going with the cheapest product and sometimes it means paying a little more for better quality. I do everything I can to spend as little money as possible. And guess what happens? The market system rewards companies that can produce something better or cheaper, because millions of people like me will buy the product. And those companies grow and…wait for it… they create jobs!

The market economy has been creating jobs for centuries, and now we’re being told that unless you specifically try to create jobs (which no business explicitly does) you’re some kind of “bad” business? And unless you’ve had a job in a company that tries to create jobs, like a Keynesian government does, you don’t know how to run an economy? That kind of “first-stage” thinking (to use Thomas Sowell’s terminology) explains a lot of the economic policies that have been in place over the last 3 years, that have left us with a 3-year slow recovery and an extra $5 trillion in debt.

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  1. Cheryl Switzer - yep we are related  •  May 30, 2012 @3:27 pm

    Much of what you say is true, but it’s unfair. Mitt says moving money around is his qualification to become the chief exec and Obama is pointing out, it’s not exactly the same as managing a business. Mitt was managing money, not businesses. Other people did that. He’s a numbers guy. Job creation is a talking point and that’s all it is.

    What we have here is the classic chicken and egg debate. Jobs get created only when there is demand for a product (or service) AND people have the money to buy it. In order for them to have money to buy it, they must have a way to get money. How do people get money? Most of them earn it or if they have a lot of money already (the one percent), they put their money to work for them. Back to square one. So most people need a way to get money. That is where the government can help. We do actually need things like bridges and dams and highway repair and rebuilding of our crumbling infrastructure in general like sewer systems etc. There really are things worthy of government investment. We may not all agree on what they are, but there are projects out there that only government can take on. They are simply not profitable enough for private business to have any interest in.

    But there investments too and these are harder to quantify. Many of the government haters out there, say we need to get rid of agencies like the EPA and FDA. This is nutty thinking. If it were not for the EPA, do you think businesses would invest in cleaner tech (like coal power scrubbers) that would reduce their bottom line? If it were not for the FDA, you’d never know what was in that bottle of cough syrup you were buying. Remember those snake oil salesmen? Shall we let the buyer beware?

    In a perfect world, government money would always be spent wisely. And yes, there is plenty of fraud and waste and some (many) people take advantage of a system designed to help in times of need. Why doesn’t anyone blame those fools who take what they don’t deserve? Every program the government embarks on cannot possibly be micromanaged but IT always takes the blame. When the rebuilding of a bridge goes billions of dollars over budget and it is leaned later sub-standard parts were used by a subcontractor and there were kickbacks and huge salaries and money siphoned off here and there, was it a bad thing to try to fix a bridge that carries thousands of people every day? If you are going to get angry, let’s look at these people who have no moral compass, the gougers, the welfare cheaters, the doctors caught in Medicare fraud scams. And there are plenty of them out there. Maybe some of them are your neighbors who brag about how they got to take tax deductions by having a meeting one day in Hawaii and writing off the entire trip as a business expense. How many of us know these people personally I wonder.
    No, I think having our government try to rebuild and invest in the “common good” is a daunting task given how immoral we’ve become as a society, how selfish and corrupt.

    So let’s just step back here and clarify this who creates jobs and what qualifies to run the largest economy in the world. Mitt made his money honestly and he put it to work for him. No crime in that, but it does not make him supremely qualified to be commander in chief. The “business” of government – which he would preside over as grand Pulbah of the U.S. – is not a for-profit enterprise. It’s a different beast altogether.

    Am I crazy about Obama? No. I honestly believe he chose the wrong advisers in re: the economy and I’m hoping he cleans house for his next term. I don’t know who McCain might have chosen, but I suspect he would have chosen the exact same team or close to it. He was pretty clueless about the economy = if you will recall, he actually admitted that on the record and then tried to step back from it later – so we got Obama who seemed a bit more engaged if nothing else.
    I was really disappointed when Obama squandered the opportunity of a lifetime; he had the bankers called on the carpet and he let them walk away without changing the rules of their game. He really did blow it that time.

    So I may be able to live with Mitt if he does become the president, but I’d like to see Obama get it right. He’s had the cr** kicked out of him in the last 3 1/2 years and I would like to see him toughen up a bit, get some new advisers and forge ahead.

  2. Janice  •  May 30, 2012 @11:20 pm

    Just a sidebar here, sorry for the interruption but I just had to say that Cheryl, your bleeping out of the word cr** just made my day.

  3. Cheryl Switzer - yep we are related  •  May 31, 2012 @11:48 pm

    Janice, you are welcome. Yeah, I suppose I might have gone all the way with that one, but I was talking to a Switzer and they tend to get cranky over “bad” words.

  4. Jim Swift (former student)  •  Jun 1, 2012 @3:22 pm

    Cheryl,

    You say “[Obama's] had the cr** kicked out of him in the last 3 1/2 years and I would like to see him toughen up a bit, get some new advisers and forge ahead.”

    I would posit he largely did this to himself. Which is cool, some people like hitting their head on the wall, even though it doesn’t accomplish much…. (it does create jobs for doctors!)

  5. ProfSwitzer  •  Jun 2, 2012 @11:38 am

    “Mitt says moving money around is his qualification to become the chief exec and Obama is pointing out, it’s not exactly the same as managing a business.”

    I believe you’re putting words in Mitt’s mouth incorrectly, as the Obama administration is also trying to do. Mitt says he managed the Olympics, worked in the private sector, and ran Massachusetts — and that’s why he’s qualified to be President. He doesn’t say, “I worked for Bain, therefore I’m qualified to be President.” His experience working for Bain gives him knowledge about how the private sector creates profits and jobs (those two things go hand in hand, actually). If all he had done is work for Bain, I’d agree that he’s not qualified. If that’s all you hear, you’re not listening to the rest.

  6. Cheryl Switzer - yep we are related  •  Jun 3, 2012 @11:23 pm

    The president’s primary responsibility is to choose the “right” people to do the work of the administration. You want someone in charge with vision and courage and dedication and intelligence. Mitt may or may not. Stay tuned.

    P.S. I am listening to all of it. Not to worry.

  7. Cheryl Switzer - yep we are related  •  Jun 3, 2012 @11:24 pm

    Augh! Mitt may or may not be the right person.

  8. Cheryl Switzer - yep we are related  •  Jun 3, 2012 @11:29 pm

    Oh David. I know you have my email and my ego is not so huge that I think you want to talk to me on a regular basis so I mean no offense when I say I probably won’t be checking back here. I understand econ and I think it’s great that you are explaining it to people who may not have had good profs in the past. Sorry to rant on your blog. I did not realize it was a econ 101 blog when I left my original comments.

    Thanks for listening.

  9. ProfSwitzer  •  Jun 4, 2012 @10:56 am

    No need to apologize. Not solely an Econ 101 blog — I have other things on here as well.

  10. Benjamin Seghers  •  Jun 5, 2012 @9:17 pm

    Great post, Cheryl.

    The “entire argument” does not “hinge on point #2 above.” We can easily get to point #3 by simply looking at Romney’s record in Massachusetts. While he was governor, his state ranked 47th in the union out of 50 states in terms of job creation. Only three other states during his governorship did worse than him in creating jobs.

    Ignore Bain. Look at his record as an actual executive over a government. It’s lousy.

    Yes, the private sector is a source of job creation. So too is the public sector. The most important innovations of the 20th century came straight out of the public sector. Everything from the Internet to the interstate highway system to the vast array of communication satellites orbiting Earth to the most profound scientific and medical discoveries have came straight out of the public sector through public funding. The 21st century is following the same course. Naturally, however, Mrs. Strassel shrinks from these glaring facts. And how eager is Mr. Romney to undo these?

    Of course people like to cry foul: “Socialism is bad!” Government is stealing our hard-earned money, those thieves! How dare they have “programs that spend other people’s money”! (Never mind that my making money is almost entirely prerequisite on that government existing in the first place, for many of the reasons I’ve just listed above.)

    Can we imagine the libertarian right’s utopia? Giving money to the rich incentivizes them; giving money to the poor disincentives them. Money will simply trickle down from the rich and go to the poor, as if magic almost. So the goal is entirely supply orientated: increase the amount of goods, therefore people buy them. It’s a strange a logic; it ignores the fact that a demand must first be present before a good is bought. So Keynes rightly focused on not only creating supply but also demand. It’s not a surprise that people need education, need a security net, need to first of all be able to afford the necessities of life. The right, I feel, tends to shrink from this to instead focus on the needs of firms: no regulation, no barriers, no rules, no oversight, no taxes. Just let them create, and people will flock to them, and therefore they will be able to create more and hire more.

    If we believed the ideology, we would be a bastion of job growth. Companies are sitting on piles of cash with record-low tax rates and stunning government subsidies. Where are the jobs? We can keep lowering taxes and jobs still won’t come back. Something’s a bit wrong with the equation. We can get out of the way all we want, but it’s not a sustainable solution for the poor, as they’ve painfully realized over the past few decades. Markets are not perfect; they do create jobs, but that’s not the whole story, even if people like Romney would like to pretend it is. His claim to fame is mismanaging a state and successfully managing private businesses. I do not see it as shining qualifications for being president.

  11. ProfSwitzer  •  Jun 6, 2012 @8:26 am

    Logical arguments often go: premise, inference, conclusion. That’s the #1, #2, and #3 above. The premise (#1) was based on Romney’s time in private equity, and the argument that was being made by the left on the weekend I wrote this hinges on the inference (#2). Since that didn’t fly with sane people, they have moved on the next weekend and attacked his record in Massachusetts. It’s a new premise, and we’ll see if it works to get them to a conclusion that Romney is not the best man for the job. It’s going to be interesting to see how the Obama people argue that Massachusetts created jobs but not quickly enough, and their unemployment rate dropped but not quickly enough, when that’s EXACTLY the criticism most Americans have with Obama’s performance.

    The libertarian right’s utopia is not “giving” money to the rich, and it’s revealing that you consider letting people have their own money “giving” it to them. It’s not the government’s money in the first place — it’s the people’s money, stemming from the labor they put forth and the investments they make. Libertarians are in favor of letting people keep a significant majority of their own money so they can do with it what they will, because people should have the freedom and liberty to lead their own lives. Nobody’s taking money from anybody and giving it to anybody else. I don’t know if you are you purposely distorting libertarian philosophy or if you do not know the difference between libertarianism (a la Ron Paul) and crony capitalism (a la pretty much everybody else, including Obama — taking from taxpayers and giving to his friends who run green companies).

    Firms are sitting on cash because of health care reform and financial reform (half of the rules of which have yet to be written over a year later, so good luck anticipating what will be required of you), and so much uncertainty about taxes. Work that’s been done on institutional economics suggests that the exact tax system you have in place is less important than certainty. Pick a system and stick with it and people will adapt. Change it every year or two with some new gimmick and people don’t know what to expect, and that’s bad for business, jobs and households.

  12. Cheryl Switzer, MBA  •  Jun 8, 2012 @10:31 pm

    Oh my. I lied. I’m back. I did not intend to come back here, but I had to see who might have responded to any of it. So I lied without intending to.

    I have to take exception with “the private sector is sitting on cash because of health care and financial reform”. Are you joking Prof? The healthcare reform bill does not require firms to pay for healthcare in any way shape or form. Obamacare mandates that everyone have coverage of some kind – and we really did need single payor but could not get it – so how on earth does it affect business? If anything, they will be dropping coverage for workers and saving money or buying cheaper policies with larger patient out of pocket co-pays. That’s a leg up for business, no?

    As for financial reform, I don’t think that’s it either. Businesses are awash in cash because it’s hard to invest in production and expansion when no one has money to buy, to splurge, to throw around. Many Americans feel poor and poor people don’t buy big ticket items unless they have to, put off going to the dentist and cut back on extras of all kinds. This is not an investing enrivonment.

    If libertarians want to live a libertarian life, they should consider going back to nature and living off the grid. I think there is a grid for a reason, a very, very good reason.

    I think tomorrow I’m going to do a little research on “the grid” to see how many agencies I would consider important contribotors to our well being in general. Because I volunteer as a manager, contributor for a medical website, I can easily think of CDC and NIH, but I know there are many others. To be continued. I’d like a libertarian to look at my future list of government agencies and click off the ones they would like to abolish. That might be an interesting exercise, you think?

  13. Cheryl Switzer, MBA  •  Jun 8, 2012 @11:05 pm

    Benjamin, I agree with 97 1/2 percent of what you say. But I have this niggling doubt about how we judge our elected officials. Don’t the policies of the previous governor have a huge affect on what happens in any given state after he leaves office? I don’t know a thing about Mass before Romney took over. I do know what the financial situation was when Obama took over and while people may be tired of hearing the same old, same old, the hole was HUGE and conditions got worse and worse and now there is europe falling apart. Lions and tigers and bears, oh my!

    P.S. you might notice I added my credentials to my name. Wanted the prof to know I am not just some roustabout. (:-))

  14. ProfSwitzer  •  Jun 9, 2012 @11:31 am

    No, I’m not joking. It’s called “regime uncertainty” and I honestly believe that’s a significant problem right now. You “don’t think that’s it” but you aren’t citing any facts or polls to back up what you think. But I’m not going to insult you by asking if you’re joking.

    Agree to disagree.

  15. Cheryl Switzer, MBA  •  Jun 9, 2012 @5:55 pm

    So does this regime uncertainty come about every voting cycle?

  16. ProfSwitzer  •  Jun 12, 2012 @7:57 am

    No, it doesn’t. It does when there are major differences. You have Romney saying he’ll end Obamacare on the first day, so clearly if he wins there is going to be a big difference.

    It’s also caused by all of the rules that went into Obamacare and the financial reform. Literally hundreds of rules that have to be written by the DHHS and SEC, that still have yet to be written. It’s taking years for them to figure everything out (and as they do, they cut some programs like the senior elder care insurance part). The smart thing to do is wait it out and see what happens. So firms sit on $2 trillion in cash.

  17. Cheryl Switzer, MBA  •  Jun 13, 2012 @8:32 pm

    Romneycare is working fairly well for Mass. and many of the healthcare insurers came out on record to say they will keep many of the Obamacare programs that have already been implemented even if the supreme court overturns the bill. They aren’t having a major problem with much of it at all. They concede however, it only works if everyone is required to have coverage. If everyone is not covered, people who are sick will buy insurance and the healthy folks won’t. That could be a big problem for insurance companies. If the supreme court does not throw it out – and many of us think they actually will toss out the entire thing for political reasons – Romney will not overturn it either. That is of course, if he is elected. Saying he will overturn the bill is a great vote getter for sure, but it’s probably just talk. Talk is cheap Romney has reminded us about Obama’s soaring rhetoric. And so it is. Talk talk.

    This thread seems to have run its course so I will bid you good night and good luck. You’re a nephew of Francine / Janet, I think. There is a family reunion coming up in Colorado. Imagining that many Switzers makes me dizzy. Enjoy.

  18. Benjamin Seghers  •  Jun 20, 2012 @7:20 pm

    “Regime uncertainty” is a lousy excuse for firms’ inability to employ people currently needing to be employed, especially if we’re blaming it on “Obamacare.” Name one CEO who has or would be willing to go on record saying that his firm is refusing to hire because he’s uncertain about his business prospects because of “Obamacare.” No one is willing to say such an absurd thing, namely because PPACA has already been written and employers already understand what’s in the bill. Virtually all changes directly influence insurers; very little of the actual bill changes anything for firms.

    The most major things include making restaurants provide information to their customers regarding the nutritional value of their products. Virtually all economists agree that informed consumers make better choices and that access to information is good; perfectly informed consumers (and firms) is a perquisite for a “perfect” market, after all. And there are studies showing that people order less calories when they’re made aware of the calories they are ordering. So it has an effect.

    Other things include taxes on indoor tanning, reducing costs to companies that provide benefits to the elderly, making firms report what benefits they provided to employees, and providing tax credits to small businesses. That’s really the extent to which it directly impacts a firm. So, I reiterate, it’s simply a lousy excuse to blame current unemployment on.

  19. ProfSwitzer  •  Jun 21, 2012 @12:23 pm

    You can think it’s a lousy excuse if you want, but a Gallup poll says almost 50% of companies attribute some of their unwillingness to hire to Obamacare and potential new regulations.

    http://www.gallup.com/poll/152654/health-costs-gov-regulations-curb-small-business-hiring.aspx

  20. Benjamin Seghers  •  Jun 21, 2012 @6:38 pm

    I find it rather curious that Gallup, what is supposed to be relatively neutral source, so misleadingly decided to title their article so deceptively. If Dennis Jacobe was being honest, he would cite the main concern of business owners as the reason for the lack of hiring: lack of demand. “Lack of Demand Curb Small Business Hiring.” The poll speaks for itself. Far away, the top four reasons small firms are not hiring can summed up in one phrase: lack of demand. The top four reason, with the top three being listed by at least two-thirds or well over, directly relate to exactly what Cheryl and I have repeated: supply-side economics has failed, and it’s time enough we pay attention to the demand side of economics.

    As for the other, lesser reasons, not a word is said about “Obamacare.” “Potential cost of healthcare” is not a new concern of employers. If you compare healthcare costs in the United States to those of other advanced industrial nations, like Canada or those in Europe, our healthcare costs are leaps and bounds above everyone else’s. The entirely privatized system is inefficient and employers have always had to pay dearly for the economic model our of healthcare system. Naturally, employers are weary of “potential healthcare costs” when our entire system is so inefficient, but it really says nothing about PPACA. So, again, trying to blame “regime uncertainty” due to “Obamacare” as the reason for unemployment, when the facts show that well over two-thirds are more concerned with demand, is a pretty lousy excuse to escape the facts.

    What could perhaps be considered striking about this survey is that no one says a peep about “taxes are too high.” No where is that listed as a significant reason small firms are not hiring. Yet the right continues to talk loudly about how “taxes are too high” and therefore firms are not hiring… if only we lowered taxes, firms would be bastions of employment growth. The opinions of small business owners, of course, is entirely different.

  21. ProfSwitzer  •  Jun 21, 2012 @7:28 pm

    I guess we both see what we want to see. Clearly, business is blaming a whole host of different factors. I’m not saying you’re wrong when you say that low demand is an issue. It is. (The ongoing debate is how to increase it — you think it’s by spending more money we don’t have, or taxing one side of the economy to give it to another side of the economy, I disagree with both of those ideas.) I’m willing to admit that demand is a factor here — I just disagree about what to do about it.

    Yet you wish to completely discount the importance of health care and regulation, which is disingenuous, since those are both important factors too, as the poll shows. Again, there’s LOTS going on in this complex economy of ours, and you and Cheryl are both partly correct about one aspect of it, but also choose to completely ignore another aspect of it so you can be “right.” Kudos to you.

  22. Benjamin Seghers  •  Jun 21, 2012 @8:27 pm

    I agree that healthcare is a big factor in employment decisions. Regulation can be too. Anyone who’s ever worked in HR is probably all too aware of that. And, of course, there’s demand. What is your solution to create more demand? Keep lowering taxes on businesses? How much further are we going to have lower taxes on businesses to realize that this isn’t their issue when it comes to making hiring decisions? The problem really isn’t that firms are so burdened by overbearing government. There’s only so much we can do to avail the supply side before we realize that our economic system is fueled by not only free enterprise but also by the demand side that is educated; that has basic protections; that has social nets; that is able to afford the most basic necessities of life, like healthcare, housing, and nutrition. Whether we care to admit or not, government does have a role in today’s economic system.

    The problem I have is that our healthcare system is too inefficient. Costs are well above where they are at for other developed nations. And this is a cost to employers as well. Because they are burdened by our inefficient healthcare model, they have to take this into consideration when making hiring decisions. But the problem isn’t PPACA. No one is saying it is. In fact, PPACA provides for a tax credit for small businesses simply for providing insurance to employees. PPACA does not force businesses to do anything, save the few small things I listed above. It does not force businesses to provide insurance. What it does is make healthcare more affordable and reduces costs for employers. To say this causes businesses to stop hiring is a bit of stretch, in my opinion.

  23. ProfSwitzer  •  Jun 21, 2012 @8:33 pm

    I’m done with this. This post was about the wisdom, or lack thereof, of saying that someone doesn’t know about creating jobs when they’ve worked in the private sector for decades. Cheryl the MBA hijacked it into a Keynesian discussion and you’ve picked up on it and are now turning it into a discussion about our health care system. To say we’ve gone off on a tangent would be an insult to tangents. Two random points to conclude this.
    1. I don’t want to sound callous, but I don’t care that you have an MBA, Cheryl. That’s great and all, but if degrees and titles mattered, you would believe what I say about economics because I have a PhD, right? The fact that I have a PhD means nothing to you, since you still think you’re right and I’m wrong, so why should my knowing that you have an MBA make a difference to me? I don’t care about degrees — I care about arguments and facts. And to get back to my original point, I think it’s stupid to say that Mitt Romney’s time at Bain doesn’t give him any credibility on the jobs issue. Which is why the Obama campaign has basically ceded that argument and moved on to other things.
    2. Much smarter people than the three of us have debated Keynesian vs. Austrian economics for DECADES, and done it in a much more entertaining fashion, even with YouTube videos. Nobody’s convincing anybody here, so let it go.
    I have the option to uncheck the “allow discussion” box on this post, but I don’t know if all of these comments will go away if I uncheck it, so I’m not going to risk it. But please consider this post as closed to further comments.

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