Jobs: Not a Proper Goal of Public Policy

In my previous piece I focused on a simple trap that we all fall into when we count what happens (jobs) but forget to count what doesn't happen (other jobs). We forget to net it out.

In this piece, also mercifully short, I hope, I would like to make the case that "job creation" is not a worthy goal of economic policy anyway. Sure, we want jobs for everybody who wants one, but jobs should come as a by-product of producing something or providing a service that is needed. Focusing on the job per se, rather than on what is produced with the job, leads to waste. There is always more work to be done than there are people able and willing to do it. It is the work that should drive the process; not just a job for a job's sake.

Some examples will make this obvious.  The government could create enough jobs to achieve full employment by having the previously unemployed dig holes on Monday, Wednesday and Friday and fill them up on Tuesday, Thursday and Saturday. Or, in my long-time favorite example, if you want more jobs, replace the heavy equipment on a construction site with shovels. If that doesn't do it, replace the shovels with spoons. Silly? Sure, but not much sillier that some of the rhetoric we take all too seriously.

When we say we have to "create jobs," we are setting ourselves up for a misallocation of scarce resources and a sub optimization of our economic efficiency. When we say that, we imply that there are just so many jobs to go around and we need to find and fill them. Pretty soon that kind of thinking leads us into the French fallacy of spreading a given (fixed) amount of work among more workers by shortening the legal work week. Only so much work to be done; let's spread it out.

Don't forget that the demand for workers will increase with the work being done. Don't forget Say's Law, "Supply creates its own demand." We sometimes forget it in times like this because we get caught up in Keynes' Law, "Demand creates its own supply." Come to think of it, neither law is a rationale for wasting good workers by putting them in sup-optimal jobs. The lesson is simple:  Don't count jobs; make jobs count."

Comments (6)

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  1. Here I agree with you. It has to matter how the money is spent, otherwise, why even bother creating jobs? Just give people money to live. In fact, from my point of view, social safety net spending works the best, since it has to be spent. After all, it’s given to people who, theoretically at least, need it to survive, and so have to spend it, and on things essential to the economy at that.

    Infrastructure is purportedly an investment. In other words, it will more than pay for itself in the future by facilitating some business or civic function or both. If it turned out be heavily siphoned off into fraud, or spent in a way that led to enormous cost overruns in the future, wouldn’t we be angry? Otherwise, why not run a big Ponzi Scheme instead? They certainly seem to attract investors.

    From my point of view, there is a good argument, in general, to borrow for investment, so that, in a time of necessary borrowing ( This is what I call the current situation. Not necessary spending. After all, you could spend without borrowing. ), some money for infrastructure makes sense. I simply thought that $100 Billion made more sense, since I do worry about things like waste and fraud, especially under crisis conditions.

    So, I agree with you. The argument is intentionally fuzzy. We want to spend money on infrastructure as an investment, but we don’t want to observe the normal precautions we take concerning it, because we’re in a hurry to spend. This is not a good argument, and neither is the argument that it doesn’t matter what the spending is for.

  2. prophets says:

    it’s difficult to get too caught up in extreme keynesian or jean baptiste-say logic when there are a lot of unusual exogenous forces occurring such as the current account deficit and offsetting capital account surplus.

    larry summers has a 1930′s economist solution to our problems and that is to spend $ and fill up the output gap.

    the reality is that we need a broad restructuring of balance sheet and resources. the answer to our problems is found in restructuring home mortgages, wiping out equity holders in citigroup and converting debt to equity, and not by mailing out checks to people to pay their mortgages or giving more $$$ to citigroup to sustain a sinking ship.

  3. Kevin Headrick says:

    First let me begin by saying that I am a long-term admirer of yours. I believe The United States would be in a far better place had you been been appointed Federal Reserve Chairman.

    I am continually perplexed by the failure of government, business and many economist to truly understand the issues that we are dealing with in the current environment.

    While testifying before the House Banking committee, Jamie Dimon referenced Albert Einstein’s remark of keeping things as simple as possible, but no simpler. In the simple form, the world economy is dependent upon the consumption of the U.S. consumer and those of the G7.

    We have joked for years that when The Untied States sneezes the rest of the world gets a cold (or pneumonia as the situation and foreign locale warrants). As other economies develop this impact will lessen. However, we have yet to reach the point where an Indian or Chinese consumer can produce the equivalent positive impact of consumption as their American counterpart. We ship jobs elsewhere in the world in pursuit of lower wage costs. In turn we reduce the discretionary spending of the collective U.S. consumer as people are either unemployed or underemployed and replaced it with consumption of far less per capita. So what is the true impact of offshoring practice versus theory? How many offshore workers does it take to equal the consumption of one U.S. consumer? How likely are American companies to be the beneficiary of their consumption? A similar question can be asked of the holders of H-1B visas and the undocumented worker? What percentage of their wages remain in the U.S. and go to consumption versus wages sent back to their home country to support their families? Intelligence and work ethic are not geographically bound. Neither are stupidity and laziness.

    Do business leaders understand that they do not operate in a vacuum; they are not the only company establishing call centers in Mumbai, Hyderabad, Bangalore, etc…; the core infrastructure is woefully lacking; the issues of political and social unrest are still very real? It is far more beneficial to build the basic infrastructures of commerce in these countries while employing the local population versus shipping call center jobs. Instead we appear to support the idea of employing train car conductors before the rails have been laid and the locomotives built. These developing countries have fallen in to the “jobs” mindset described. Quantity is valued more than quality and support of a strategic plan. In am under developed country of one billion, labor is not a scare resource and the need for infrastructure is enormous. Are we a doing a disservice to these economies and our own in not supporting internal development of infrastructure in these countries. Iraq is a great example of this. Rather than working to employ Iraqi citizens to build out the infrastructure we sent American companies and workers to take these quality jobs. Thus, we effectively eliminated the ability of a foreign citizen to improve their surroundings, provide for their family and increase their standing in the world community. We did not help to rebuild Japan and Germany post World War II by sending our switchboard operator positions offshore.

    How is it possible to substantially and permanently increase the welfare of one by taking from another? It would seem that there is a selective application to this simple rule.

    We are the most productive country in the world. However, we seem to focus on the issues of previous decades rather than the current. At least two of the three major U.S. auto makers will not survive even with an aggressive government loan program. The loans are a form of corporate and jobs welfare that provide no lasting benefit or resolution. Instead, the government should pursue a policy of aiding consumption e.g., consumer tax credits/deductions for the purchase of a new cars and trucks. It would see far more productive to provide American consumers an incentive to purchase new cars in lieu of a ‘welfare’ check that will be deposited and unspent in fear of greater economic strife. In the simple form, consumption approach secures jobs for auto workers, parts suppliers, dealerships and mechanics and allows the companies to focus on the long-term restructuring necessary. In turn, the employed worker spends their earnings on goods and services. I believe we may have forgotten the basic principles of the money multiplier. The government is now focused on restructuring the automakers rather than stabilization of the economies in which they operate. There is no value in restructuring the micro when the issue is the macro. We are past the point of 0% financing providing incentive for new car purchases GM, Chrysler and Ford could have the best restructuring plans in history, but if consumers are not buying cars there is no value to their work or hope of success. The fixed costs and linkage to other industries and sectors is too great. Bankruptcy is not a necessity if we would employ policies that return consumption to near normal levels.

    I believe the current sub-prime/CDO debacle underscores the results of inaction. Contrary to popular rhetoric, I do not subscribe to the idea that low interest rates were a primary contributor to our current issues. The culprit was the lack or complete abandonment of lending standards and practices. In reality, low rates could have been sustained for a longer period of time had historical lending practices been applied. In essence, high standards would have led to a lessening of demand and an ability further decrease or at least maintain rates at lower levels. The idea that any lending institution would extend a home loan equivalent to 12.5X a borrowers gross income or regulators would allow such a practice was once thought to be preposterous. Now, it at least appears to have been an accepted practice.

    Both the former and current administrations in conjunction with the Congress appear to have very little idea of how to address the issues. You have repeatedly proposed at a minimum the suspension of mark-to-market accounting. This is an absolute essential to address the current banking balance sheet ‘death spiral’. If 90% of all mortgages are current the simple calculation would provide a 10% discount to par for the collective market. The devaluation of housing would next be factored in the collective equation. Assuming a 30% reduction in housing value versus issuance the value now approached 60. At this point it is a simple calculation of stated rate versus current interest rates to determine the mark. Presumably, this would be at or above 60 given the current low/no rate environment. This basic mark-to-model method would be far more useful in setting a realistic starting point for valuation in the near term. If we insist on mark-to-market there is no end to the money required to support this misapplied accounting practice. If the answer is Nationalization, how is that cheaper of less of an impact than the in place workout of the toxic assets? No entity would be more motivated to address the issue than the one holding them. However, they must know the rules before a market can be resurrected.

    Two things puzzle me with regards to the CDO issue. First, what financial genius determine that there was a statistical reduction in risk by dividing 1,000 mortgage backed ABS’s and creating 1,000 CDO’s with one piece of each ABS in each CDO? There is none! This was simply a revenue generating instrument that convoluted risk rather than reducing it. Second, having worked in financial services technology and built and supported the systems that tracked ABS instruments, I know that each individual mortgage was tracked and serviced within eachABS instrument . Why have we not moved to identify both performing and non-performing assets to help determine a value. We had no issues with determining the effects of early payoffs, delinquencies and defaults in the past.

    Coming full circle and ending this diatribe, it is about quality jobs. Statistically speaking, the employed pay their bills when they are afforded proper credit. I applaud Intel and their investment of $7,000,000,000 to create quality jobs. It would also seem prudent for other companies to make this type of investment or at least refrain from layoffs where possible.

    My own experiences have led me to believe that there is very little original thought in business today. We, as business leaders, all attend the same seminars, hire the same consultants and are all astonished when our outcomes are all the same. We have adopted the ways of government without realizing the error of our ways. Still. the grandstanding by the Administration and Congress has moved beyond laughable. They appear to believe it is more important to plan the intricate details of the face and full body lifts of the patient versus the cardiac arrest and pending vital organ failures. In turn their lack of proper actions further erodes the consumers’ confidence and deepens the macro issue.

    In three words, stabilize the patient.

  4. John Booke says:

    Ur right the government should not be in the business of creating jobs just because we’re in a slump. There are no jobs. There are no reasons to make new jobs (look at falling Capacity Utilization numbers). But in an advanced country like ours the government should provide every citizen with a safety net. The only government rescue should be to simply send the money directly to all US families with or without jobs. Let the people put the economy back on the right track by doing whatever they want to with the government funds. I trust Americans as a group more than I trust American political or business leaders.

  5. Tamas Kormos says:

    I agree completely. However politicians and policy makers often have to balance out short term promises and deals with long term goals. Is there somewhere in the world though, where a positive example can be seen in these though times ? Would be interested if there is a country to which we could point to and see that they prosper due to the right policies and long term decisions being made and maintained.

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