Alan Beaulieu’s Comments on Job Creation  caused me to consider that most people don’t have a clue about how jobs are created.

Let me review what I learned in Economics 101 – Since the beginning of civilization, every substantial and healthy economy has been based founded upon a foundation of the three fundamental ways of producing wealth: agriculture, manufacturing, and mining.   All other service industries, financial and banking, legal, transportation, tourism, entertainment, you name it, are there to support, facilitate or exploit the wealth generated by these three basic pillars.

For government to “produce jobs,” as FDR did in the 30’s with the Works Progress Administration (WPA), it must find money (through taxation or borrowing) to pay the workers.  Then, unless the government employees that result are involved in manufacturing,  mining, or agriculture, they are not producing any new wealth, and the result is the same as welfare – short-term relief for the unemployed that ultimately results in a drain on the rest of the economy that is producing wealth through mining, manufacturing, and agriculture.  (To FDR’s credit, the WPA did a lot of infrastructure improvements that fostered a better business environment.)

If a government does attempt to generate wealth through mining, manufacturing, or agriculture (state-owned and state-operated industries) it has always failed. The State either has a monopoly or it must compete with private industry.  The monopoly option produces inefficient enterprises that cannot compete on a global scale. Competition with private industry has always resulted in either subsidies to keep the government-run business open, or the failure of the government-run enterprise.

Too big a government is a drain on the economy.  Because it does not generate new wealth, government can only redistribute wealth generated by the rest of the economy. Too little government is not a choice for a successful economy, proven at the extreme by no government, which is anarchy.  Yet proof that too big a government is bad for an economy is provided at the other extreme.  Consider if everyone worked for the government – the government would be forced to be in the mining, manufacturing, and agriculture sectors in order to generate any wealth for the rest of society to share.  The result would be a failed economic society – think Soviet Union under their brand of “communism.”

So the challenge is “right-sizing” government.  How much is too much?  Today US Total Government Spending is around 40% of GDP – (This includes state, local and federal spending); one third of Federal spending is BORROWED – The borrowed amount and resulting debt is a unsustainable drain on the economy. If the borrowing issue is not resolved, Federal Government income will soon not be sufficient to service the principle and interest on the debt, let alone provide services. With current budget and deficit projections, by 2020 interest on the national debt, currently at 7.2% of the federal budget and 10.9% of tax revenue, will exceed 50% of tax revenues.

There is evidence that the maximum sustainable number for total government spending is between 30% and 35% of GDP. More than that and the private sector cannot produce enough wealth to support the drain on wealth caused by non-wealth-producing government spending.

Somehow, despite these realities, there remains a popular fiction that governments can “produce” jobs or can “turn economies around” quickly through actions such as the wasteful fiction of the 2009 “Economic Stimulus Package,” (which even its proponents finally admitted was just a spending bill) that did not stimulate the economy or reduce unemployment, since most of the work done on the “shovel ready” infrastructure projects went to existing companies and to employees who already had jobs.  How many of you know of a street that didn’t need repaving that was repaved using funds from this wasteful, debt-increasing spending bill? I know of 3 within a mile of my house.  “Stimulus Packages” are budgetary “pork” that do nothing to change the underlying realities of an economy. Sort of like opening the refrigerator door to cool off a hot, un-airconditioned house – it sounds good and seems to feel good for a few moments, and ultimately does nothing long-lasting to solve the underlying problem.

What governments can do is establish the conditions that make it possible for private industry to be more successful at their mining, manufacturing, and agriculture efforts.  This is a long-term effort – there are no quick fixes here.  Some example actions include:

1. Establishing the rule of law (a problem China, for example, had to address to get foreign investment).  With that rule of law, governments establish consistency in the law and regulatory environment such that business knows that the game isn’t going to get changed on them after they make a capital investment.
2. Being “business friendly,” specifically manufacturing business friendly.  Mining and agriculture are, of course, tied to the land. However, a manufacturer can generally locate his company wherever the infrastructure and work force exists to support the plant.  A city, state, or nation that is manufacturing-business-friendly (regulatory environment, tax rates, work force education etc.), such that the manufacturer can compete better in the global market, will thrive.
3. Establishing incentives.  Local governments do this all the time, with tax and infrastructure incentives, because they know that the taxes generated from more manufacturing wage earners and more wage earners in the supporting service industries will far exceed the investments made in the incentives.
4. Making general infrastructure improvements, like the Interstate Highway System, that are not targeted at a particular industry and make it easier for all businesses to do well.  Here again, we don’t need to repave roads that don’t need it, or build “bridges to nowhere.”  We need to target our infrastructure improvements on being more business friendly.
5. Investing in research and spinning the results of that research into the private sector for commercialization.

What can the United States do to grow it’s economy?  The answer is really pretty simple: make it easier for businesses to succeed in both national and global markets by making the United States the most business-friendly environment on the planet.  Businesses and business owners are not villains;  they are the risk-takers who have made the United States the wealthiest country in the world.   Failure to make it possible for entrepreneurs  to succeed here will see more jobs “shipped overseas” (see our blog post of December 7, 2012) because, as I noted in my December 7th post, people vote with their wallets.

Jobs are created where businesses thrive, making goods and provide services that people want, at a price they can afford.  Another example of voting with the wallet.  Governments cannot produce a healthy, thriving economy by borrowing money and spending it on “jobs programs.” They can only provide the environment that makes existing businesses successful and makes new businesses want to establish themselves within their borders. Businesses then provide the jobs, and the accompanying wealth that increases the standard of living for all citizens.