Thursday, August 30, 2012
Jobs created on demand
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From the RoundTable blog
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"I will create jobs" is the mantra on the lips of all candidates seeking our votes. Unfortunately, there is no magic wand to wave that will create these jobs. Only one thing creates jobs: demand for goods and services.
When Whirlpool laid off 5,000 workers in 2011, the reason given for the reduction in force was decreased demand for its product. The illegal drug trade clearly demonstrates how demand by consumers results in a thriving business, i.e. jobs, in spite of efforts by drug enforcement officials to eliminate the supply. All job creation proposals should be evaluated for their demand creation capabilities.
Reducing corporate taxes and minimizing government regulations are touted as magic supply-side pathways to job creation and economic prosperity by some candidates. Additional after-tax funds may be used to improve facilities in small, cash-strapped businesses. However, large nonfinancial corporations currently have record cash reserves in banks of $1.93 trillion. It certainly is not clear why adding to these record cash reserves through tax cuts will suddenly motivate corporations to expand production capability if there is no additional demand for their products.
The private sector could have used these record profits to fuel a robust economic recovery if they emulated Henry Ford's business model and shared their profits with their employees. Ford ensured long-term growth by paying his employees generous wages, thereby enabling them to buy the cars they were assembling. Targeted tax breaks to stimulate the development of new products, reduce production costs or train employees would have long-term job growth potential. Companies have the means to increase production, but that alone does not increase demand by consumers.
Eliminating government regulations whose costs far exceed any benefits to the health of our citizens and environment could contribute to lower production costs and spur job growth if the savings are passed along to consumers as lower prices, or outsourced jobs are brought back from overseas. However, America does not want to go back to the days of the Love Canal, acid rain and the Cuyahoga River in Ohio, which caught on fire, or to the financial recklessness that led to the past recession. Candidates have to identify specific government regulations they are targeting to be considered credible proposals. Specifically, construction of the Keystone Pipeline should not be viewed as a job creation endeavor until its importance as an infrastructure to the country has been shown to outweigh any credible threat to the environment.
Federal, state and local governments create demand by purchasing goods and services from the private sector. In a recent International Monetary Fund report on the U.S. economy, Director Christine Lagarde favors boosting the U.S. economic recovery in the near term through infrastructure improvement, worker training programs and extended unemployment benefits, and is greatly concerned the mandated spending cuts and tax increases at the end of the year will slam the recovery.
Lagarde's comments echo those of The Economist, a respected business-oriented weekly news magazine, which has both praised our government for the bold steps taken to stimulate the economy during this recession and at the same time chided it for not being more aggressive with additional investment.
Demand by the consuming public will increase only if consumers have additional income, the prices of products decrease or new products are introduced. Our political debate has to go beyond the sound-bite jargon stage and delve into the details of how proposed programs will induce corporations to expand capacity and create jobs.