Job Creation and Other Fables

There are currently two competing theories on how jobs can be created to rescue the economy. Both of them are wrong. One side would have us spend more stimulus dollars to create jobs, dollars for infrastructure (mostly unneeded and hard to put your name on, so unpopular with politicians) and for “green jobs”. Spain undertook major government investment in green jobs a few years back and managed to drive their unemployment rate nearly to 20 percent as a result. About one trillion dollars of stimulus managed to create, well, nothing, but certainly a trillion more will do the trick. Why, just recently I hit myself in the head with a hammer ten times in order to learn to speak Spanish. It didn’t work, but another ten hits will probably get me there.

The other side believes tax cuts will stimulate hiring. If a company has more money to spend, they will naturally spend it to hire people because, you know, it would really help the politicians out. Less regulation and lower taxes could make the prospect of hiring less daunting, but taxes and regulation really aren’t the impetus for job creation. After all, most European nations have significantly lower corporate taxes than the United States, and they’re not exactly swimming in jobs.

Let’s get back to basics. Jobs are not “created” in the same way works of art or sandwiches are created. Jobs exist solely to serve a need. Necessity is the mother of invention, and she’s also the mother of job creation. Why does an employer hire an employee? To satisfy somebody’s demand for a good or service – and this next part is important – while making a profit. The employer hires an employee because they think will get earn more money from that employee’s labor than they have to pay the employee. Lowering taxes might help push a few potential hires over the line from “loss” to “profit”, but probably not on a large scale unless those tax cuts are significant. Stimulus funds might pay for an employee temporarily, but when the stimulus funds run out, so does the employer’s ability to pay his new employee.

Massive debts accrued over the past two or three decades by individuals, businesses and governments have caused what some economists call “The Great Contraction”. This boils down to less spending for goods and services than in the past. This reduction in spending, coupled with the need for businesses to increase efficiencies and hold their bottom line, means that there is less profitable work to be done. The one thing that will solve our current situation is time. This is cold comfort to the unemployed, who demand action. Politicians have little choice but to heed those calls to action, so they will keep on pushing the fable and leave future generations to pay the bill.

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Illustration by Arthur Rackham from 1912 edition of Aesop's Fables.