My wife's niece seems to interested in politics and, to say the least, has a rather liberal viewpoint on some subjects. In a discussion on Facebook I posed several questions to her to see how she would answer. I found her response interesting and I thought I might try to respond. I think this kind of discussion is a bit much for Facebook, as it is essentially a social medium and is not intended for any meaningful discussion of anything. I decided to address this on my blog and share it with her. I find the subject quite interesting.
I asked her to contemplate the questions: How are jobs created? Especially the middle income type jobs. And, what are the impediments to creating those jobs? I also stated that there is no such thing as a free lunch; somebody pays, always.
She answered that jobs were created by the demand for goods and services and stated that middle class earning jobs were created from some form of contract. She also stated, suspecting where I was going, that taxes don't kill jobs. That greed is responsible for stopping job growth.
The answer to the first question I find (while true in a sense) to be a little overly simplistic. In fact jobs are created by businesses. Very often businesses that require a huge initial investment to get them started. But, whether it's a massive investment to start or expand a large business, or to start one on a smaller scale the result is the same. An investment that carries with it the risk that the business will fail and the investment will be lost. That investment is the engine that drives the creation of the business for the purpose of making money if they succeed. Some call that greed. It is businesses that are formed to meet the need or desires for goods and services, jobs follow. Sometimes there was no perceived need for a product or service until a business is formed and as a result of marketing strategies, a desire was established. These businesses in turn hire people to design, produce and market the product or service. When you think about it a lot of the businesses operating today started that way. Nobody thought they needed the dishwasher, clothes washer, electric toaster, the light bulb or radio until it was developed and the public found that they wanted those things. Now they are considered almost necessities.
Let us take a few examples of businesses that produced a lot of jobs.
In the case of the market responding to a built in demand we can take the automobile industry after WWII. In fact all kinds of manufactured products such as washing machines, refrigerators were in high demand. Following WWII the American manufacturing capability was totally intact and able to switch from war time production to peace time very rapidly. We kind of had the world by the tail. The manufacturers hired a ton of people to design, manufacture and market the goods we were making to meet this demand. We were almost the only source of produced goods in world for a number of years. The jobless rate stayed so low that an unemployment rate of over 4 1/2 percent was viewed with great concern. In this case, indeed, demand created jobs because industry responded to the demand.
This condition, however, was a two edged sword. Having no global competition and a ravenous market, the manufacturers did everything to feed that market. They produced cars with their bumpers literately falling off and depended on the dealers to fix the problems. That came back to haunt them later as they lost market share to foreign cars, especially Japans, on the basis of reliability. They capitulated to the unified labor unions ( the UAW) for almost every demand in order to keep the lines moving. The unions demanded and got work rules which, to say the least, were ridiculous. The unions did ever thing they could to expand the work force. They paid middle class wages for putting nuts on bolts. They only had themselves to compete with and the unions negotiated as a group. No outside players were as yet in the game. In a sense all the car companies were competing on a level playing field.
As everybody knows that condition slowly came to an end as the products from Japan and Europe begin to enter the market. Especially after the first great oil crises created by OPEC. Many of the manufacturers went out of business because they couldn't compete and thousands of workers lost their jobs. Remember Studebaker, Rambler, Hudson, and Packard? And, still the unions, with strong government backing hung on to all the perks that they had gained during the plush times, in spite of the fact that they were making American manufacturing noncompetitive in the new emerging global market. In the end, two of the remaining three major auto makers had to declare bankruptcy and only Ford was spared because they had negotiated a large loan just prior to the recent recession. Only massive loans by the government saved GMC and Chrysler. The failure of these companies would have resulted in thousands of American jobs lost. The demand was there for cars, but that could have easily been satisfied by overseas industries. The demand for goods and services would be there but, that would not have resulted in any American jobs. Only saving the businesses did that. Under auspices of the bankruptcy court they restructured their contracts to reduce costs and with the money from the government loans, the car companies are now back in business and competing very well with the foreign made cars. They have paid back all the money they borrowed.
Take a look at your appliances, clothes and shoes; where they made? Not likely in the USA. High costs due to labor, taxes and regulations have driven almost all major manufacturing overseas. Your say they are greedy. But wait a minute, why did Americans stop buying home grown products resulting in the exodus of manufacturing? For two reasons. They actually were made better and they were cheaper. Businesses either compete or say adios and kiss all their workers goodbye.
Let's now consider the creation of a jobs where there was no demand for a product; ergo no business,ergo no jobs. Because there is no history or established Washington mafia these types of business are generally not regulated as much by government bureaucracies making it much easier for a start-up. Apple computer is a good example. There was no demand for personal computers. Two guys went into their garage and developed this technology specifically for computer geeks (the Apple I). They got initial investment capital from a "greedy" investor who thought they might have a good idea and proceeded to market their creation. It was more successful than they had imagined. This led them to design the first true desktop stand alone computer, the Apple II. The established computer powers such as IBM never conceived of a market for personal computers at that time. They thought the market was with the large main frames where they excelled. They questioned why the average citizen would ever want to have access to a computer. They thought the market was limited to Engineers, Science, big business,government and the like. But, some investors saw the product and took the risk that the Apple II would make money and invested in the manufacturing capacity to build the computer. Of course the Apple II was roaring success as ordinary people bought it in droves and it changed the computer landscape forever. The investors were rewarded for their faith and assumption of risk. Following that was whole string of Apple products that had no demand until they marketed it and created that demand. They produced a the IPad, IPod and all the other "I" products, most of which had no market until Apple marketing made one. Apple hired a whole bunch of middle and high end labor to keep at the forefront of the tech design. In this case business didn't respond to a demand, they created one. Out of that venture rose Microsoft, Intel, Dell Computers, a bunch of PC makers and a whole host of additional companies employing thousands of well paid people.
You can also look at Facebook, Tweeter, Google and a lot other so called dot-com businesses that were created before there was any demand for them. After all, who really needs any of the social media. They employ a ton of people. Some required massive investment to grow to their present condition others are small operations employing less that 100 people. Remember also, that most of the dot-com adventures, involving a lot of investment money went belly up and all the investment was lost.
Another example might be the type of business that took some service or product that existed in a limited way, usually only for the rich, and improved it so much that it became the standard for their industry from that point on. A good example of that might be creation of the Ford Motor Co.
Henry Ford envisioned a new manufacturing method that could revolutionize the way cars are built so that they could be owned by the average person and not just the wealthy. His ideas of mass production however, would require huge investments of capital to built the facilities required for his methods to work. He acquired the capital from individual and institutional investors who were willing to take the risk on his ideas. Of course the first mass produced car in the world was the Ford Model T. A roaring success. It seemed that everybody in America wanted one. As a result of Ford's ideas and foresight, thousands of workers were employed in making of the Ford cars. Of course it wasn't long before his assembly line methods were adopted by other manufacturing companies producing everything from toasters to automobiles resulting in hundreds of thousands of new jobs being created as the price of manufactured goods plummeted and ordinary people could begin to afford these luxuries.
Of course Ford was entering virgin territory with his venture and there were not yet a ton of government regulators breathing down his neck at every turn. Nor where there a large body of entrenched interests in Washington set to protect the then current industries.
And Ford wasn't only example of this type. There was Carnegie, who figured out how to produce steel cheaply and spawned a building boom never seen before; there was Rockefeller, who revolutionized the oil industry and made American the largest producer and exporter of oil for many years, Edison with his many inventions and the industries that came out of his ideas, Tesla and the electric power systems we use today. And the list goes on.
So again I reiterate that business creates jobs. Therefore, it should be clear that impediments to business development has a negative effect on the job market.
So what are the true obstacles that businesses have to face at their start up and every day of operation? Mainly, if you are competing in the open market, it's controlling costs. The price you can sell your product or service for is dictated by market conditions. If the manufacturer of the product or service can not meet the market price because of high costs and still make a profit, they will fail and go out of business with all the concurrent job losses that go with it. It follows then that an essential task for any business leader in a competitive environment is to control costs.
Of course government does not operate under those restraints. There is absolutely no incentive for government departments to worry about controlling costs. They have no competition.
There are a number of factors that go into the cost of providing a product or a service. The cost of the material they have to purchase, their faculties costs (likely a nearly a constant), labor, including executive salaries, taxes and adherence to government and collective bargaining regulations and restrictions are some of them. Companies have some control over most of the costs involved with the exception those that are government imposed. I.e. taxes and regulations.
Of all the things government does to hamper job growth, the more onerous is probably the abundance of regulations they have created for a business to get started and to operate. Potential businesses have to spend a large amount of money and time doing all kinds of studies to show the potential new businesses impact on everything. They must show the impact on the environment, wild life, ancient tribal sacred grounds and their compliance with local zoning and long term objectives of local planning commissions among other things. And none of the studies are cheap. If a company gets over the initial hurdles and starts to operate, they now have a prolific set of laws and regulations that must be met concerning workers safety, access for the disabled, working hours, product safety, and other regulations. An over abundance of these types of things results in companies fleeing to less onerous locations.
One should also be very clear that the cost of a company complying with a government regulation is, by necessity, passed on the consumer in form of a higher price. It is almost impossible to conceive of a regulation that doesn't cost money to implement. That is not to say that all regulations handed down by a myriad of government bureaucracies are all bad. But, they do cost money. And, the originating agency never seems to consider cost of implementing their brain burst.
On the subject of taxes. Let's be clear. Who Pays All Taxes? And I do mean all taxes. The answer: the consumer. That's in addition to the up front taxes the consumer pays in the form of income tax, sales tax and any special tax that local government has imposed. When you buy that new Chevy you are paying GMC's corporate taxes. You are also paying their workers compensation in all forms. The company contributions to pensions, Social Security and Medicare, vacations and sick leave for their workers are factored into the selling price of the car. That's in addition to the taxes that their subcontractors had to pay in order to sell their own product, which the final manufacturer has to absorb. Taxes are just another expense to the manufacturer. If the manufacturer is competing on a global scale then higher taxes mean higher costs and thus they are
less competitive. If they are less competitive they sell less of their product, therefore don't need as many employees; loss of jobs. The average corporation pays something like eighteen percent of it's net profits in taxes. That's money that is not there for reinvestment in R&D, expansion and hiring more workers as a result and payment of dividends to it's stockholders. The company has to offset those expenses somehow and the only means they have is to reduce hiring to a minimum to reduce labor costs.
If there is one thing the economists all agree on is that taxes are bad for the economy. What they don't agree on is the effect of a tax cut on Federal Revenue. Historically as taxes crept higher the economy suffered and unemployment rose. When the tax rate was lowered an economic resurgence occurred almost always occurred with lower unemployment, a growth in the GNP, and the government actually took in more money. A good example was the Revenue Act of 1964, an across the board tax reduction championed by JFK and carried through by LBJ. In 1964 and again in 1965 unemployment fell, the GNP increased and the Federal revenue increased. That is a story that was repeated under Reagan in 1984.
To the statement that "greed" is what hampers job growth, just doesn't stand up. "Greed" i. e. a desire to make money, as a matter of fact creates jobs as a myriad of examples would show. What hampers job growth are factors which effect businesses ability to produce products at a price the people are willing to pay. People are willing to pay only so much for their widgets. If the price gets to high, or the quality gets too bad, they will slow down on their widget purchasing resulting in the lose of jobs in the widget industry. Produce a high quality widget at a good price and the mob will beat a path to their door and the widget manufacturer will hire lots of people to make more widgets.
