Thoughts on job creation

 

As the Obama administration holds its jobs summit today, I would like to make a contribution to the debate.

To begin with, consider this chart, which takes the monthly establishment survey of jobs and breaks it down into two components: public sector (federal, state and local) and private sector. Note that the two y-axes are set up so that they both show an equivalent percentage change from bottom to top (12%). Note further that over the past 10 years private sector jobs are down, while public sector jobs are up almost 10%. Public sector jobs rarely shrink (with the exception being census years, when lots of people are hired and then fired); they simply ratchet ever higher. Private sector jobs, however, can drop significantly, as they have in the past two years. The public sector hardly knows the meaning of sacrifice when it comes to jobs, while the private sector ends up bearing virtually the full brunt of every downturn. Note also that at the peak of the last expansion (Dec. '07), the private sector accounted for about 84% of all jobs. Government (fortunately) still plays a relatively minor direct role in total job creation.

But government does play a huge, indirect role in private sector job creation, since most—if not all—recessions are the result of major government policy mistakes: usually erratic monetary policy, and more recently unwise market intervention (e.g., FNMA, FHLMC, affordable housing mandates). Recessions can be also be prolonged by policy mistakes. Extending unemployment benefits reduces the incentives of workers to find jobs; deficit spending absorbs funds that might otherwise be used more productively by the private sector; tax credits can distort economic incentives; high marginal tax rates can reduce the private sector's willingness to take risks; erratic policymaking and government mandates can increase uncertainty about the future and thus reduce the private sector's willingness to hire.

Following the advice of people like Mark Zandi, who yesterday proposed a series of measures supposedly designed to create jobs, and which could cost upwards of $300 billion, would do very little if anything to create jobs. The litany of poor ideas is familiar: extend unemployment insurance benefits, spend more on infrastructure, create a tax credit for hiring, make more money available for small business loans, give more aid to states. It would instead be much better to focus on policies that create new and permanent incentives for the private sector to create jobs: lower corporate tax rates, lower payroll taxes, reduce government mandates, reduce the taxes on capital and dividend income.

We need the government to get out of the way of the private sector, by reducing government jobs,  reducing government regulation and intervention in the markets, and increasing the rewards to work and investment.

UPDATE: Don Boudreaux, a consistent font of economic wisdom, explains why a tax credit for new hires is a bad idea: 

... (the) proposed tax credit would bias firms toward producing output by using more labor and, hence, would likely increase employment in the short-run.  But the flip side of this effect is that this tax credit would thereby bias firms away from producing output by using more machinery, R&D, and other capital investments.  Because in the long-run workers’ wages are determined by their productivity – and because worker productivity rises with greater, market-driven capital investments – (the) proposed tax credit, by biasing firms away from capital investments, will cause future real wages to be lower than otherwise.

A cut in corporate-profits taxes, in contrast, would simultaneously prompt firms to expand output – and, hence, hire more workers – without biasing firms against making the capital investments that are the indispensable engine of economic prosperity and growth.