The Myth Surrounding Job Creation (Redux)

This piece, by Randy Wills, originally ran almost exactly a year ago — September 17, 2010. In the context of the perennial focus on jobs and, in particular, in the context of the president’s recent jobs-related speech and superficial push for job growth, I felt it appropriate to re-run the piece as Featured Commentary. Please read it, consider it, and share it with friends. — Jeff

A few days ago, I was listening to President Obama’s Labor Day speech about “creating jobs” — union jobs, of course — by providing $50 billion of “seed money” to jump-start a huge national infrastructure maintenance and upgrade program.

As I understand it, the $50 billion is only a first installment of a proposed program which will actually require six years to complete and cost the taxpayers something like $650 billion dollars that we don’t have, but let’s not dwell on that “inconvenient” little fact. Now, correct me if I’m wrong, but I had it in my mind that we were already funding public infrastructure repair and maintenance programs by the usage and fuel taxes that all types of transportation users pay each and every day when they travel somewhere by some other means than walking.

Silly me, I guess. I’ll bet that the “lock box” that is supposed to hold all that money until it’s needed is actually full of IOU’s, just like the Social Security “lock box” and every other “lock box” in our nation’s capital, to which it seems everyone has a key.

But I digress.

As I listened to the president try to sell the same old snake oil of “job creation” by spending taxpayer money that we don’t have, primarily as a sop to his union constituency, I actually found myself feeling sorry for him. I really don’t enjoy seeing anyone make a fool of themselves on the public stage–particularly when it’s the president of my country–but this guy is in way over his head.

To be fair, however, we need to cut him some slack. He’s never had a real job outside of the surreal worlds of academia and politics and, as far as I know, neither has anyone else in his cadre of economic policy advisers, so naturally it’s easy for him to get lost in the unfamiliar landscape of the real world. Furthermore, it’s really the voting public which should be held responsible for setting him up this way by ignoring his obvious lack of fitness for the job, but heck — as Scott Peck said in his mega-bestseller The Road Less Traveled, “[l]ife is hard and the sooner you recognize that, the easier it will be.” Hopefully, President Obama will have ample opportunity to hit the links and reflect on the perils of an over-reaching ego after the election of 2012, but in the meantime, I keep asking myself if there isn’t someone in his own circle of friends and advisors who is courageous and honest enough to tell him that, like the fabled emperor, “he has no clothes,” is stark naked, and has left the rest of us in America out to dry.

The important point that seems to escape the president is that the real economy rests on the shoulders of those who actually create and produce goods by combining private capital and human effort–physical or intellectual–with natural resources in order to produce something of value as defined and determined by a given market. Increasing the government payroll or using taxpayer dollars to fund secondary, tertiary and on up the scale, ad infinitum, employment venues does not create a sustainable economy if the primary level of the employment hierarchy has become weak, almost to the point of being nonexistent.

Now, I’m not an economist but for more than forty years I have been continuously and gainfully employed in the beginning-to-end process of designing and making things that someone, somewhere, is actually willing to pay more for than the cost of production (that’s called “profit,” and it tends to interest folks with money to invest, enabling the producer to increase his capitalization, grow the business, hire more people, make more “goods” for less cost and, in the process, provide everyone involved with more resources to pursue the finer things in life). Hopefully, my decades of experience will give me some “street cred” regarding job creation which, other than bashing the so-called “party of no,” was ostensibly the purpose of Obama’s speech on Monday.

If you’re familiar with Maslow’s Hierarchy of Needs, you would know that it is graphically represented as a pyramid-shaped hierarchical stack of human “needs,” starting at the bottom with the most basic needs of sustenance and safety and then progressing up the scale of “needs” as discretionary resources become available to the individual to do so. Maslow’s hierarchy is usually used as a management training tool, but it also has value as a tool for understanding the foundational source of wealth, which is my purpose for referring to it in this context.

The point is that you cannot build a sustainable and prosperous economy by pouring taxpayer dollars into the upper layers of Maslow’s hierarchy if there is not a sufficient amount of resource-creation going on at the most basic level of personal sustenance and safety. In other words, the economy cannot sustain itself if all we are doing is recirculating or printing (don’t you just love that concept?) dollars without backfilling the economic system with newly created “wealth” at the most basic level, and in a quantity at least equal to the rate of consumption. For purpose of illustration, consider that roadways, runways, and rail beds do not “create” wealth but rather facilitate the production of real goods, upon which all wealth-creation depends.

This may sound too simplistic for my economist friends, but think of it this way: what are the “jobs” which no society can survive without? The answer, of course, is the production of food, clothing and shelter, and the concomitant provision of the means–such as tools, machinery, and transportation–necessary to accomplish that production. Everything else is ancillary to the fulfillment of those basic needs. And therein lies the problem.

A major reason why our economy is failing to recover sufficiently is that as a result of productivity gains, investor uncertainty, and growing trade deficits, there are not enough full-time jobs available in the United States to achieve anything close to historical employment and income levels. Without the Obama administration artificially propping up wages in collusion with the trade unions, the competition for whatever jobs are available will have the inevitable effect of forcing incomes down until we are able to compete in a world economy, stanching the out-flow of U.S. dollars to lower cost-structure production venues. (Just cruise through any one of the major “big box” retail stores and see how many “Made in the U.S.A.” items you can find.)

Another one of the large, but typically unacknowledged, factors influencing the slow recovery is the increasing number of “underemployed.” These are workers who have been forced to work less than a full work-week, thus enabling their employers to avoid the ever-increasing costs of healthcare and other employee benefits. Harsh measures, but faced with that choice or going out of business and ceasing to employ anyone, who can blame them?

This new reality will require a major recalibration of the U.S. middle-class standard-of-living expectations. In The Road to Serfdom, F. A. Hayek made the statement more than six decades ago that the one thing that a democracy could not survive was a reduction in their standard of living. That may be true, but I can tell you that there’s an even surer way to bring down a democracy and that is by hollowing out the middle class, comprised primarily of the agricultural producers, building contractors, commodity-class product manufacturers, and transportation providers, done by basically outsourcing far too many of the wealth-creating jobs to lower-cost-structure venues.

The wealthy will survive very nicely by moving their investments to safer, more stable and more lucrative environments than that being created by our government. The perennially-unemployed, under-educated, and minimum wage classes will be safely subsidized by the ever-expanding welfare programs, but the shrinking middle class will have nowhere to go–other than down–in terms of their standard-of-living. Class warfare will be rampant without the middle class acting as a buffer between the lower and upper classes and representing a realistic opportunity for advancement for the entry-level wage earners.

You’ve heard terms like “Information Technology Economy” or “Knowledge-based Economy” or “Service-based Economy” thrown about by theorists and politicians to placate an anxious public as they feel the effects of the constant erosion of job opportunities in the basic work sectors, but these are neither realistic or achievable expectations for a very large portion of our present work force. At best, we are only globally competitive in a few high-end technological disciplines, and even those are under attack by equally-skilled technologists in many lower-wage countries.

Two recent articles in the New York Times regarding employment in the technology industries caught my eye. The first addressed the reality that, contrary to expectations, the technology sector in the United States is not hiring. This is causing great concern among industry watchers and economists. As the sub-heading of the article states: “Trend prompts economists to ask, ‘If high-tech isn’t hiring, who will?’” Going further, Hal Salzman, a public policy professor at Rutgers University, was quoted in the article as saying:

There’s been this assumption that there’s a global hierarchy of work, that all the high-end service work, knowledge work, R&D work, would stay in the U.S. and that all the lower-end work would be transferred to emerging markets. That hierarchy has been upset, to say the least.

This only confirms what I learned during the better part of ten years developing partnerships with technology firms around the globe. Believe me — although many highly skilled technologists worldwide were educated and trained at American universities, we by no means whatsoever have a corner on highly skilled technologists, and many out there are more than willing if given the chance to do the same job for a fraction of the wages expected in this country. In fact, the second article in the Times pointed out that in Japan falling salaries for scientists and engineers with advanced degrees are forcing many to find second and, in some cases, third jobs in order to maintain their standard of living. The article also stated that the median salary of this group, in U.S. dollars, is around $30,000 per year. Might this not be a precursor for what lies ahead for us?

Even now, if you are an unemployed technologist north of forty years old, stellar work record notwithstanding, you will likely find that it is almost impossible to secure comparable employment and, if you do, that you should not expect the remuneration to be anything close to the income that you took for granted in your former employment. A chief human resources executive of a major corporation recently said in a Wall Street Journal article that those in his position “have the pick of the best from all of the most prestigious universities now,” so what chance does an unemployed, forty-something “old geezer” have to look forward to? Thirty more years of trying to make ends meet flipping hamburgers or being a security guard? Not a pleasant prospect for an increasing number of the “baby boomer” generation, but a frighteningly real one. It’s going to be sad to watch how all of this plays out.

So, what to do?

First, we must stop spending money that we don’t have, both at the government and the individual levels. We cannot afford the luxury of continuing to live in the fantasy world that the politicians would have us believe is our rightful expectation. We must preemptively ratchet back the wage and benefit expectations in all sectors of our economy so that we can gradually achieve a competitive cost structure in the emerging reality of a global economy. If we don’t take this step voluntarily, the market will make the decision for us under much more uncomfortable conditions than we now face. Our goal must be to rebuild our manufacturing capability rather than ceding this core employment sector to off-shore entities. It was the manufacturing sector that gave rise to the generalized middle class, beginning with the Industrial Revolution and continuing up through most of the latter half of the twentieth century, and we have not yet found a suitable replacement for the countless thousands of jobs lost to productivity gains, out-sourcing, and the importation of lower-cost goods.

Unless we tackle these realities head-on, the prospects for the declining middle class are bleak indeed. As a product manufacturing person, it has always been a source of deep disappointment to me that the ordinary citizen never seemed to grasp that it was he, not corporate greed (not that corporate greed is somehow an unknown phenomena), that was the primary motivating factor for out-sourcing American jobs. The consumer voted with his pocketbook for the lowest prices available in the global marketplace and American producers had no choice but to respond accordingly. Yes, those lower prices from offshore suppliers enabled the American consumer to maintain a higher standard of living than was rationally deserved, vis-à-vis our competition, but in many cases that advantage came at the price of his neighbor’s job.

I am by no means advocating protectionist trade measures–those are always counter-productive–but I get tired of hearing about “greedy fat cats shipping jobs offshore.” Being one of those personally responsible for a large amount of out-sourcing, I can tell you unequivocally that it was not greed that drove us offshore; it was simply the unwelcome choice that the American consumer forced us to make. We either accessed the same cost structure available to our overseas competitors or we went out of business. It was that simple. Predictably so, the drive for the lowest price by the consumer, regardless of place of manufacture, had the effect of hollowing out the manufacturing sector and to a large extent the technology sector, leaving many American workers with no place to go except to the unemployment line.

We could have done much to ameliorate this crisis if, a few decades ago, we had been willing to face the facts and recognize that neither the political class nor the consuming public was responding rationally to the realities of the changing demands of a global economy. The political class chose to manipulate the economy and monetary policy in ways that were designed to fool the gullible pubic into thinking that all was well when, in reality, we were selling off our most precious asset–American industrial capacity–and piling up debt to subsidize an unsustainable standard of living. At the same time, the average consumer chose to ignore the logical conclusion of the path that we had set ourselves upon in order to live beyond his means. We could have, through the application of common sense and the power of individual and collective discipline, exercised significant if not complete control over our own destiny rather than becoming the helpless victim of circumstance that we are now on track to become. Regrettably, we chose rather to believe a fantasy in which we could somehow insulate our economy from the rest of the world and maintain a much higher standard of living than those with whom we are forced to compete for jobs.

Shame on us. We rationalized excess by blindly citing the notion of American exceptionalism when we should have ensured that we did not diminish our capacity for said notion by carelessly overextending ourselves.

Unfortunately and as glaringly demonstrated by President Obama in his Labor Day speech, apprising the American public of this hard reality is not what this administration is about. Rather, what this administration is about is feeding the public’s fantasy that throwing more and more taxpayer dollars at the employment problem will help to solve it. Debt as a solution to a problem caused by debt.

The Obama administration seems to believe that adding thousands of government employees or propping up uncompetitive enterprises with “stimulus” funds or burdening the manufacturing sector with costly policies pushed through by environmental activists is “creating jobs.” Nothing could be further from the truth. In reality, what is now happening is that by so doing, we are crushing the economic engine at the base of the hierarchy with taxes, regulations and intransigent union demands, exacerbating America’s inability to compete for the type of jobs that create wealth at the essential, foundational level of Maslow’s Hierarchy of Needs. Can anyone say “China”?

November is coming. Be sure to make the most of it, but keep in mind on November 3 that we need much, much more than just a change in party control.


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