Capitalism and Creating Jobs

This was published in the WSJ by Bill Burbage on Thursday 20090730. I thought it made alot of sense and rather insightful. Perhaps it was obvious but sometimes the obvious needs to be restated.

No entrepreneur has ever had an objective of “creating jobs.” Everybody, employers and individuals alike, constantly seeks to eliminate jobs. As Adam Smith put it in “The Wealth of Nations,” all of the tools and machines that we use are designed to “facilitate and abridge labour,” i.e., to reduce jobs. People go into business to make a profit. If any jobs are created in the process, they are created because there is no way to avoid it. Employees are expensive.

To create more jobs, the sovereign must remove as many obstacles as he can between the entrepreneur and his ability to make a profit. No other stimulus is necessary. As Smith says: “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.”

In his wildest nightmare Smith could not have imagined the “impertinent obstruction” of a 15.3% payroll tax—not on profits but on total revenues. Mandates by the federal government have made the hiring of an employee more akin to adopting him and his family.

To those who think that a recovery is automatic based on historical or cyclical experience, consider that Cuba has not recovered in 50 years. It will not recover in another 50 years unless it restores an environment that is not hostile to entrepreneurial activity; neither will the U.S. Instead of eliminating the obstacles that already exist, we are preparing to pile on even more with the carbon tax and health-care reform.

Economic Stimulus: Work vs. Job

This exchange between Steele & Stephanopoulos highlights something that has been adequately addressed by the media's discussion regarding Obama-Democrat's "stimulus/pork package."

When the government spends money on short term projects, such as construction, work is created but not jobs. A job is something is stead work, something you can go to the bank with and use to get credit for a house or a car. A work is a temporary arrangement where you get paid for a limited duration, whether it be picking crops in the field or building a bridge. Any stimulus spending should keep this difference in mind.

The more I think about it, the less it make sense for the Government to spend money as a stimulus. Firstly, it takes money from taxes to spend, and in the process serves as the middle men. Be certain that the money it collects and the money doled out is not one for one. Secondly, the Government consistently acts in the short term, without sufficient thought to long term consequences. The government emphasis on works rather than jobs is a clear example of this. Thirdly, the taxpayer is in a much better position through his or her interaction with out capitalistic economy to direct spending dollars to what he, she, and the community needs as a whole. Fourthly, the increased in government spending for any stimulus package will only drive the deficit up, further limiting the availability of credits to the economy while increasing foreign ownership of our economy.

As such, the government stimulus should primarily be in the form of tax cuts. This will also have the added benefit of forcing the government to trim its budget. The primary spending of the government should be directed toward national defense.

The only stimulus spending at this point that makes sense to me are grants for research (both scientific, industrial and economic) that will lay the foundation for further discoveries.


HT: Right Wing Sparkle

Government Bailout & Executive Pay Cap

I am all for the government imposing a cap on executive compensations with regard to salary, bonuses, and buy-outs. Firstly, it only applies to companies accepting government buy-outs and thus the government has a responsibility to see to it that the money is well spent and not wasted. This occurs in most other circumstances of government financial supports whether it be NIH research grants or federal moneys to states. Federal money should always come with restrictions. Secondly, and perhaps even more important, I hope this executive compensation restriction is such that the vast majority of large companies, those that are "too big to fail" would think twice about asking for federal hand-outs. I rather them take a chance on failure. I think this would be better for the companies, the economy, and the tax payers. Now small companies might be tempted to take government money but since our economy is built on the back of small and medium companies, I am fine with this.

Government & the Economy

I recognize that in difficult economic times, the public expect the government to act. And it would be appropriate for the government to act but clearly not all actions are beneficial.

Firstly, bailing out any commercial entities because they are "too big to fail" is just ridiculous. Spending money, even tax payer money, should be seen as an economic investment for success. Investing money in failing companies is just absurd. I understand the reason is to minimize job lost but in this is a horrible way to achieve this. When you give money to large companies, the company executives are more likely to see the money than the average worker. The government would be better off increasing the money available to unemployment than to give it to failing companies. In addition, by bailing out failing companies, their legacy actions for continued failure delay their necessary demise so that other, smaller companies with better vision and ability can rise. If anything, it should be the ascendant companies that receive federal funds (in terms of tax breaks rather than hand-outs) rather than the descendant companies.

Secondly, the best way to stimulate the economy is to get more money into the economy for circulation. I believe that this is best achieved by giving more money to the tax payers hand. This can be done as either a tax rebate or as unemployment benefits. The individuals are the one best position to decide how to spend money, not the government, and especially not failing companies that are too big to fail.

Thirdly, if the government feels that it is necessary to direct some of the spending themselves, the money would be best spent toward projects that is not likely to cause dependency. Infrastructure projects, while they may be both necessary and desirable, will require long term commitment for upkeep and maintenance. I suggest a combination of small business grants in new scientific or technology fields, as well as education grants as scholarships for students and research grants.

Automaker Bailout

W is using the TARP moneys to bailout the auto industry. It would have been best if no bailout occurs at all. Second best would have been restructuring ala bankruptcy as a precondition for a bailout. But using the TARP at least means no additional new money is being spent by the feds during the whole economic crisis.

Job Economics

Two interesting reads today regarding jobs and economics. Firstly, a review from the MIT Press on a book entitled "Minimum Wages" by David Neumark and William L. Wascher.

In this book, David Neumark and William Wascher offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labor market outcomes, prices, and the aggregate economy. Arguing that the usual focus on employment effects is too limiting, they present a broader, empirically based inquiry that will better inform policymakers about the costs and benefits of the minimum wage.

Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

Now complement the above with the following article by C Edmund Wright at American Thinker

When the jobs report for November came out last week, many so-called "experts" were shocked at the massive loss of an estimated 533 thousand jobs. Even a Time /CNN organization called "The Curious Capitalists" were at a loss to explain it.


Let me attempt to help out these "curious capitalists" (though I am still skeptical that anyone working for CNN or Time is either curious or a capitalist). I caused part of this job loss and I know precisely why; the election. The results portend big trouble for small business.


The job destruction process has started. We are about 20% of the way through our ramp down process and on schedule to complete the shut down by spring 2009. Watch the financial news and you will see continued job cuts each month. We are not alone in our strategy. Far from it. Atlas has shrugged all over the country.


Like many business owners, we are no longer willing to take all of the financial and legal risks and put up with all of the aggravation of owning and running a business. Not with the prospects of even higher taxes, more regulation, more litigation and more emboldened bureaucrats on the horizon. Like others we know, we are getting out while the getting is, well, tolerable. Many who aren't getting out are scaling back.

Those in government, especially the recently elected administration, just do not seem to understand how economic work. While the government intention may be good, their results is far short of good.

Automakers Bail-out

The big three US are looking to the US government for cheap loans to continue business as is. This would be a mistake for the automakers, the US government, and ultimately the US taxpayers. The first question to be asked in all this is why are the US automakers having a problem being competitive. In manufacturing there are three factors to being successful: cost efficiency of production, quality of product, and appeal of product. Currently the cost efficiency of production for the US automakers is prohibitive. While it cost the foreign automakers about the same to manufacture automobiles in the US, the big three automakers are burdened by legacy payments to retired United Auto Workers union members. This substantially increased the cost of operation for the big three. While it is not necessarily wrong to guarantee retired workers a pension, it was a poor decision to use operational budget for this rather than set up a separate fund/portfolio to do so. Considering that the quality of US autos have improved significantly in the past decade, as well as the appeal of SUVs and pickup trucks remain high for US automakers (their major products rather than passenger cars) I believe this aspect of cost inefficiency to be the primary factor for the big three financial woes at this point. For the US government to bail out the US automakers as is would only perpetuate a broken system and reset the date of failure. (Didn't we bail out Chrysler in the 80s?)

I see two potential solutions.
Firstly, let the automaker fail. The benefit would be that in the restructuring and reconstruction of the automaker, a better and more efficient company would arise that would then be competitive. This is the most free capitalist approach to the problem and sets the best precedence for other large companies facing similar problems. We cannot be bailing large inept companies out over and over again. There can be no true success without a chance of failure. I believe this to be the superior, though harder, solution. Harder to do as well as harder to suffer through. I am skeptical this option will be chosen.
Secondly, the federal government could assume the retirement cost and thus remove the financial burden from the big three automakers, thus allowing them a chance of being cost efficient again. Naturally this sets a poor precedence for future bailouts. However, this allows a political solution for politicians wanting to, or expected to, do something to help. And this option would certainly be more palatable than a hand out to the big three, whether they take on new management of not.

PotUS: Issues & Challenges

What i expect from my president, in order.

A. Protect the US from outside threats. I view this as the primary responsibility of the executive because this is the essential and historical role of any community leader from a family patriarch, the tribal chieftain, to a people’s King. The constitution sets foreign diplomacy and commander in chief as the responsibility of the President. Performing these responsibilities well is the most important function for the PotUS in a world that remains full of dangerous challenges. Ultimately, regardless of how generous and responsible the US is as a member of the international community, some out there will want to hurt and harm us. Once they believe this is in their best interest, we will not be able to talk them out of it. I want a president willing to make war before we are attacked as well as one willing to talk so we won’t be attacked. It certainly won’t sound fair but I rather have foreign blood spilt than ours, foreign lands bombed than ours. I do not want war all and I want wars prevented within reasons. But I recognize that there will be times when undesirable war is preferable to hoped for peace. But once a war I want us resolved and determined to win. Once won I want to see the US as magnanimous in victory in order to jointly build a new future with our former foes. In short I want our foreign policy predicated on the simple idea of “There is no better friend and no worse enemy than the US of A”.


B. The second responsibility for the executive branch is to maintain a secure environment for Americans to pursue happiness. Here the president will need to lead, direct and set the agenda for Congress to formulate legislations further secure the American pursuit of happiness. Factors essential for a secure American environment are sound fiscal policies, fair resource management, and secure individual liberties.

B1. Sound fiscal policies have three aspects: first is a fair taxation plan that would stimulate economic growth, second would be appropriate federal spending to grow the essential governmental function, and to reduce the federal deficit.

B1a. Regarding taxation, it may seem tempting to tax the rich and give it to the poor, but in practice this just does not work. Firstly, who has the most money? Large businesses. But if for every penny they are taxed, they certainly pass it down to the consumer in terms of higher product cost. Sadly, it is the poor consumer that pays more as a percentage of their income on buying essential products for living than do the rich. If not big businesses then what about medium size businesses? Some of the tax they will certainly pass along to us, the consumer voter. But what tax they cannot pass along will eat into their bottom line and reduce available capital. Less capital means less growth in terms of hiring as well as building a better business. Either way, the community loses. Alternatively the rich individual can be taxed. From the Tax Foundation the fact is that this is already happening, with the top 10% (those making about $109,000) earners paying 70% of the federal income tax revenue. The bottom 50% earners (making less than $32,000) currently pay less than 3% of the federal income tax revenue. Squeezing the rich individual is harmful in three ways. Firstly it makes the rich even more involved in politics to reduce their tax, and once tax issue resolved, they will try to influence the governments in other ways. We cannot afford a plutocracy. Secondly like with small businesses less disposable income due to higher taxes mean less money to spend on personal services, from assistants to maids, cooks, and gardeners. Again the working voters get cut. Thirdly taxing the more financially fortunate is just counter intuitive to the American dream to become more financial fortunate. While my personal bias currently is for a federal flat tax along with a federal sales tax instead of the federal income tax (less tax bureaucracy too!) this is currently not likely. In lieu of this, I am and think we all ought to be opposed to raising taxes on any segment of the public.

B1b. Appropriate federal spending to grow the essential governmental functions covers firstly maintaining an active and competitive military, secondarily a national security program, and a functional transportation infrastructure for internal commerce. Maintaining the military is the primary function of any national government to defend its people and existence. The military must be well trained and well supplied in terms of men and equipment. Naturally we must care for our military personnel as they are serving and once they have served. I support a well-funded program to support the family of soldiers on active service; the families of those who love ones have died in service, and for our veterans after they have served our country. I also believe the best defense is a strong offence and this requires a technologically advanced military. To go on the offense you need accurate and reliable intelligence service. A similarly effective intelligence capability needs to be applied to protect against foreign terrorist acts within the US. There can be no freedom or prosperity without security. And prosperity will also require a well-maintained infrastructure for communication and transportation, especially as the US is structured as a federal union of states.

B1c. The president proposes the federal budget to Congress. If the US government is not in deficit, then it might be alright for the government to spend liberally, but given the size of the federal government, there needs to be limits on non-essential federal spending to reduce the federal deficit. The deficit needs to be reduced because these credits are especially sorely needed elsewhere right now. The first way to reduce the deficit would be to cease the expansion of government services except as above (B1b). The second way to cut the deficit is to increase revenue. This will occur if governmental policy stimulates economic growth. Increasing taxation usually inhibits economic growth. Thirdly, there needs to be a serious discussion with the American voters about reducing welfare.

B2. For fair resource management, the essential resources to focus on firstly is human labor, secondly promotion of trade, and finally energy independence, and promotion of trade. Human labor isn’t just about fair wages, human labor development is about having the opportunity to work and earn a living as well as opportunity for both personal and professional growth through work. The opportunity of work can only come about through a growing economy. And once employed, we need to provide circumstances for the American worker to be both productive and opportunities for advancement. I believe essential to productivity and advancement is a sound education, from grade school through high school (to provide the basic understanding of how life and our country works) as well as appropriate trade and vocational education. As the American voters progress, by necessity we will have others to do the more menial and more labor intensive jobs to others. But by doing so more people will have opportunity for employment and grow the market for goods. This is true whether these lower paying jobs will remain here in the US or is sent across our borders. And if sent across our borders, we need to establish trade agreements with these other nations to make it easier to both allow them to accept our needs for basic labors as well as open their markets for our goods. These trade agreements should be both free and mutually beneficial. But one thing we cannot depend on oversea for is our energy needs. The US needs to become less dependent, or even independent, for our energy resources. Energy is to our economy what food is to our body. The US cannot perpetuate the energy import as we have been. The PotUS needs to take leadership to promote expansion of our traditional energy sources as well as build up more energy resources, both green and nuclear.

B3. Secure individual liberties by preserving the bills of rights and protecting against act of crime or terrorisms. The most important bill of rights are the first protecting freedom of speech, to essentially speak against the government, and the second to keep and bear arms, also to personally defend oneself. But regardless of how the Bill of Rights is interpreted, it becomes meaningless if America is entrenched in fear due to crime or terrorist acts. I do not believe our liberties need to be sacrificed in order to obtain personal security. I believe we can navigate through and preserve both liberty and security. A president needs to understand the significance of both and take consideration of both.


C. Everything thus far discussed, to protect the US against foreign threat and to maintain a secure environment for Americans to be happy, are all practical and earthly responsibilities but won’t be enough without something for the soul and spirit for America. In my opinion the most important them for America to move forward with is the concept of “individual and personal responsibility.” No nation can ever be great if its people do not have the initiative to act or to act without personal accountability or responsibility. Without personal responsibility, then the state becomes responsible for everything. This can only lead to failure. Accepting personal responsibility means accepting that an individual can change the future. I believe this is cause for optimism, for through actions from each and every individual America can be made better and greater. This is what I would like to see for America.

Business: Dems vs. Reps

As an Obama victory looms likely, along with a possibility of a democratic filibuster proof majority, business are stepping in the fray against the Dems. All the more reason to believe that despite the economic crisis, business people believes the Reps are better for business. Is the reason predicated on tax schemes? Actually no. The reason is because the Dems are anti-democratic when it comes to union voters.

Firstly, the Chamber of Commerce acts to shore up GOP Senators:

The nation's largest business lobby, the U.S. Chamber of Commerce, has raised ire among Democratic leaders for pouring millions of dollars into an advertising push to prevent the party from winning dominance in the Senate next year.

The Chamber says it has raised enough money this year from corporations to spend about $35 million on the election, double its budget for House and Senate races in the 2006 election. The group is supporting pro-business candidates, almost exclusively Republicans in contested Senate races.

Business executives fear that Democrats, bouyed by heavy spending from organized labor, could gain enough muscle in the Senate to spark policies favoring increased unionization, higher taxes, more restrictions on trade and more regulation on the financial-services and housing sectors.

Secondly, individual retailers acts on their store managers:

Retailers are meeting with store managers to warn how a strong showing for Democrats in the Nov. 4 election could cause what they fear would be more economic pain for their companies, in particular by potentially making it easier for unions to organize stores.

The companies are worried about presidential candidate Sen. Barack Obama's stated support for the Employee Free Choice Act, which would do away with secret balloting and allow unions to form if a majority of employees sign cards favoring unionization. The legislation, retailers fear, would have improved chances of becoming law under a Democratic administration.

The legislation passed the House last year but died amid a Senate filibuster and a threatened presidential veto. The issue in this election is whether Democrats, who hold a 51-49 majority in the Senate, can win the presidency and gain enough seats to prevent Republicans from using procedural motions, such as filibusters, to thwart legislation.

The bill was crafted by labor as a response to more aggressive opposition by companies to union-organizing activity and as a way to shield workers from antiunion pressure from their employers.

the Bush Economy

Do not let the press or the left disuade you otherwise, the economic outlook is sound.

Economic growth. U.S. output has expanded faster than in most advanced economies since 2000. The IMF reports that real U.S. gross domestic product (GDP) grew at an average annual rate of 2.2% over the period 2001-2008 (including its forecast for the current year). President Bush will leave to his successor an economy 19% larger than the one he inherited from President Clinton. This U.S. expansion compares with 14% by France, 13% by Japan and just 8% by Italy and Germany over the same period.

The latest ICP findings, published by the World Bank in its World Development Indicators 2008, also show that GDP per capita in the U.S. reached $41,813 (in purchasing power parity dollars) in 2005. This was a third higher than the United Kingdom's, 37% above Germany's and 38% more than Japan's.

Household consumption. The ICP study found that the average per-capita consumption of the U.S. population (citizens and illegal immigrants combined) was second only to Luxembourg's, out of 146 countries covered in 2005. The U.S. average was $32,045. This was well above the levels in the UK ($25,155), Canada ($23,526), France ($23,027) and Germany ($21,742). China stood at $1,751.

Health services. The U.S. spends easily the highest amount per capita ($6,657 in 2005) on health, more than double that in Britain. But because of private funding (55% of the total) the burden on the U.S. taxpayer (9.1% of GDP) is kept to similar levels as France and Germany. The U.S. Census Bureau reports that 84.7% of the U.S. population was covered by health insurance in 2007, an increase of 3.6 million people over 2006. The uninsured can receive treatment in hospitals at the expense of private insurance holders.

While life expectancy is influenced by lifestyles and not just access to health services, the World Bank nevertheless reports that average life expectancy in the U.S. rose to 78 years in 2006 (the same as Germany's), from 77 in 2000.

...

Investment has been buoyant under President Bush. According to the ICP, outlays on additions to the fixed assets (machinery and buildings, etc.) of the U.S. economy amounted to $8,018 per capita in 2005 compared to $4,963 in Germany and $4,937 in the U.K. Higher taxes on the upper-income Americans, as proposed by Mr. Obama, are likely to result in lower saving and investment, less entrepreneurial activity and reduced availability of bank credit. Lower-income Americans would be among the losers.

...

Employment. The U.S. employment rate, measured by the percentage of people of working age (16-65 years) in jobs, has remained high by international standards. The latest OECD figures show a rate of 71.7% in 2006. This was more than five percentage points above the average for the euro area.

The U.S. unemployment rate averaged 4.7% from 2001-2007. This compares with a 5.2% average rate during President Clinton's term of office, and is well below the euro zone average of 8.3% since 2000.

Debt interest payments. The IMF reports that the interest cost of servicing general government debt in the U.S. has averaged 2.0% of GDP annually from 2001-2008, compared with 2.7% in the euro zone. It averaged 3.2% annually when President Clinton was in office.

The cost of the wars in Iraq and Afghanistan has been largely absorbed in a relatively small increase in the defense budget (to 4.1% of GDP in 2006 from 3.8% in 1995). A much higher proportion of U.S. income was devoted to the military during World War II and the Korean War.

Oil and Gas, the money

from Powerline:

Stephen Simon amplified:

Exxon Mobil is the largest U.S. oil and gas company, but we account for only 2 percent of global energy production, only 3 percent of global oil production, only 6 percent of global refining capacity, and only 1 percent of global petroleum reserves. With respect to petroleum reserves, we rank 14th. Government-owned national oil companies dominate the top spots. For an American company to succeed in this competitive landscape and go head to head with huge government-backed national oil companies, it needs financial strength and scale to execute massive complex energy projects requiring enormous long-term investments.
To simply maintain our current operations and make needed capital investments, Exxon Mobil spends nearly $1 billion each day.

Because foreign companies and governments control the overwhelming majority of the world's oil, most of the price you pay at the pump is the cost paid by the American oil company to acquire crude oil from someone else:

Last year, the average price in the United States of a gallon of regular unleaded gasoline was around $2.80. On average in 2007, approximately 58 percent of the price reflected the amount paid for crude oil. Consumers pay for that crude oil, and so do we.
Of the 2 million barrels per day Exxon Mobil refined in 2007 here in the United States, 90 percent were purchased from others.

Another theme of the day's testimony was that, if anyone is "gouging" consumers through the high price of gasoline, it is federal and state governments, not American oil companies. On the average, 15% percent of the cost of gasoline at the pump goes for taxes, while only 4% represents oil company profits. These figures were repeated several times, but, strangely, not a single Democratic Senator proposed relieving consumers' anxieties about gas prices by reducing taxes.