Friday, February 27, 2009

Jobs Summit, 1: The Problems

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

0_21_zombies_450I don‘t know about you, but when I first heard about today’s so called Job’s Summit I immediately thought of that famous quote above from Adam Smith’s Wealth of Nations, in which he berates the zombies of government for “not leaving things at perfect liberty” and thus raising prices by “by obstructing the free circulation of labour and stock.”

And I thought too of US President Hoover, who in the wake of the great Stock Market Crash of 1929 organised an economic conference and a committee on unemployment, which attempted to keep prices up by the sort of contrivances described above.

I fear the result of today’s Summit will be the same, since all the advice proffered in advance of tomorrow’s Job Summit has involved lots of merchants --almost to a man and woman  -- calling for lots of government help for their particular businesses, the net result of which is likely to see the government doing lots of stuff to restrain their competitors and to keep prices high, and paying for lots of stuff to keep “purchasing power” inflated.

There’s at least seven problems with those solutions – not the least of which is that when President Hoover tried precisely those same contrivances, it resulted in a drastic loss of production and a savage rise in unemployment (which by the end of his presidency had reached well over twenty percent!). 

First, the notion that governments need to act to keep prices up is exactly the opposite of what economic reality demands, and ignores the simple fact that one man’s prices are another woman’s costs. In a time of falling world prices, which all governments are powerless to diminish, what is most important is to lower costs to all producers, which governments can best effect by doing the opposite of what they normally do: which is to say they should get the hell out of the way.

Second, the idea that governments should protect local businesses at the expense of foreign suppliers is to invite a protectionist backlash – disastrous to an economy like ours that is entirely dependent on the world’s trade to stay afloat.

Third, the idea that government needs to spend money it doesn’t have in order to keep spending up and “purchasing power” elevated is another example of the notion I explained yesterday, by which the government steals from you with every inflated dollar it spends.  The notion that it needs to spend, or to encourage consumption, is the direct result of measuring national income without measuring real production -– which, as George Reisman thoroughly explains, is like playing macroeconomics with only half a deck of cards.  As he points out, it’s not consumption that drives an economy, it’s production.

Would that anyone at today’s Summit understood that, before we perish in an orgy of consumption that we couldn’t afford before, and we definitely can’t afford to pay for now.

Because the money to pay for lots of all the government’s spending “to create jobs” has to come from somewhere (and this is the fourth point here).  Government has no money of its own, so to get money to throw away it can only tax, borrow or print dollar bills – which means either from the incomes of existing taxpayers or from their pool of real savings. In the latter case it simply puts off the taxation until later (and the heavier the borrowing, the more it approximates a kind of “fiscal child abuse” of following generations).  And in the first case it just takes money right out of producers’ pocket, raising their costs once again and reducing the level of real investment they can make and the amount of productive employment they could purchase, and (as a consequence) lowering wages. And in the second case, if they borrow in order to spend, all they’re doing is crowding out the market of loanable funds and making it more difficult (and more expensive) for producers to borrow. 

“Stimulus” packages may create make-work jobs in the short term, but this is at the expense of many more real jobs in the long run.

Fifth, we desperately need tax cuts – producers desperately need tax cuts to lower their costs and employ more people productively – but responsible governments would know that every cut in taxes must be accompanied by corresponding cuts in government spending – since if they have to borrow to afford those cuts, they would know that’s only sleight of hand because the taxpayers are still paying anyway.

Sixth, the sort of spending already signalled (and the sort of shopping lists we’re likely to hear today)  suggests the ghost of John Maynard Keynes is behind most of the spending plans. “Pyramid-building, earthquakes, even wars may serve to increase wealth,” he advised many decades ago. “To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services,” he said, indicating the quality of his advice – and reflecting the quality of much of the spending we hear about.  With advice like this from so called friends, it’s hardly necessary to have enemies.

Seventh, it’s important to understand what real investment looks like.  Real productive investment produces more wealth than it consumes.  It takes existing capital, and it makes more of it. There is nothing in the lists of government spending that fits this bill, which is to say that all government spending is consumption, not investment.

Which is to reinforce the point that every dollar that government spends is not a dollar that is going into productive investment.  Sure, you’ll see the dollars the government is spending, and see the jobs “created” – but what you won’t see are the jobs that would have been created if that money had been left in producer’s pockets.  Henry Hazlitt explains with an example that demonstrates the fundamental error in all the solutions we’re going to hear today that involve government “doing more”:

    A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money had it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.
   
Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.
   
This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes [or borrowing]. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.
   
Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.
   
But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer. Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

It does not matter whether the money to pay for the make-work projects is from taxes or from borrowing, since it’s essentially the same  source in both cases.  In either cases, any job created by taxpayer-backed projects means at least one private job has been destroyed somewhere else.

Think about that.

SO THERE’S THE PROBLEM WITH the “solutions” we’re going to see today.  The fundamental problem for a growing number of producer now, which is a problem characteristic of depressions, is that (even with the inflated prices we already see) their costs to produce goods and services are now higher than the price for which they can sell those goods and services.  House builders are a prime example.

More government spending is not the answer.  More debt-ridden consumption is not the solution. Keeping prices up is not going to sort things out.  Obstructing the free circulation of labour and stock is not going to help.  What will help is the opposite of this approach: More freedom, less government – which will lead to more enterprise, more wealth, more jobs – in that order.

Let’s recap: the fundamental problem that producers face right now is that their costs are now approaching (or are above) the prices they can get for their work.

Which means the most urgent need is to allow costs to fall -– which (if we remember our earlier point that one man’s prices are another woman’s costs) means to allow prices to fall.  We’ve just experienced an orgy of consumption in which whatever was produced at whatever price it was produced was snapped up.  Even unviable producers were viable.

Those days are gone.

Recession means correction. Prices need to correct, urgently. Unviable malinvestments need to be flushed out, urgently, so those resources can be put to work properly.

In short, to borrow the words of CNBC’s courageous Rick Santelli, we need to reward people that could carry the water instead of drink the water.

And government needs to urgently get the hell out of the way so that can happen.

More later today, when I’ll offer half-a-dozen solutions to help that happen…

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4 Comments:

Blogger Dinther said...

After an entire day of whining about how the government should buy Kiwi made apparel I struggle to see how we ever get through this.

Did you see that hippie Davey Hughes from Swazi Apparel carrying on on TV about how unfair it was they lost the order. He was making big statements about how they pledge to keep all staff employed.

Not a single word in the news about why they lost the order. Were they too expensive? Did the increase in minimum wages tip them over the edge?

Then this morning a guy called in to talkback radio. He runs a store and used to sell Swazi products. He had a problem with the fact that they also sold their product at the factory against reduced prices but Swazi would not listen so the business man did what a businessman should do. He looked for more competitive alternative products. And he found them in China, equal quality but half the price.

When people start whining about keeping jobs their first concern should be to offer their product called labour at a better price.

2/27/2009 11:04:00 am  
Blogger Matt Nolan said...

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices"

That is a brilliant quote ...

I'm pretty disheartened about this whole job summit trash myself.

If it replaces the addition of more crap policy then I'll take it as the waste of money it is - my fear is that it will lead to bad policy

2/27/2009 11:13:00 am  
Blogger PC said...

"If it replaces the addition of more crap policy then I'll take it as the waste of money it is - my fear is that it will lead to bad policy"

And that's another quote I have to, unfortunately, agree with.

2/27/2009 12:22:00 pm  
Anonymous LGM said...

The story I heard was that Swazi were importing some lines of product from China themselves. Some of that was on-sold to the NZ Army.

It appears the generals are not as stupid as some would like them to be. By purchasing those items direct from China the Army cut out the middle-man who, in this case at least, added no value. Hence the Army saved taxpayer dollars. More bang for the buck. That's what they SHOULD be doing.

LGM

3/01/2009 09:18:00 am  

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