Where do Jobs Come From?

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I watch, with great interest, whatever I can to understand how the third world works. Human nature is fascinating to me, not just the good bits, but the bad bits.

In impoverished countries, what is sorely needed is a way for unskilled labor to be used profitably. I see streets and slums overloaded with able-bodied young men, who, if given proper direction, could be doing any number of things that would be economically beneficial to themselves and their country as a whole. If they had a reassurance that they could be gainfully employed after learning a trade, then finding the money to go to school and learn the trade wouldn’t be a problem.

With this in mind, one of the questions I ponder again and again is, “Where do jobs really come from?” That is, how do societies build up to the point where someone is almost guaranteed a job if they simply apply themselves in preparing for it, finding it, and working to maintain it?

Of course, I have my ideas, and so does everyone else, but what surprises me most is not what I think, and what I think economists think, but what people who vote democratic tend to think about jobs. I have heard the following things, all of them surprising in their naivety and foolishness.

Sidenote: The definition of rich, poor, and middle-class that I use works like this.

  • The poor have to work. If they miss a day of work, they miss a meal. They have little economic freedom, and have no money to invest or to save.
  • The middle-class work, but they can endure a few months of no work at all, perhaps a year. If they play their cards right, they can get jobs where they can work really hard for a while, only to take a long, long vacation afterwards.
  • The rich don’t have to work, because they already have their life’s necessities provided for.Because their livelihood isn’t at stake, they can take far more risks and won’t move unless there are far bigger rewards.

“Jobs come from taxes. When people are forced to pay more in taxes, they have to make more money, so they create more jobs.” What people who adhere to this philosophy don’t realize is that, by definition, the rich don’t have to work at all. They can simply “wait out” bad economic conditions. If they don’t see a good chance of a healthy return, they have no reason to invest. Yes, they contribute to charity, but business and charity are two separate things.

“Jobs come from the government. By spending money, the government creates jobs.” This is true, to a degree. The government can create jobs by spending money. However, there are 4 parts of the equation that people miss, that are much more important than the jobs created. (1) The opportunity cost of taxes raised to buy those jobs, which taxes would have been profits used to create jobs. (2) The opportunity cost of money borrowed to buy those jobs, depriving businesses that would otherwise borrow to create jobs. (3) The opportunity cost of having government handle the money, which it does so at tremendous overhead. (4) The opportunity cost of diverting resources that would have been used elsewhere to instead be spent according to the government’s policy. Overall, using government money to create jobs destroys more jobs than it creates. At best, and this is purely theoretical, the government could only create 1 job for each job it destroys. Usually, the ratios are much, much worse.

“Jobs are created with unemployment paychecks.” Of all the ideas, this is the most obviously absurd. Consider an unemployed man. He got laid off for whatever reason, most likely a legitimate one. As long as we pay him not to work, he is not going to work. That is, unless there is something else more valuable than the government’s money, such as his self-dignity or his self-imposed sacred duty to his country.

“Jobs are created through businesses borrowing money.” This also fails to completely capture the picture. Yes, some companies borrow money to hire people to do things. Jobs are indeed created with borrowed money. But it completely misses the “why” of the borrowing. Businesses borrow money if they know they will make a killing with the borrowed money. They do not borrow money if it is uncertain if they can pay it back, long-term or short-term. In these uncertain economic times, no one is borrowing money except those who either trust that their sector is immune to the uncertainty or who have a very high degree of confidence that they will win regardless of conditions. Still, there are some businesses that borrow out of desperation, but banks are foolish to lend to such companies, and do everything they can to prevent such loans from ever happening.

Now, let me counter with what I feel is the core to job creation.

To create a job, a businesses needs these things:

  1. Opportunity. That means, they need to see a way to apply the money they have or can obtain to make future profits. Without this opportunity, they won’t do anything.
  2. Capital. Capital can be obtained from profits, borrowing, or investors. When there is an opportunity, businesses will first rely on their own profits, then borrowing, and finally on investors.
  3. People to hire. Just because you have an idea and capital doesn’t mean you can find the right people to hire. Companies search far and wide for the right people, and sometimes, they come up empty-handed. If this happens, the company would rather not hire at all.

With this in mind, the government should do all it can to maximize these three things.

  1. Maximize opportunity, by writing a tax code that allows the rich to keep their earnings, and by writing rules in such a way that people can predict what the rules will be tomorrow and the day after that.
  2. Maximize capital by allowing businesses to keep their profit, by borrowing nothing from the private sector, and by allowing investors to invest.
  3. Maximize people to hire by allowing people to work in whatever job they like, and by not keeping people out with minimum wages or unemployment checks. Government should also encourage people to immigrate, lawfully, to our country, and allow businesses to hire world-wide.

That’s really all there is to it. If the government sees its job as helping, not hurting, the economy, and if the government wants to help create jobs, it will do the above three things.

Note that this means the following:

  1. A fair tax code, that allows people to keep what they earn, invest what they have, and lend their money, all with minimal taxes.
  2. A fair regulation system. Meaning, all laws and all regulations give plenty of time for the businesses affected to have their say. No change occurs to quickly. The laws are accessible and easy to understand. The courts are fair and stick to the letter of the law or tradition.
  3. A government that doesn’t borrow—at all. If the government got out of the business of borrowing, people with money in their bank accounts would be busy trying to find the right businesses to loan their money to, or better yet, invest in. This would send a whole lot of capital into private markets where jobs would be created.
  4. An end to unemployment and minimum wages. Don’t pay people not to work, and don’t prevent people who want to work from doing so because of the wage that they come to agree to.
  5. An open immigration system. Allow people to come to America and work on a whim. Only keep those out who are a threat to our security.
  6. A free trade system that allows businesses to hire overseas. This would mean even more jobs would be created, even though the people we hire do not live in the US.

 

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