Marsh Business Advisors, LLC
"CAPITAL"
Why Is Job Creation So Critically Important?
By: Stuart Wm. Marsh
President, Genesee Capital, Inc.
September 9, 1994
Why is “job creation, job preservation, and job retention" so vitally important to politicians and elected government officials?
And why are the actions taken by politicians and elected officials so vitally important to all businesspeople?
"Job-creating" and "job preserving" actions of note have taken place recently. On a local level, Monroe County and the City of Rochester provided a 10-year tax-abatement plan, worth an estimated $1.85 million, and a 20-year, interest-free mortgage for $660,000, worth roughly $568,000 (before taxes, and assuming a fixed interest rate of 7 percent) to Monro Muffler Brake, Inc. It cost the city of New York $362 million last year to stop four companies and five commodities exchanges from moving across the river to New Jersey.
On a more national – and dramatic - scale, the State of Alabama beat Georgia, Florida and South Carolina by spending an estimated $220 million to have Mercedes-Benz open its first manufacturing plant in the United States there. What makes this example of "job creation" so dramatic is that the cost to Alabama for the 1,100 jobs is a staggering $200,000 per job.
Why do our various governments' spend such enormous amounts of taxpayers' money to" create, generate, preserve, and retain jobs?" The eloquent and moving response you will hear is: "Jobs create pride, respect, and dignity. Jobs eliminate poverty, hunger, and crime." This answer is absolutely true. But, sadly, it is not the politicians' primary motivator.
Rochester Mayor Bill Johnson wants to create jobs in Rochester to improve the tax base to pay for all the services demanded by city residents, and also those services mandated by Monroe County. County Executive Robert King wants to create jobs in Monroe County to improve the tax base to pay for all the services demanded by county residents, and also those services mandated by New York. Gov. Mario Cuomo wants to create jobs in New York to improve the tax base to pay for all the services demanded by the state's residents, and also those services mandated by Congress. President Bill Clinton wants to create jobs in the United States to improve the tax base to pay for all the services demanded by U.S. residents, and also those services that are mandated by Congress, and Congress mandates those services because it is pressured to do so by the residents of Rochester and Syracuse and Albany and New York and Massachusetts and Connecticut and so on and so on.
Why are our governments (local, state, and federal) so desperate for new tax dollars, when tax receipts are at an all time high? Simple. Because the growth in government spending is faster than the growth in the economic tax base. Our governments are spending more than they're taking in.
So what? Why does the government's share of the economy matter? Another straightforward answer. Because every dollar the government takes, in the form of taxes, is one less dollar private enterprise can invest. And every dollar the government borrows is one less dollar private enterprise can borrow.
Some countries try to get around this economic fact by literally printing more money to finance government spending. We all know what happens: hyperinflation. As the supply of the currency skyrockets, the value plummets. Thankfully, the money supply in the United States is controlled by the Federal Reserve and not by Congress.
An econometric study done several years ago, at the peak of the federal budget deficits, concluded that because the federal government's appetite for borrowing was so enormous, and because it has the best credit rating in the world, it was "crowding out" other investment, and was adding two percentage points to the cost of money. In other words, a 20-year, fixed rate mortgage that "should" cost 8 percent actually was costing 10 percent, because the government was willing to bid up the price of borrowed money because it absolutely had to have the cash to pay its bills. And because of the government's credit rating, people were more willing to lend to Uncle Sam than they were to Joe Blow. The result was those people who could afford a starter home, or wanted to trade up to a newer, bigger home with an 8 percent mortgage were "crowded out" by good ol' Uncle Sam who was willing to pay 10 percent for a loan. Consequently, the housing market went in the tank as first-time homebuyers remained apartment dwellers, and first time homeowners could not sell their houses in order to trade up.
The exact same thing happened to businesses. Managers reviewed investment proposals and discovered that many projects, if successful, would provide a return less than their cost of capital. How many smart businesspeople stay in business by borrowing at 10 percent and earning 5 percent on their investment? Not many. (Those that do, and we all know some, aren't able to do it for long.)
When a business can't find good investment opportunities, it stops growing; and when it stops growing, it stops hiring new employees. If the company starts to shrink, so does employment.
Remember also that when businesspeople go into the capital markets, they are seeking debt or equity financing that is expected to provide a return higher than the cost of capital. The only way to accomplish this is for the business to sell its product or service at a price high enough to cover all of its costs, including its cost of capital. The only way to do this is to sell a product or service that provides real value for the consumer. If the product or service does not provide that value, it will not be purchased.
Unlike a company, which must create value with the capital it employs or it goes out of business, government often is value-neutral, and worse, value-negative. Much of what our governments do is called "wealth transfers:" the government takes money out of one pocket (say, those people who are working) and puts it into another pocket (say, those people who are retired and collecting Social Security).
Our Social Security program is an excellent example of the difference between the way business and government works. The contributions to the company-sponsored pension plan are invested by a pension-fund manager in the stocks and bonds of other companies, with the expectation that the growth in the value of the invested contributions will provide a pension during retirement. By contrast, Social Security is a direct wealth transfer: money is taken from one paycheck and deposited into another checking account; no investment or growth takes place.
But the real crime is committed when this wealth transfer is accomplished in an inefficient manner. I read once that less than 48 cents of every $1 taken in by the state for welfare actually goes to welfare recipients. The other 52 cents goes to "administration." This means buildings, cars, pens, pencils, papers and salaries. Would you make a donation to a charity that spent that much money on "administration?” I think not. But the critical difference is the State of New York did not ask you to contribute – you were told to do so, under penalty of fines and jail.
When was the last time you truly felt you received real value for your tax dollars? The response to your distress call to the police or fire department probably made you feel that way. The roads you use every day probably do as well. Your ability to sleep at night without the threat of a nuclear attack makes April15th a tad easier. But sadly, none of these services account for the enormous growth in government spending.
In1900, total government consumed slightly more than 6 percent of our gross domestic product (GDP). During World War II, total government spending soared to almost 50 percent of GDP. It was this “war effort,” and not any of President Franklin Roosevelt's "works" programs, that ended the Great Depression.
By 1948, total government spending fell to roughly 13 percent of GDP. Since then it has risen steadily, reaching 33.3 percent of GDP in 1993. This means that one out of every three dollars spent in this country is spent by some level of government.
Spending on national defense actually has declined steadily since 1952, while spending on physical resources (highways, environment, etc.) has remained relatively constant. Interest expense on the national debt has increased because much of the growth in spending is financed with borrowings.
But the enormous growth in government spending has been on "human resources," that is, Social Security, Medicare, Medicaid, Welfare and so on. Representing just 5 percent of GDP in1 948, these social welfare plans have almost tripled to 13percent of GDP in 1993.
This trend doesn't look like it will change: our current president was elected partly because of his goal to institute what could have become the granddaddy of all social welfare programs: guaranteed universal healthcare.
Yet with all this spending, do we have fewer poor people, fewer homeless people and fewer sick people?
In order to finance this virtually insatiable appetite for social welfare programs, taxes must go up. Contrary to what many politicians may have you believe, taxes come from only one source: people. A tax may be disguised as a "corporate tax," but these don't tax corporations; they tax the corporation's customers, employees, and shareholders – and all, if I'm not mistaken, happen to be people.
The obvious solution is to have more people working so they can provide tax revenue. An unemployed person not only doesn't pay taxes, but costs other people through social-welfare programs. But this elegant solution of having more people employed is being frustrated by the laws of economics. In order for companies to survive they must be as productive and efficient as possible, and must continually seek ways to reduce their costs.
Increasing taxes is termed a "political" solution to our social problems. Unfortunately, this political solution ignores the economic realities of our modern world. Overtaxed people and businesses can, and do, move to other countries, and still are able to sell their products in the United States.
Many low-skilled, low-wage manufacturing jobs have been "exported" to lower-wage countries that are just beginning to industrialize. Many high-skilled, high-wage manufacturing jobs are disappearing as highly sophisticated machines equipped with computers and motion-controllers allow one worker to do the work that once required two, three or more workers.
And now there appears to be the beginnings of dramatic productivity gains in service-sector jobs, as new technologies used in conjunction with increasingly powerful and decreasingly expensive computers are reducing, or eliminating, the need for many service workers. ("Thank you for calling Universal Mega-Behemoth Industries. To place your order, press '1.' To check on your order, press '2.' To talk to a real, live, warm-blooded human being, please hold the line while we search for one...")
In sum, many jobs are disappearing just when the government desperately needs jobs to be created to pay for all its spending.
In the last decade, we, the people, have spent $1 trillion more than we had, and these budget deficits, which will continue for at least the coming decade, clearly show our inability to pay for all the government spending.
So the answer is: create jobs. The question is: how? In this column I've explored why job creation is so important. In my next column I'll discuss how jobs are created.