A politician’s role in creating jobs

by Robert Wayland, Economics of Business instructor

Editor’s note: This is the second of 3 posts by Robert Wayland, instructor of Economics of Business at Harvard Extension School, on job creation and the government’s role in creating a stronger workforce. Throughout the presidential race we’ll be writing blog posts that explore the different sides of campaigning for president.  

Is it possible for political leaders to create jobs?

Yes. Direct hiring by the government is a major source of job creation. In many cases public and private jobs have similar economic consequences. For example, in a rising crime environment, municipalities may hire additional police officers, and firms may hire more security personnel.

The differences may be in the cost and the potential for job reallocation. The public security person may be paid more and have more job protections, and thus be less susceptible to discharge in a downturn or when the proximate cause of hiring has diminished.

Governments may also increase private job creation (or preserve existing jobs) by increasing purchases of privately produced goods and services. This is the case for stimulus spending. The argument is made that dollars spent on stimulus ripple through the economy with a multiplier effect, and a virtual cycle of new job creation ensues. There is a great deal of argument about the existence and size of the multiplier among economists on both sides of the argument.

Sometimes governments try to “share” available work or jobs, as when France legislated a 35-hour workweek, a policy that was counterproductive and since largely abandoned. In other cases, governments make it harder to discharge people and wind up reducing new hires because they have made it more costly and inflexible to employ people. Similar effects are seen with required benefits and working conditions.

Is there a particular example of government job creation that you think worked well?

It’s almost impossible to trace the net job creation and destruction effects of a specific policy. For example, stricter environmental rules might increase employment in compliance-related activities but reduce those in, say, coal mining. If the population is on balance, healthier, and wealthier with a better environment it is extraordinarily difficult to make credible estimates of the broader effect.

Increased defense department spending probably leads to some increase in jobs in related sectors, but it’s hard to measure. A lot of people who believe that we emerged from the Great Depression primarily because we went to war and created a huge military that removed many capable workers from the civilian workforce and created an extraordinary demand for industrial goods.

This might suggest that winding down our current wars would reduce output and employment (albeit the military is much smaller now relative to the economy), but the evidence is ambiguous. The steep post-war drop in 1945 gross domestic product was not matched by a proportional rise in unemployment. Also, WWII produced a lot of pent-up demand for civilian goods, an effect that doesn’t seem significant today.

Some people would cite the General Motors “rescue.” But I think the definitive analysis of the net effects stills needs to be performed. The administration-managed bankruptcy stripped the bondholders and thus removed a lot of potential investment capital from the game. And the related closures and spin-offs of Pontiac, Oldsmobile, Hummer, and Saturn probably destroyed jobs. I think on balance, the GM (and Chrysler) actions probably had no more, and possibly less, effect on the total surviving jobs than would a more conventional bankruptcy. The distribution of saved jobs was probably different than would have occurred otherwise.

And don’t get me started on “cash for clunkers.”

How do you think the economy can accelerate job creation?

By coincidence, a just released Harvard Business School study reports that many, perhaps most, professionals feel the United States is losing its competitive position relative to other countries. The reasons cited include taxes, regulation, and access to world-class talent.

When making location decisions, firms are increasingly locating facilities (and jobs) in other countries. Some of this is simple comparative advantage, but the suspicion of many is that the United States is becoming an increasingly and unnecessarily difficult place to do business or to start a business.

So, a short answer would be to make it easier to do business and especially to start a business in the United States you need to reduce uncertainty about policy and to increase the expected value of the net income from a venture.

The problem is that it is hard to tailor policies to benefit the start-up and young firm population. Much of government regulation has a disproportionate compliance burden on smaller firms. In fact, you could argue that their capacity to bear compliance costs accounts for much of the support given new social and environmental programs by big business. It is an indirect form of crony capitalism. It is equally misguided to pass special legislation to favor start-ups over other categories of firms (e.g. Senators Moran and Warner’s recently proposed Start-up Act). Although the start-up cohort produces more net jobs than others, the net job destruction attributable to older firms results from firm deaths. When the deceased are removed, the remaining firms create even more jobs than do start-ups.

In the World Bank Survey of Doing Business for 2011 the United States ranks 4th overall but 13^th in ease of starting a new business. Given the importance start-ups and young firms play in creating jobs, this should be addressed. We also rank fairly low among developed countries in the sort of activities that involve building new plants and facilities. Steve Jobs is reported to have complained to President Obama that it was too hard to build here and too hard to hire international talent. Making work permits and visas easier to get by highly trained international students would be a good policy.

Our patent system seems also to impose costs on young companies and serves as a cudgel for the mature and static companies. Kodak’s last gasp was an effort to sell off their patent portfolio to firms who would use them largely to counter or initiate patent infringement suits. Motorola was valued in large part on the basis of its 17,000 cell phone related patents. The number of cross suits in the mobile telephony market is staggering and involves nearly every company. Uncertainty about patent validity or vulnerability probably discourages some start-up activity.

Finally, the government should get out of the venture capital business. A glimpse at the economic literature on product life cycles, evolutionary economics, and innovation demonstrates that all new areas are marked by initial variety of competing models and technologies that are advanced by people relatively well equipped to evaluate the options.

Yet outcomes are rarely, if ever, easy to identify. And winners emerge only after the market selects the fittest through competition. The frontiers of technology and innovation are driven by selection from variety. The government stifles variety and is not equipped to make such choices. (Think Solyndra or almost any other government-backed venture.)

During the Republican primaries it has been proposed that tax cuts for businesses will help create jobs. In Robert Wayland’s next post he will explore this idea, and other tax plans that have been put forth by the candidates.