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Sunday, March 28, 2004

The Presidency and Jobs

FDR was the primary cause of the hope or belief that the Executive branch of the Federal government is responsible for jobs - whether their creation or their destruction. Bill Clinton, through accident of time and circumstances, was president during a period of time in which "millions" of new "jobs" were created during the 1990s. Many of these jobs came about because of the new technology called the Internet, and an overhyped concern over Y2K. After it was discovered that the Internet was not going to completely replace but would simply complement the brick-and-mortar economy that we developed over the past hundred years, many of these "jobs" turned out to be transitory and not careers.

President Bush fell into this trap of rhetoric and popular belief by "promising" to create three million new jobs this year. About two seconds of thought would l be sufficient to prove that the promise is not possible to keep, unless a new FDR-type jobs creation program is put into place. Private enterprise hires and fires based upon profit maximization, which is dependent in part upon the demand for a company's product. No speech by the President will ever directly change that.

John Kerry has floated a "plan" that would supposedly create 10 million jobs over four years, or 2.5 million on average (less than Pres. Bush's promise). The claim is just as much of a joke as any other president's promises to "create jobs" and should be treated as one, but that is not the case. However, unlike FDR and others who have promised to create jobs to help those that are unemployed, Kerry's rhetoric focuses on the supposed crisis in "outsourcing" of jobs and jobs moving "overseas."

I was digging around my old dustbin of writings and came across this little bit about NAFTA and jobs that I wrote during the 1992 campaign season (during my first year in graduate school). It centered on the claims of Clinton and Perot that NAFTA would be a disaster for American jobs, which has a connection to what Kerry complains about today:
The fact is that there is no profit maximizing firm that will move out of this country if it does not pay. To say that firms are being paid to go out of this country is simply not the entire truth. The fact is that firms are paid a certain amount of money by the Federal Government for retraining the labor that is being displaced by the move. The firm must match these funds and see that the workers are retrained. Now, why would we want to do that. Simple economics, yet no one understands this.

The fact is that if a firm is profit maximizing, which is what we want all private corporations and small businesses to be, else we would have socialism, firms must be able to cut costs if it is profitable for them. If a person is doing a job that he gets paid $8.00 an hour for, and someone else is willing to do that same job for $1.00 an hour, then the job is only worth one dollar an hour.

Wages in a labor force are not like an auction, it is exactly the opposite. The reservation wage (the wage at which the labor decides to work, anything less than that they will not work) can be higher in this country, but that is not the fault of the firm. Since the firm supposedly has share holders, and they receive dividends from the firm's profits, if the firm can find some other labor with a lower reservation wage at which they are willing to work, then there is no reason to deny the firm the ability to do that.

The problem with our system at the moment, is that organized labor, amidst doing a lot of good, has driven up the reservation wage that labor holds out for. The problem is that the job simply may not be worth the higher reservation wage, and thus it is profitable to go elsewhere. This can come from two different sources: The labor in this country may be over-skilled for the job that it is doing, and thus demands higher wages, when someone with less education/training can do the job just as well. Then the firm moving is not such a bad thing. In fact it STIMULATES economic growth in the fact that the production possibilities have been increased due to the fact that the overskilled worker is no longer wasting his time and production capabilities at the (truly) low wage job.

Therefore, the government could do the most good by subsidizing in some form (again not too specific here) the development of higher skilled production capabilities. This subsidy would move us to a higher production possibility set (see below), and thus the firm's move is better for the overall economy. Note that this is a general result. It says nothing about what the labor is supposed to do between jobs, but that is what unemployment insurance was meant for, right?

Another way to combat jobs going elsewhere is to raise the reservation wage of the other labor forces that we are supposedly going to loose jobs to. Methods would be organizing labor, restructuring tax regulations so as to make the costs of moving to another labor source prohibitive. No one should think that firms making more money is bad, because that money is injected into the economy through the shareholders, however it is: e.g consumer goods, capital investment, government bonds, whatever, it is all positive in the economy.

Guaranteed that if the costs of production in the U.S. and in another country, then some firms will stay in the United States. Remember that firms are owned by shareholders whom we can assume are Americans for the most part. So, firms will show a bit of national loyalty, as well as logistic simplicity, by staying here.

Bush passed it [NAFTA], now Congress has to also. Chances are that it will not go through as it is intended to, but we will see on that one. It is most likely going to be made worse, i.e. it will limit our possible gains from this. Our economy has the most to gain from the NAFTA because we have the highest productive workforce in the world and they are being wasted on putting shirts together. There is nothing WRONG with putting shirts together, it is very valuable in its own right, but if people elsewhere will do it for cheaper, then let them. Our labor force is better put to use building computers, steel, prefab concrete, whatever, that is more valuable.

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