Thursday, June 9, 2011

How to decrease unemployment

I just read an interesting article by Dave Johnson.  In it he talked about creating jobs, and how taxes don't affect it.  At hart, he states that you only get taxed on profit, and if the business is profitable, you do it anyway, while if the idea is not profitable, taxes don't matter.   You have to make the decision on whether to hire new people before you look at taxes, not after.    In addition to this core idea, he made some other good points, but I  don't agree with everything he said.   I would like to expand the scope a bit - creating jobs is only half of the story.

I am going to talk about how to decrease unemployment, which is not just about creating jobs.  Among other things, it doesn't help if Starbucks 'creates' 4 new jobs by destroying opening up a new store that drives an older, mom and pop store employing 5 people, out of business.   What matters is how many people are unemployed, not merely job creation.

There are two parts of decreasing unemployment:   Increasing Demand for a product requiring workers and decreasing the Supply of workers.

First, let's talk about decreasing Supply, as it is easier and simpler to explain.   Basically, if less people look for a job, that lowers unemployment.  It doesn't matter if they retire (at normal age or early), give up looking, go to jail, die (starvation from not being able to feed themselves, from a bullet in a war, or from drug overdose, it doesn't matter), or hit it big in the lottery.

It is obvious that the lottery is not an effective method.  It costs large amounts of money and removes very few people from unemployment.   Of the other options, the best one by far is early retirement.  The rest are very depressing - and have an unfortunate tendency to increase automatically when unemployment goes up.  If anything the government should strive to avoid the others, but increase the number of people retiring.  If you want to fight unemployment, lower the retirement age for Social Security.  This will immediately and directly cause some people to retire, opening up jobs for others to take.  Of course, Social Security needs some help, so that may not be the best idea.   Also note, that obviously raising the retirement age for Social Security to help out the Social Security will clearly increase unemployment.   Either way, you get rid of one problem by making others worse.  Note I am not advocating messing with Social Security, I think we should leave it alone.  I am just pointing out that changing the retirement age merely moves someone from one problem category to the other.

Now lets talk about increasing Demand.  That is a much more upbeat topic, and one where the government has multiple activities that it can do to help.  There are five ways to increase demand, and therefore jobs related to the production and sale of products.

The first was the invention of a new product.  No one wants something they don't know exist.  Whenever a new product is invented, a slew of new jobs are created.  The particular product example I am going to use is seat belts. With the invention of seat belts, you got designers, manufacturers, salesmen, managers, etc. all making and selling the new, revolutionary product.  All of those jobs are new jobs, not old ones cannibalized from competitors.  Government helps the invention of new products via patents and also via extensive research grants.  In general, most new products are NOT invented by the rich, but instead by the hungry.  New drug research is one of the few counter examples, but even then more new drugs are created by small companies that get bought by the big ones, than get started at the big companies.

The second method to increase demand for a product is advertising.  Once you create a new product, you need to tell people about it, and sometimes to convince them they need.  Research had to be done to show that seat belts save lives, then everyone had to be told this.  Repeatedly.   Note, advertising also works even if they really don't need it, as numerous personal hygiene products can tell you, artificial demand is still profitable demand.  The government generally does not help with advertising, except in rare cases, but it generally does not prevent it (again, with a few - tobacco and alcohol - rare exceptions).

Another, related way to increase demand is to create a new usage for an old products. Aspirin was originally a pain reliever, that got expanded to heart attack and many other medical usages.  The government generally does not help create new uses.  In fact, this is one area where government sometimes prevents new uses (off label medical usage for example.).  Advertisers and consultants are always on the look out for new uses.

The fourth method to increase demand is distribution.  It is not enough to offer the product for sale, it must be available and delivered to the customer in a timely fashion.  The government is a major aid to distribution via both the internet and the physical transport networks it maintains (roads, railroads, shipping, airports, pipelines, etc.)  High quality communication and transport facilities are essential to product usage. If you want to increase jobs, enhance communication networks, cheapen transportation costs,  and speed up transportation. That allows goods to move, enabling for example, people to sell Alaskan Oil in California. 

Finally, the last method to increase demand is to bundle it with another product.  Whether it is via corporate contracts/rules (iPhone only with specific phone networks), or by legal requirements (cars must have seat belts), when you force someone to buy something, it's demand goes up, and people get employed.  Governments do this all the time. Conservatives dislike this method because they are afraid that while the demand for the required item goes up, total demand for the desired item goes down.  This does happen, but VERY VERY rarely.  At heart, it requires the desired item's demand to be soft, with a cheaper alternative around. 

That is, if you require all coal power plants to install better air purifiers, to capture pollution, demand for coal produced electricity does not go down, unless non-coal electricity is cheaply available nearby.  The same amount of coal will be burned.  Yes, the price of coal-electricity will go up, reducing the total amount of funds other people have to spend, but that amount of money goes DIRECTLY to creating the better air-purifiers, for a net gain in jobs.  If in fact there is a nuclear power plant nearby that suddenly becomes profitable, that is not a bad thing, but a good thing.  You haven't lost jobs, but instead shifted them from one area to another - as long as the nuclear power plant has similar safety requirements.  Note coal/nuclear is a prime example as coal has a long established history of being far worse for the environment than nuclear, despite people's unreasonable fear of nuclear accidents and active avoidance of knowledge of the estimated one thousand people that die each year from coal burning.  In fact, when the government attempts to regulate a business to destruction, illegal businesses spring up, keeping those jobs the government tried to kill (illegal drugs are a prime example).  Regulations almost always create more jobs than they destroy.  In fact, when regulations actually do destroy a business, that generally means the business was 'evil' and based on deceiving their customers.  A prime example of this was the destruction of the patent medicine trade when we regulated them into admitting the amount of cocaine in their product.

So why do businesses complain about being regulated?  Because the regulations create profits for the new companies hired to fulfill the regulations, at the direct cost to the original base industry.  That is, the coal companies lose 100 million that would have gone into their owners' bank account, but the smokestack scrubbers gain 100 million that goes mostly to new employees, with say 10 million going to a business man's bank account.  I am not against money going into people's bank account but this is about JOB creation.

So, lets look at who actually create jobs:
1. The major industries that create real jobs are advertising (including all media), transportation, and communication/internet.    Other industries do NOT create jobs, at best, they fill existing demand created by advertising, and enabled by transportation /communication.  Manufacturers do not create jobs, they fill already existing jobs.  If they didn't do it, someone else would.   In fact, much of the management gets paid to destroy jobs, thereby becoming leaner/increasing profit margins. Hence outsourcing and robotics.

2. Poorer people who come up with a new idea.  Why 'poor' and not rich?  Two reasons - (A) the rich don't have the motivation, and (B) if the idea is worthwhile, they make money, becoming richer than they were before, Q.E.D. they were 'poorer' when they came up with the idea.  If you honestly create new jobs, you will become rich - regardless of taxes.

3.  The government does in fact create jobs.  It creates them by funding research, funding transportation and communication systems, and by regulating industries.  Regulations are more likely to create jobs than to kill them.  It takes a really bad regulation to reduce jobs via sales reductions than to increase jobs by required work.   If the business has a real demand, regulating it increases jobs, it doesn't destroy them.  Now, regulations may have other bad effects, but they definitely create jobs.

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