The government and job creation

[Cool Chris]

This has been on my mind a lot lately. Everyone seems to be clamoring for the government to do something about jobs. Obama is currently on a road trip to promote his job plan. “I am unemployed dammit!” the signs say in these ‘Occupy….’ protests. What exactly is the government’s role and responsibilities with regards to job creation? And what should it be?

[jsem]

Government creates employment, but not as effective as the market and it distorts the markets.

Basically, the role of government in terms of guaranteeing employment should be none.

[Scheavo]

The market can falter, and can create a vicious cycle where jobs will be lost because consumer power had dwindled. Without a strong base, you cant' have an economy.

Ignoring jobs like firefighters, policemen, and teachers... The governments role in this is to create temporary/short-term jobs which pump money into the base by taking future tax guarantees (i.e. move capital from the future to the present), which help create a virtuous cycle where jobs are created. These temporary jobs are "infrastructure" jobs, building roads, bridges, schools, updating public transportation, updating electrical grids, updating water works, etc. This employment puts money into the economy because those people with those jobs have to spend that money, this gives businesses... business... so that they have demand for their product, and incentive to grow, invest, and hire new workers.

[Riceball]

inb4 Praxis

In my mind, the government's (that is, the legislature and also the central bank) role is to create the conditions for the private sector to create jobs - public job creation should ideally only be a last resort when an economy is in the kind of funk that the US is in. If you want to look into it a bit more, I'd suggest checking out Keynesian economics on this topic.

I suppose, in relation to the jobs plan (I'm not too well versed in it), it seems like they are trying to cut the barriers to employing people via payroll tax cuts...? Not sure how effective this will be, considering (as Scheavo said) you need private demand to facilitate economic activity, and you need economic activity to boost private demand (ie chicken and egg scenario). This is where, ideally, government stimulus can come in and be the chicken to lay the egg, to put it simply.

[jsem]

Keynesinanism is running rampant in this thread.

This article might be to the benefit of this thread

On a side note though, why would government even need to boost aggregate demand? Let the markets readjust, because the market itself was distorted due to the malinvestment caused by terrible monetary policy.

[Riceball]

Yeah its because we haven't had the neoclassicalists in here yet; they must be in their dungeons still

Looking at this through the guise of business cycle theory & Keynesianism, the government should step in to ease fluctuations in the business cycle (stabilisation policy) which generally happens through the tax and transfer system. However, this is a financially-derived recession not a demand-derived recession, and so normal automatic stabilisers aren't as effective because of the nature of the recession (lack of lending, loss of wealth etc). And so, the government has to turn to discretionary fiscal and monetary policy to smooth out the cycle. They've done this to a degree, but its just kind of prolonged the deleveraging and capacity adjustment across the economy.

I'll leave the classical analysis to someone else. Needless to say, nothing they have tried so far has worked wonders - in my mind due to the nature of the political/economic classes in the US. I mean, you've increased the opportunity cost of holding onto cash basically as far as it will go, and yet noone is lending still...kind of says it all really.

[Scheavo]

Keynesinanism is running rampant in this thread.

This article might be to the benefit of this thread

On a side note though, why would government even need to boost aggregate demand? Let the markets readjust, because the market itself was distorted due to the malinvestment caused by terrible monetary policy.

Because the market does not always readjust, that's why it's called a market failure. Free-marketers go to great lengths to distort what happened leading up to the Great Depression, ignoring the fact that economists at that time were saying the markets will readjust. They didn't, becuase people didn't have the money to drive the market changes needed. This lack of theory explaining reality is why Keynesian economics was able to get a foothold, becuase it proposed different things, and people experienced it as having a positive effect.

[Riceball]

Again, quite a timely article:

https://www.theaustralian.com.au/news/world/severe-risks-in-culture-of-thrift-imf-warning/story-e6frg6so-1226170147423

This is only a report of a report, I'll see if I can track down the report that this report is reporting.

[Rathma]

On a side note though, why would government even need to boost aggregate demand? Let the markets readjust, because the market itself was distorted due to the malinvestment caused by terrible monetary policy.

I think you mean malinvestment caused by deregulation of derivatives and the hijacking of the government by the financial sector.

[rumborak]

Regarding the OP, I always think people are overestimating the government's ability to create or destroy jobs really. All this talk of "if we lower taxes by 2%, it will create jobs" never struck me as likely. Decisions whether to employ new people in a company doesn't come down to 2% more money in the pocket. Much more important is the perception of what the market will look like in the future. And that is almost impossible to steer, since it's dependent on herd behavior.

rumborak

[Orthogonal]

On a side note though, why would government even need to boost aggregate demand? Let the markets readjust, because the market itself was distorted due to the malinvestment caused by terrible monetary policy.

I think you mean malinvestment caused by deregulation of derivatives and the hijacking of the government by the financial sector.

The derivatives market is only a proximate cause of the malinvestment, not a root cause. Complex derivatives, predatory lenders, shady ratings agencies etc... are all proximate causes. The root cause of malinvestment comes from manipulation of interest rates, which are the price of money with respect to time preferences. Any attempt to regulate interest rates will send ripple effects throughout the structure of production and credit markets which inevitably lead to malinvestment. The Federal Reserve monopoly on interest rates is the root cause. If we had a market based interest rate, any attempt to push sub-prime loans would quickly fizzle as interest rates sky-rocketed for the demand for credit and the crazy derivatives market never happens.

[Riceball]

But is that not what happens through money market pricing? Ie your 30-day, 90-day and 180-day bills of exchange? The Fed only sets the rate of interest charged on overnight lending/borrowing by banks, not the direct interest rate that is charged to businesses, consumers and financiers. These money market rates of interest adjust for circumstances in the economy, which would (given an efficient market) adjust according to prevailing market conditions.

I'm certainly not a financial market guru, but thats my understanding about how the borrowing/lending system works in an economy with a central bank, floating exchange rate, free capital flows and fixed central interest rates (which are determined via the money supply).

That'll send you yanks to sleep

[rumborak]

The derivatives market is only a proximate cause of the malinvestment, not a root cause. Complex derivatives, predatory lenders, shady ratings agencies etc... are all proximate causes. The root cause of malinvestment comes from manipulation of interest rates, which are the price of money with respect to time preferences. Any attempt to regulate interest rates will send ripple effects throughout the structure of production and credit markets which inevitably lead to malinvestment. The Federal Reserve monopoly on interest rates is the root cause. If we had a market based interest rate, any attempt to push sub-prime loans would quickly fizzle as interest rates sky-rocketed for the demand for credit and the crazy derivatives market never happens.

I find this argument very sketchy. Many many countries have a Fed equivalent of their own that regulates interest rates, and many of them thrive. The idea that everything can be boiled down to a single root cause is Pied Piper business, IMHO. Makes it easy to collect the latent government hate that exists culturally in the US and put under one umbrella.

rumborak

[Rathma]

The derivatives market is only a proximate cause of the malinvestment, not a root cause. Complex derivatives, predatory lenders, shady ratings agencies etc... are all proximate causes. The root cause of malinvestment comes from manipulation of interest rates, which are the price of money with respect to time preferences. Any attempt to regulate interest rates will send ripple effects throughout the structure of production and credit markets which inevitably lead to malinvestment. The Federal Reserve monopoly on interest rates is the root cause. If we had a market based interest rate, any attempt to push sub-prime loans would quickly fizzle as interest rates sky-rocketed for the demand for credit and the crazy derivatives market never happens.

In free market magic theory, yes. However there isn't even a means to test this theory as no modern economy lets interest rates run amok. Stability is necessitated in democracies. If interest rates were allowed to sky-rocket as it does in your scenario this would also have significant implications on the economy. You might argue that the impact is less severe but again there's no means to test it. If you're arguing that the Fed and the control of money should be nationalized I agree with you. If you're arguing that we should just end the Fed then I disagree because it would only lead to big banks re-allying to revive the Fed functions in the shadow.

[Rathma]

The Fed only sets the rate of interest charged on overnight lending/borrowing by banks, not the direct interest rate that is charged to businesses, consumers and financiers.

But it manipulates overall interest rates through quantitative easing and whatnot, right?... via buying bonds through created credit...

[Riceball]

Well, yes to a degree as money market rates are based on the lending rate charged by the central bank. Thats the reason why monetary policy can impact the economy. As yes, quantitative easing is designed to change the relative price of holding onto cash vis a vis lending it by reducing the rate of return on safe assets in an unconventional manner. Normally, regular interest rate policy does this, but when rates are at zero the central bank looks for alternative ways to change the relative price of cash. As I said previously, the issue, from where I see it some 20,000kms away, is that there is no demand for credit/conditions are too volatile and so banks/financiers just cop the pisspoor rate of return on the chin and stay safe. Or they put their money in global assets like commodities, foreign stock markets etc.

Thats a bit disjointed, but do you see what I mean? Again, I'm certainly not a financial economist, I'm just going on what I know.

[Chino]

The government doesn't have a bag a jobs lying around that they can just decide to open. There isn't really anything the government can do other than things like offer tax credits for not outsourcing (which won't make a huge difference). They could also start the project of rebuilding Americas failing infrastructure. It's going to have to be done within the next 50 years anyway, and will probably cost a lot more then due to inflation. At least doing it now would put a bunch of people to work, at least for a few years.

[PraXis]

The government does not create jobs because it cannot create wealth. It has to take it from something/someone else first. The only thing government can do is establish a business-friendly environment. We've been trying Keynesian methods and they have failed each time.

The problem is that too many politicians have become career politicians, instead of public servants. This has caused crony capitalism, where lobbyists have infected our government.

Government regulations in industry are basically there to give one company advantage of another because THEY lobbied for each specific piece of regulation. EVERYTHING has been infected.

The SEC spent 10 years before arresting Madoff.. there's no excuse for that incompetency... it turned out SEC officials had terabytes of pornography and were too busy viewing that instead of their jobs.. but hell they were probably paid off by Madoff's people for a while.

The FDA? Why the hell are food and drugs regulated by the same agency? I say regulated loosely because the FDA is owned by Monsanto and Big Pharma.

We're in a global economy now, so the only way to create jobs is to entice foreign companies to come here. The cost will be low wages and a reduced standard of living. You cannot stop Company ABC from manufacturing in Third-World Country XYZ. You can try tariffs on imports (Chinese for example), but that will simply raise the price of Chinese goods and probably won't stimulate any kind of domestic production.

We're still the #1 manufacturer in the world, but with our tax/regulatory climate, automation, and other ways of "doing more with less" businesses don't need to expand right now. They're sitting on cash reserves and waiting... the Euro collapse has a lot to do with it too.

Our government spends way too much money that it does not have. At a max, we should go back to 1999 spending levels. Increasing taxes won't do jack squat. The money gets wasted and economic output decreases.

[Scheavo]

The government doesn't have a bag a jobs lying around that they can just decide to open. . At least doing it now would put a bunch of people to work, at least for a few years.

I'm confused. "They can't create jobs, but they should put people to work now becuase they can."

[7StringedBeast]

I think the government shouldn't be responsible for creating jobs, but it should do everything in its power to try to impede any circumstances that will cause jobs to disappear, and when it can, foster an environment that is well suited for job creation.

[livehard]

People think that the govenrment can simply create jobs and everything will be ok, far from so. What truly matters is output.  As I have mentioned, they could create 1 million ditch digging jobs tommorow, but would that help the economy? No.  What matters is that we have certain amount of reources, and we want to be able to maximize the wealth created from the use of those.

As was mentioned, all the govnerment can do is lower the costs of trading (do nothing, lower taxes) in order to promote job growth.

[Scheavo]

Hey, would you care to give an argument and address mine?

I gave reasons why "ditch digging" jobs would help the economy, but beyond that, improving infrastructure aides and improves the ease, and speed, of commerce, helping lower the cost of trading and thus promotes job growth.

[PraXis]

Hey, would you care to give an argument and address mine?

I gave reasons why "ditch digging" jobs would help the economy, but beyond that, improving infrastructure aides and improves the ease, and speed, of commerce, helping lower the cost of trading and thus promotes job growth.

Property taxes, road and bridge tolls, and fuel taxes are there for the purpose of maintaining the infrastructure. Where does the money go?

Any temporary "stimulus" from gov't is just that, temporary. It's like putting a small bandaid on a big laceration.

[7StringedBeast]

Except that if you use gov money to build high speed rails, those rails last longer than the temp money put into them and the money gets paid back and then some because it would open up business and tourism to different parts of the country.

[PraXis]

Except that if you use gov money to build high speed rails, those rails last longer than the temp money put into them and the money gets paid back and then some because it would open up business and tourism to different parts of the country.

If you want high-speed rail, then get a private company to run it, otherwise it will be a money pit like BART, MTA, and Amtrak.

[7StringedBeast]

Ok then a bridge.  Highways.  Whatever.  Infrastructure helps the country and is worth the government putting money into it.

Same with schools.  If we could invest more money in our schools it would pay dividends later.

[PraXis]

Ok then a bridge.  Highways.  Whatever.  Infrastructure helps the country and is worth the government putting money into it.

Same with schools.  If we could invest more money in our schools it would pay dividends later.

We've already put enough money into schools. The DoE budget doubled from 2000-2008. Throwing more money at it is not the solution. Prior to the DoE, American schools were on top of the world. Since the fed gov't got involved (rather than the states handling it themselves), performance has dropped dramatically.. and then we have the NEA.

Gov't can't manage its money efficiently. When is an agency ever under budget? It generates enough revenue through taxes and fees to maintain the infrastructure.

A funny piece on education:

https://online.wsj.com/article/SB10001424052970204226204576601232986845102.html?mod=djemEditorialPage_h

[7StringedBeast]

Yes throwing money at the problem doesn't work.  But I'm not talking about throwing money at a problem.  I'm talking about making real investments into schools.  Paying teachers better salaries for performance.  Making sure students have up to date text books and other tools to get them the best education they can.

I'm not talking about brand new schools with beautiful gyms and theaters and whatnot.  This is what happened in NJ and it was an abysmal failure.  You can't just build new schools in failing inner city areas and expect the kids to get all jazzed up about education.

The money has to get put into the right place and must be responsibly allocated to best serve the students.  This kind of an investment is necessary.  If we could turn around our education system and put more capable people out into the real world, our economy would start to change.

Education is the key.  More education means more ideas.  More inventions and innovations.  It all starts with education.

I believe that infrastructure for our country should not be something to be overlooked.  I think that is the one thing government should be responsible for.  To me, one of the governments main jobs is to maintain the infrastructure of the land it rules and watches over.

[Orthogonal]

I find this argument very sketchy. Many many countries have a Fed equivalent of their own that regulates interest rates, and many of them thrive. The idea that everything can be boiled down to a single root cause is Pied Piper business, IMHO. Makes it easy to collect the latent government hate that exists culturally in the US and put under one umbrella.

rumborak

It is a root cause because money creation and interest rates are the basis of a monetary system. Everything else is a derivative, hence they can only ever be a proximate cause of financial unrest. Some Central banks have done a better job than others, but the bottom line is they all distort markets to some degree.

Think of it like a restaurant that went out of business. It could have been a number of things that made the restaurant fail. Maybe it was bad food or lousy service. Perhaps they were just in a bad location or the menu wasn't appealing to the local community. Either way, these are all proximate causes of why it went out of business. The manager/owner has control over all these things. They would be the root cause of the restaurants demise.

Even if things seem to be doing "well", there are still problems rippling out due to fiat money and the increased opportunity costs of business. The people who receive the new credit/money first get to purchase goods before prices have had a chance to react to the newly created money. As that money circulates the economy, prices rise causing inflation and the people who get the money down stream now have additional money but at diluted value. It is even worse for folks on a fixed income since they will never see the new money, but only pay for inflation. The Government is typically the largest beneficiary of newly created money which amounts to new debt. Inflation is indirect taxation since the government can now just spend money and you pay for it at the grocery store. The public then laments the producers and big corporations for fleecing their wallet, when it was inflation due to fiat money that caused the problem in the first place.

Having a sound money and market based interest rates are the only way to remove the distortion, and only then can we talk about predatory lending and shady ratings agencies.

[Rathma]

People think that the govenrment can simply create jobs and everything will be ok, far from so. What truly matters is output.  As I have mentioned, they could create 1 million ditch digging jobs tommorow, but would that help the economy? No.  What matters is that we have certain amount of reources, and we want to be able to maximize the wealth created from the use of those.

As was mentioned, all the govnerment can do is lower the costs of trading (do nothing, lower taxes) in order to promote job growth.

Is creating jobs just about having a better economy? Is it about a higher GDP growth rate? When you have double digit unemployment, not really. It's about a good chunk of society falling behind. The government's job isn't to maximize wealth, it's to serve its citizens.

[Rathma]

The Government is typically the largest beneficiary of newly created money which amounts to new debt.

Yea, the banks who get to charge interest on up to ten times the amount of the newly created money definitely aren't the largest beneficiaries.

[Orthogonal]

The Government is typically the largest beneficiary of newly created money which amounts to new debt.

Yea, the banks who get to charge interest on up to ten times the amount of the newly created money definitely aren't the largest beneficiaries.

Banks are a large beneficiary, but not to the same degree. Yes, they can charge interest on up to 10x reserves, but the US government can get any amount, at any time, with 0 reserves.

[Rathma]

That's not how I understand it... what process are you talking about? Yes the government can issue as many bonds as they like but it has to pay interest to the bondholders. The Federal Reserve can buy bonds with electronically generated credit (thereby eliminating the interest, I suppose) but the Fed isn't part of the government and those decisions are made independent from the government. The government can't issue money. In certain times in the past, it could. A return to a system where the government actually controls the supply of money rather than a privately owned central bank is what people like Bill Still, running for Libertarian Party candidacy for the president, are advocating.

[Scheavo]

Even if things seem to be doing "well", there are still problems rippling out due to fiat money and the increased opportunity costs of business. The people who receive the new credit/money first get to purchase goods before prices have had a chance to react to the newly created money. As that money circulates the economy, prices rise causing inflation and the people who get the money down stream now have additional money but at diluted value. It is even worse for folks on a fixed income since they will never see the new money, but only pay for inflation. The Government is typically the largest beneficiary of newly created money which amounts to new debt. Inflation is indirect taxation since the government can now just spend money and you pay for it at the grocery store. The public then laments the producers and big corporations for fleecing their wallet, when it was inflation due to fiat money that caused the problem in the first place.

So assuming this theory is true, why do some places within the US experience deflation, and increases in CPI?

[livehard]

Even if things seem to be doing "well", there are still problems rippling out due to fiat money and the increased opportunity costs of business. The people who receive the new credit/money first get to purchase goods before prices have had a chance to react to the newly created money. As that money circulates the economy, prices rise causing inflation and the people who get the money down stream now have additional money but at diluted value. It is even worse for folks on a fixed income since they will never see the new money, but only pay for inflation. The Government is typically the largest beneficiary of newly created money which amounts to new debt. Inflation is indirect taxation since the government can now just spend money and you pay for it at the grocery store. The public then laments the producers and big corporations for fleecing their wallet, when it was inflation due to fiat money that caused the problem in the first place.

So assuming this theory is true, why do some places within the US experience deflation, and increases in CPI?

Because you have the more money chasing the same amount of goods. You have money creation without wealth creation.