The crash of falling shares all over the globe has given rise again to fears of more recessions. Most commentators are focusing on European sovereign debt as the crisis de jour. Although one may point out that the problems with European sovereign debt have been going on for over a year. There are enormous potential problems due to misallocation of capital in emerging markets that haven’t yet appeared on the radar. But the real problem that is bothering economies, at least for now in developed markets, is the lack of demand and for demand read jobs. Until the unemployment rate drops and more people become employed, aggregate demand will suffer.
In the US the president and his Democratic party have put a bill before Congress that is supposed to create jobs. The program basically has two elements. It hopes to create jobs by spending money to build, or rebuild physical infrastructure. It also hopes to create jobs with classic Keynesian stimulus by cutting taxes. In short, it is attempting to cure the problems with money.
This is normally not such a bad idea if you were far sighted enough to understand the concept of a business cycle. It is a good idea to squirrel away some savings in good times to carry you over the bad. But politicians can’t resist spending money, usually on their friends and families. Economists and promoters always assure us that business cycles are a thing of the past. So many governments, again in the developed world, didn’t save for the inevitable rainy day and the cabinet is bare.
The US opposition party, the Republicans, feel that just spending money is not a good idea, although they spent over eight years doing just that. Enthralled by new found fiscal orthodoxy, they are worried that the money has to come from somewhere and that somewhere is the rich. These rich we are told are job creators and if you tax them they won’t create jobs. If you look at the US economic history over the past fifty years you will find that this thesis is simply not true. Strong economic growth and job creation did in fact occur when taxes for the wealthy were high. So reigning in the tax man is not the answer.
Many people today are looking at the Chinese model. China has been able to create millions of jobs and move those employed millions out of poverty. They were able to do this with industrial policies that limited household income in order to spur manufacturing growth and investment. This had the obvious secondary effect of speeding up employment and, with it, household income.
Seems like a good idea until you consider that the program was and is filled with unsustainable subsidies and imbalances. The Chinese economy is tilted in an unprecedented way towards investment and away from consumption. Its currency has been kept low artificially in order to move the excesses of this policy onto its trading partners. The subsidies are given disproportionally to friends of the state in the state owned sector. The private sector, the main source for jobs, has been starved. The combination leaves China inordinately exposed to a global slowdown, trade restrictions, enormous bad debts, and eventually serious job losses.
The Chinese have another way to hinder job growth. They don’t protect property rights. Since property rights can be denied at any time the private sector’s incentive to grow and hire more employees is severely restricted.
India and Brazil have sadly adopted labor codes from Europe. These laws weren’t worried about creating jobs. They were worried about protecting workers. They have been exceptionally successful. They have worked so well that it is almost impossible for employers to fire even the most incompetent employee. In addition there are myriad of taxes and regulations that make compliance difficult and require vast amounts of time to do so.
The Noble Laureate Ronald Coase proposed in his famous theorem that it did not matter what the initial allocation of property rights in the law was. As long as the transaction costs were low enough, the parties could bargain their way to an efficient outcome. And that is the rub.
Bureaucrats and politicians have raised the transaction costs. They do so by failing to define the property rights; failing to enforce the property rights; creating barriers to realizing property rights, and finally constantly changing the property rights. This is the last thing that employers need. Employers to create jobs must invest. Any investment is a bet on the future. If the laws are inconsistent, they cannot make this bet because they don’t know what the future holds.
To create jobs Governments need to do theirs. Their job is to create clear property rights and enforce them. But this is one job that none of them seem able to do.
