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Monday, June 7, 2010

More Jobs On Your Payroll

On Friday the Labor Department released employment figures for the Month of May. To those who just read the headlines the news was fantastic, 431,000 net new jobs in the economy. Unfortunately headlines are not news, except to the lazy and continuously uninformed. Beyond the headlines we learned that the actual number that should have been highlighted by news publishers was 41,000. That was the number of private sector jobs created in May.

Of the 431,000 jobs created 411,000 were temporary Census workers hired by the Federal Government. And according to some reports the Census is firing workers and then re-hiring them to pad their employment reports (NY Post, Neil Cavuto, CBS Sacramento). So we do not know is if the 411,000 being touted as new hires by the Census are representative or inflated. Keep in mind that to count as a new job the Census Bureau must hire someone to work one hour in a month. Sounds like unemployment to most people but not the Labor Department.

What gets lost in these numbers are the payments these workers receive, the cost to train them to knock on doors and say "How many people live here," are paid by taxpayers. Taxes that come from public sector jobs are just recirculating dollars within the government sink, taxes that come from the private sector are adding new water to the sink--water to replace that which has gone down the drain.

With only 41,000 new jobs in the private sector supporting 411,000 new jobs in the public sector it seems well continues to run dry to support expanding, or even current levels, of government employment. Meanwhile the majority in Washington (and Sacramento, Albany, Springfield...) and the Chief Executive feel more spending will create more jobs. This may be so on a very limited basis if any spending is actually being done to create private sector jobs, but that is not what has occurred or what is planned to be spent next.

Government spending to stimulate the economy is referred to as Keynesian Economics, after economist John Maynard Keynes. Keynes' philosophy of government fiscal policy to stimulate an economy was very popular with Western governments after World War II and the policies seemed successful as economies boomed. That economies had tremendous manufacturing bases built to produce war material now converted to consumer goods seems lost on the economic historians touting the success of Keynesian activity during the Fifties and Sixties. As the economies slowed and the oil embargoes pushed the cost of production higher in the Seventies Keynesian policies began to unravel. No mind to Europe as social democrats continued their progress to where they are today, deep in debt, high percentage of their populations on government payrolls or entitlements and being forced to rapidly retract government spending and handouts.

The White House is under the economic policy advice of Keynesian philosophy. The modern neo-Keynesian philosophy is that for every dollar the government spends economic output will grow 1.5 times, a fifty percent return. Under this philosophy the "Stimulus Plan" in February 2009 of $787 Billion should have a return of almost $1.2 Trillion. Except there has been practically no return as most of the funds did not go into jobs stimulation in the private sector.

Underlying the Keynesian $1 of spending is that dollar has to come from somewhere, and that somewhere is the private sector. For the efficiency of government spending it needs to collect almost $2 for $1 it wishes to spend in transfer payments (social security, Medicare, government salaries). Further exacerbating the current situation is that most of the spending on "jobs" bills in Congress have nothing to do with enabling the private sector to create jobs, but rather end up increasing taxes on the private sector that inhibits job creation. Increasing payments to unemployed workers is not a "jobs" program, it pays people not to work. Making massive payments to state governments, $100 billion so far and requests for at least $25 billion more, to retain teachers is not a "jobs" program. Increasing taxes over $80 billion on small businesses is not a "jobs" program. All these measures continue or expand government payrolls, benefits and pensions that are being supported by a shrinking private sector.

Small and medium size businesses provide the overwhelming majority of jobs in the private sector. For the past few years credit has been almost non-existent to this sector restricting operating expenses, growth and expansion. Credit has been tight as banks are concerned about balance sheet audits and federal take-overs of banks considered "risky" by the Feds. Lending to small businesses can be risky. Too many small business loans by a local community bank results in a balance sheet that the Feds may not appreciate and require the bank to be absorbed by a larger regional or national bank. With the risk of losing a charter on the horizon smart bankers are sitting on their deposits.

Small and medium size businesses generally do not operate with the reserves or ability to gather capital like large businesses and multinational corporations. With the entitlement and benefit mandates included in Obamacare and other industry specific legislation passed many businesses do not have an idea of what their future costs will be. If I hire a new worker at $45,000 per year will it end up costing me $60,000 per year? Will the extended benefits I will have to provide to my current workers equal $45,000 so I should save the funds to insure against future employment costs? Uncertainty leads to stagnation. Few businesses expand into an uncertain economic environment. Faced with higher costs in benefits and taxes most businesses are not going to take on new employees until they know exactly what the cost-benefit analysis will be.

With many small and medium sized businesses family owned as either LLCs, Sole Proprietor or S Corporations profits and net income flow from the company income statement onto the personal tax returns. If the company profits $250,000 and the business owner decides to retain $150,000 in capital for reserves and cover operating costs, lines of credit or future equipment replacement, he is still taxed on the $250,000. A magic number with the Obama Administration to eliminate tax deductions for home interest deductions, increase marginal tax rates and expand taxes to health care premiums and other expenses. Facing increased costs on the business and personal side of the income stream business owners are not willing to invest in expansion or growth to further increase the net negative on their personal net incomes.

Throughout the current Congress every piece of legislation has expanded government and restricted private business. American Recovery and Reinvestment Act (Stimulus), Obamacare, Cap and Trade, Financial Reform, all programs near or over $1 Trillion have expanded government spending on government employees and increased the taxes, and therefore burdens, on the private sector.

Currently our federal debt is $13 Trillion and our national Gross Domestic Product is $14.4 Trillion. We owe 90% of what we produce. The debt is growing at a pace of $1 million every thirty seconds, the GDP is growing at a pace of $1 million every two minutes. Our debt is growing four times as fast as our production.

We need our elected representatives to stop pouring hundreds of billions of dollars into spending that does not directly produce private sector jobs. Failure to do this will create an economy that is an upside down pyramid with the balancing on the private sector becoming less and less secure. For examples of this look at the economies in Europe with huge public payrolls and entitlements balances on a shrinking private sector no longer able to support the taxes required for those payments.

Here's a "jobs" bill: expand the 2001 tax cuts across the board; reduce taxes by 10% on small and medium size businesses; suspend revenue collections under Obamacare for a minimum of twelve months; kill Cap and Trade; cap Federal payroll and benefits at 2% growth per year for the next five years.

Finally, quit thinking that the Federal Government can spend my money better than I can. Small business owners want to increase their company payrolls not the payrolls supported by their taxes.


DCS06072010

5 comments:

Alan said...

It alarms and angers me that this stuff is beyond simple, yet our so called leaders continue taking us down the path to economic ruin. Meanwhile, too many Obama supporters hold unexamined beliefs in these policies.

Bob Schilling said...

Well, it's actually not quite beyond simple. The Bush Administration cut taxes, claiming that the subsequent economic expansion it would cause would provide greater net revenue. Sadly, it did not, although revenues did rise for part of the Bush Administration. Whatever revenue gains were realized were inundated by the costs of the wars after 9/11 and the economic collapse that started in 2007.

Reduced deficits and government surpluses almost always occur in times of prosperity and peace. Deficits -- especially big ones -- are almost always associated with wars and financial panics. There is no magic pixie dust to change this.

We collectively drove the car off the road in the 2000s. We overspent, overborrowed, and underregulated. We are now, officially, in the economic ditch. We're going to get muddy and greasy and tired getting out. It's going to be expensive. Given that this is a democracy, we're all responsible. We either advocated the wrong policies or failed to make convincing arguments for the right ones. Shouting epithets at the government is both misdirected and a waste of time.

Decrying census jobs is misguided. Democrats want everyone counted in cities, where they have more supporters. Republicans are content with lower counts in cities, since the heart of their support is elsewhere. From that narrow perspective, hiring more Census workers gives an advantage to the Democrats, and Republicans resist it for the same reason. It's a political fight, not a policy difference. Treating it as a policy or economic disagreement is misleading, and distracts us from the real priorities of our current situation.

Dennis C Smith said...

Sorry to burst your bubble Bob but the Bush tax cuts did indeed increase tax revenue, increased considerably. Google U.S. Treasury revenue charts and look at tax collections starting 2002 through 2007, higher and higher every year. The economy grew a record 20+ quarters in a row and unemployment dropped below 5%. Sorry, to burst your anti-Bush didn't do anything for the economy bubble but the economic numbers from post-9/11 to the credit meltdown in October 2008 show what really happened.

PLANit Event Solutions said...

It's really too bad that the current administration has the spending habits of a child who has never been taught the value of the dollar by its parents.

I guess the "low-balling" that we see by employers who are hiring is the result of the fear of not knowing what the Obama adiministration will throw at them next.

Bob Schilling said...

I did say that revenues increased. The point is that Bush got us into a war, and thus deficits. A critique of W's economic policies we can save for another day.