Jobs Versus Budget Cuts: It's One Or The Other

So many still seem to be missing this basic point:

"Right now the central challenge is to reignite the economy — getting jobs back, improving wages, and restoring growth.  

Deficit reduction moves us in the opposite direction. That’s because most consumers (whose spending is 70 percent of economic activity) are still losing ground, and businesses won’t expand and hire without more consumers." 

- Robert Reich in "The Economic Challenge Ahead: More Jobs and Growth, Not Deficit Reduction"

At least, so many among the Republican movers and shakers and apparently in the Oval Office too. Why? One can only presume that they're still taking it on faith that reducing the deficit is the most important thing ever, despite all the mountains of reason to believe otherwise.

One data point in that mountain, as Reich puts it,

"Likewise, cuts in government spending, such as occurred in the fourth quarter of 2012, cause the economy to contract — as it did in the fourth quarter."

In order to move the country in the right direction, policy needs to get the basic problem correct. So long as they figure deficit reduction via budget cutting is the order of the day, they'll continue to hurt. Everything. Including the deficit.

"For 60 years (!) the pattern has held. When unemployment drops, the deficit as a percentage of GDP drops. When unemployment rises, the deficit rises." 

- Joe Weisenthal in "There's Only One Way To Fix The Deficit — And Actually It's Totally Painless"

Sure, we could possibly have jobs despite their budget cutting. After all, we've had some recovery so far, if a rather anemic one. But that's despite their budget cutting. The whole economy -- including the debt/deficit picture -- would be better off if deficit hawks weren't hamstringing us with their fixation on budget cutting.

Government and Job Creation: Where Both Candidates Got It Wrong (Although One More So), Government Does Create Jobs

No binders involved in this jobs question, not even Mitt's "binders full of women" for filling state cabinet positions. In the Presidential debate last night neither of the Presidential candidates got it right on government and job creation. One, of course, was more wrong than the other ... but neither got it right.

Mr. Romney:

"Government does not create jobs. Government does not create jobs. (Chuckles.)"

 President Obama (in response to "What do you believe is the biggest misperception that the American people have about you as a man and a candidate?"):

"... a lot of this campaign, maybe over the last four years, has been devoted to this notion that I think government creates jobs, that that somehow is the answer. That's not what I believe. 

I believe that the free enterprise system is the greatest engine of prosperity the world's ever known. I believe in self-reliance and individual initiative and risk-takers being rewarded. But I also believe that everybody should have a fair shot and everybody should do their fair share and everybody should play by the same rules, because that's how our economy is grown. That's how we built the world's greatest middle class."

Given his relatively conservative budget policy and restraint -- arguably ambivalence -- on fiscal stimulus, it seems plausible that the President really doesn't get that government can create jobs. Sure, he could have just been playing to conservatives, but his actual record suggests he really meant it. He may see more of a role for government in helping free enterprise than his opponent. But that just makes him less wrong. He apparently doesn't particularly believe in fiscal stimulus as a major tool to raise actual GDP towards potential GDP, which shouldn't be surprising to all of the Keynesian economists who called for a much larger, better stimulus and who read the accounts of how we came to get what stimulus we got, mostly without the President seriously pushing for any more. Sure, it might not have been politically feasible to get more, but that was partially because the President wasn't using the bully pulpit to push hard for more. Why? Apparently because he believes the widespread conservative myth that "government does not create jobs".

Despite what the candidates appear to believe, the fact of the matter is clear. Government most certainly can create jobs when actual GDP is significantly below potential GDP. Such as now.

As Dean Baker put it in summing up a different debate, "the Baker-Rowe-DeLong-Krugman Deficit Debate",

"First, we all seem to agree that in a situation where the economy is clearly operating well below its potential, governments can run deficits to boost employment and output. I believe we all agree that in principle the government can also use these deficits to increase future output through productive investment in either physical or human capital. This would make future generations better off on net as a result of deficits today, since the economy will be larger than it would be without the deficits."

When the economy is running at capacity, deficit spending generally won't stably boost us above potential. At that point, extra government spending risks crowding out private enterprise and in some cases certainly will do so. We're not at that point. Heck, we're nowhere near that point. The economy is gradually improving, but we've got a long way to go. While we're still plugging an output gap, deficit spending most certainly can and does create jobs whereas government cuts directly reduce overall employment.

Yet deficit spending during a downturn just illustrates one of many ways that government can create jobs. Progressive tax rates combined with social safety-net programs mitigate inequality and -- by getting money to those who have more want than means to fulfill it -- increase commerce, both effective and potential. Then there's research and development, for which various estimates show it's just a matter of exactly how many dollars are added to the economy for each dollar we've spent on NASA research that we've patented and licensed out to domestic firms. The only question is the exact multiplier; it's certain that NASA spending (not to mention DARPA and others) has created some number of private enterprise jobs beyond those that would have existed without the space program.

Private enterprise certainly excels at many things and government would be the wrong choice for a number of tasks, especially producing most kinds of manufactured products from MP3s to ice cream. So please don't misconstrue this as suggesting that more government is always better; there's a limit to what government reasonably can be expected to do or should do. President Obama is correct to believe that a major part of government's role consists of working towards creating a level playing field for private enterprise. But like Mr. Romney, he's wrong to fall for the conservative delusion on government and job creation. Government most certainly can create jobs. And right now, even more than usual, we very much need government to stop cutting back and do all that it can to create jobs.

But how do we get these politicians and the general public they serve to understand that?

A More Important Deficit: The Jobs Deficit

Yes, the jobs scene is getting better. But it's obviously not back where it should be yet, and for more than one reason.

From "Closing America’s Jobs Deficit", Laura Tyson reports that

"Public-sector demand has also contracted, owing to state and local governments’ deteriorating budgets. As a result, public employment, which usually rises during recoveries, has been a major contributor to high unemployment during the last three years. Despite a modest uptick in the last three months, government employment is 569,000 below its June 2009 level – a 30-year low as a share of the adult civilian population. According to Hamilton Project calculations, if this share were at its 1980-2012 average of about 9.6% (it was actually higher between 2001 and 2007), there would be about 1.4 million more public-sector jobs and the unemployment rate would be around 6.9%."

This may not be stunning news to those of us who've already been lamenting that aspect of layoffs stunting our recovery, but it's certainly worth highlighting again ... especially that we would have an unemployment rate somewhere around a full point lower if it weren't for the public sector layoffs. Obviously, if it weren't for contractionary fiscal policy (govt budget cuts), we'd have a far better employment situation.

And what is a certain party calling for? More contractionary fiscal policy.

Tyson also note some interesting points about the jobs that are out there, the differences in unemployment for those with less education versus those with more education, and that:

"... recent study by McKinsey suggests that the gaps in educational opportunity and attainment by income impose the equivalent of a permanent recession of 3-5% of GDP on the US economy."

The Cost of Balanced Budgets and a Longer View on Presidents and Jobs From Ike To 2012

I'd usually heard the 50s described as more or less a golden era of rising prosperity. But till recently I tended to skip over digging into that decade's economic data to focus on the Great Depression up through World War II (when not mucking about the peaks and valleys of more recent times). So I have to admit this chart surprised me.

starting with Ike, the first President fully covered in the monthly POP data; to June 2012

I was expecting that adding in the Republican Presidents before Reagan would show that prior to Trickle-down / Supply-side economics / Reaganomics infecting the Republican party, they'd done better. I expected to be illustrating the post-Depression glory days of the Republican party via Ike, Nixon, and Ford. Instead, the data gave me what we see above. In jobs, Nixon and Ford both did worse than Johnson, Carter, and Clinton. While Nixon and Ford did better than Obama's marks for his full term so far, they each did worse than during his tepid recovery span from February 2010 on to the latest data. And then there's Ike -- whom we admire -- down there with the likes of the Bushes. I didn't want to see that. Frankly, I wanted to believe Ike pulled off the Clinton trick of balancing the budget while improving employment. But I can't deny the data.

If we look a bit further back, before the dates in the data used above to put payroll growth in perspective via population growth, we can at least compare Ike's raw payroll figures to those from FDR (since 1939) and Truman, but that only rules out claiming Ike's dismal jobs performance as part of a longer trend.

Ike's sad job numbers with context: at least he's not Bush II

It's not a pretty picture for Ike, which I'm sad to see. Thankfully there's still much to admire from President Eisenhower in the highway system and his work for civil rights. I still like Ike. I still think I'd have voted for him if I'd been old enough at the time. But his economic record is tarnished.

In his defense, President Eisenhower did start his term with a 2.6% unemployment rate during that first full month. It's hard to improve on 2.6% unemployment. Still, unemployment rose dramatically to 6.9% by the first full month of his successor's term. Ike's shift: +165% unemployment. That's a rather lousy fumble. And while the Eisenhower years saw increasing family incomes, the same can be said for the Kennedy / Johnson years except without the rising unemployment, as over the course of their span they reduced that rate from the 6.9% that Eisenhower left them back down to 3.4% by the end of Johnson's Presidency.

So what went wrong? Let's look at the modern history of balanced budgets:

• At Republican urging, FDR tried to balance the budget with spending cuts and it brought us the Recession of 1937-38. 
• After World War II we saw dramatic cutbacks in spending with balanced budgets in 1947 through 1949 and the recessions in 1945 and 1949. (Of course, the war spending was unsustainable; there was probably no way to avoid recession in the late 1940s.)
• Truman balanced the budget in 1951. But like the later Clinton-era balanced budgets this one was done while expanding federal outlays ... rather swiftly increasing from the 1948 lows. Then after we slowed spending at the end of the Korean War, we got the recession of 1953.
• Eisenhower balanced the budget in 1956 and 1957 and we got the Recession of 1957.
• Eisenhower balanced the budget again in 1960 and we got the Recession of 1960.
• Nixon balanced the budget in 1969 and we got the Recession of 1970.
• While Clinton balanced the budget in 1998 lasting through Bush's first budget in 2001, the balancing in these years was done without reducing the growth of federal outlays but rather through moderate increase of tax rates. As such, this particular instance was thoroughly different from most previous balancing of the budget (except Truman's).

There were also some recessions that didn't correspond to these balanced budgets: the oil shock under Nixon, the extremely high interest rates under Reagan, the S&L crisis under Bush I, the Dot-Com crash under Clinton and Bush II, and the housing/finance crash under Bush II. I'm not suggesting that all recessions are caused by cutting to achieve balanced budgets. However, it would seem that balancing our national budget via cuts -- even if only in inflation-adjusted terms as in 1960 and 1969 -- tends to lead to recession.

The impact of Eisenhower's budget balancing exploits are particularly of interest for its parallel to job losses in the Great Recession. Private payrolls dropped by 2.385 million between August 1957 and June 1958, a 5.26% decline. By comparison, that's just barely below the 5.47% decline during the worst job-loss months of the Great Recession from August 2008 through June 2009. Remember that saying about doing the same thing and expecting different results. If we implement massive cutbacks like Eisenhower with our sequestration fiscal cliff, we can expect yet another massive fall just like the Eisenhower recession ... and we've not climbed far enough back from the jagged rocks as it is.

In case after case, budgets balanced with spending cuts have brought on recession. And now the Republicans are once again pushing us to balance the budget with dramatic spending cuts. Democrats may not be leading the charge, but Obama like FDR is far too willing to accept the Republican push for cuts. If we don't turn away from this push to slash budgets, previous experience shows us it will hurt the economy. When we make the debt more manageable by growing our economy such that the debt shrinks by comparison, that's tended to work out well. When we clumsily attempt to tackle the debt directly by slashing spending to balance the budget in the hopes a primary surplus, the records shows it tends to work out poorly.

Presidents and Jobs (Average Private Payrolls Added Per Month Since Carter)

Given that Republicans are often billed as the pro-business party, shouldn't we find business booming under Republican Presidents? Shouldn't we find payrolls rising significantly from all that business expansion?

For President Reagan, to be fair, we should note that his early years were hurt by the same force that crushed payrolls under President Carter during April through July of 1980: the high rates with which Paul Volcker battled inflation. Double-digit prime interest rates diminished employment under both Presidents Reagan and Carter. While those unusually high interest rates may have been necessary to get control over inflation, those high rates severely slowed expansion and thus hiring. However, that doesn't remove the possibility that President Reagan's descent from Carter's payroll numbers hinted at the start of a Republican trend under Trickle-down policies. After all, the Bush I policies were largely a continuation of the Reagan policies. If we average together the Reagan and Bush I months, together they get 113.3 thousand jobs / month. That's less than either of Carter or Clinton. And it's also less than the rate of increase we've seen since the turn-around on 2/1/2010 under President Obama.

While these figures aren't conclusive proof alone, add them together with a few other factors such as that GDP growth has lagged under the lowest top marginal tax rates. It sure looks like Trickle-down (or Supply-side economic or Reaganomics) failed us in a big way.

Maybe we should stop accepting the notion that talking about lowering taxes and deregulating would actually be business-friendly. Maybe we should instead consider ways to return to the sort of sensible, progressive tax structures we had before Reagan lead us down the road to decline. Instead of calling it red tape, maybe we should consider regulation's value for helping business manage risk, compete on a level playing field, and have more predictable returns. And maybe we should get back to expecting serious infrastructure projects and demanding aggressive investments in our research and development programs to build our avenues for growth.

Notes on methodology: Generally speaking, the January in which the executive transitions from one branch to another will be almost entirely impacted by the outgoing President's policies and not those of the incoming President. As such, the average uses the change in monthly manufacturing payrolls starting with the change from the first full month of the President's term (i.e., from the February that is the first full month to the March thereafter) and going until the first full month after the President's term (i.e., the last change counted is from the January during which the President in question is last in office to the February thereafter). Data from BLS/FRED.

Presidents and Manufacturing

Average manufacturing jobs / month gained or lost for the past half dozen Presidents and since the turn-around on January 2010.

Notes on methodology: Generally speaking, the January in which the executive transitions from one branch to another will be almost entirely impacted by the outgoing President's policies and not those of the incoming President. As such, the average uses the change in monthly manufacturing payrolls starting with the change from the first full month of the President's term (i.e., from the February that is the first full month to the March thereafter) and going until the first full month after the President's term (i.e., the last change counted is from the January during which the President in question is last in office to the February thereafter). Data from BLS/FRED.

Mitt and Manufacturing

Rather bold of a guy who made a lot of money closing down (among other things) American manufacturing plants to speak on manufacturing jobs ... too bad it was boldly striding into error.

Trends in Manufacturing Payrolls

A bit of manufacturing job historical info:

• Peak: 6/1/1979 (shortly before Reaganomics) at 19.553 million manufacturing jobs
• Decline from 6/1/1979 to 2/1/2001 (first full month of Bush II's first term): 2.523 million jobs, a 12.9% drop
• Decline from 2/1/2001 to 2/1/2009 (over the course of Bush II's Presidency): 4.644 million jobs, a 27.3% drop
• Post Bush II floor: 1/1/2010 (less than a year after President Obama sworn in) at 11.458 million jobs
• Increase from 1/1/2010 to 8/1/2012 (turnaround to present): 512 thousand, a 4.5% rise

But When Did Those Jobs Disappear, Mitt?

The state of industry speaks for itself better than some candidates do. When Mitt Romney in Toledo on the 26th of September, 2012 said, "we see manufacturing jobs disappear", he neglected to mention that most of that disappearing happened during the tenure of a President who implemented the same policies that Romney himself is pushing. He also neglected to mention that under the current President they're not disappearing anymore. Under the current President, we've seen manufacturing jobs grow again.

In manufacturing in specific, manufacturing jobs moved mostly sideways through the first quarter of 2006, creeping to a peak in April of that year. From the April 2006 peak, 1.844 million manufacturing jobs were lost under the Bush II administration by the first full month of President Obama's term. From the floor in January 2010, we've recovered 512 thousand manufacturing jobs as of August 2012. There's still a long way to go, but adding half a million manufacturing jobs since January 2010 is growth, not "disappearing".

Clinton's Convention Speech in Images

On the argument for President Obama's reelection:

Are we doing better than that today?

Job scoring:

Republican economic policies:

Trickle-down:

President Clinton's Convention Speech: highlights from the prepared text

Highlights from the prepared text for President Clinton's Convention Speech:

"It turns out that advancing equal opportunity and economic empowerment is both morally right and good economics, because discrimination, poverty and ignorance restrict growth, while investments in education, infrastructure and scientific and technological research increase it, creating more good jobs and new wealth for all of us."

...

"In Tampa, the Republican argument against the President's re-election was pretty simple: we left him a total mess, he hasn't cleaned it up fast enough, so fire him and put us back in."

...

"I like the argument for President Obama's re-election a lot better. He inherited a deeply damaged economy, put a floor under the crash, began the long hard road to recovery, and laid the foundation for a modern, more well-balanced economy that will produce millions of good new jobs, vibrant new businesses, and lots of new wealth for the innovators."

...

"The Recovery Act saved and created millions of jobs and cut taxes for 95% of the American people. In the last 29 months the economy has produced about 4.5 million private sector jobs.  But last year, the Republicans blocked the President's jobs plan costing the economy more than a million new jobs. So here's another jobs score: President Obama plus 4.5 million, Congressional Republicans zero."

...

"Now there are 250,000 more people working in the auto industry than the day the companies were restructured.  Governor Romney opposed the plan to save GM and Chrysler. So here's another jobs score: Obama two hundred and fifty thousand, Romney, zero."

...

"The Republicans call it Obamacare and say it's a government takeover of health care that they'll repeal.  Are they right? Let's look at what's happened so far. Individuals and businesses have secured more than a billion dollars in refunds from their insurance premiums because the new law requires 80% to 85% of your premiums to be spent on health care, not profits or promotion.  Other insurance companies have lowered their rates to meet the requirement.  More than 3 million young people between 19 and 25 are insured for the first time because their parents can now carry them on family policies.  Millions of seniors are receiving preventive care including breast cancer screenings and tests for heart problems.  Soon the insurance companies, not the government, will have millions of new customers many of them middle class people with pre-existing conditions.  And for the last two years, health care spending has grown under 4%, for the first time in 50 years."

...

"Both Governor Romney and Congressman Ryan attacked the President for allegedly robbing Medicare of 716 billion dollars. Here's what really happened. There were no cuts to benefits. None. What the President did was save money by cutting unwarranted subsidies to providers and insurance companies that weren't making people any healthier. He used the saving to close the donut hole in the Medicare drug program, and to add eight years to the life of the Medicare Trust Fund. It's now solvent until 2024. So President Obama and the Democrats didn't weaken Medicare, they strengthened it."

...

"Remember, Republican economic policies quadrupled the debt before I took office and doubled it after I left. We simply can't afford to double-down on trickle-down."

Payrolls During President Obama's Term

What's the direction of the jobs picture?

Total non-farm payrolls (the early/mid 2010 spike in the curve is because of temporary census activity):

Private payrolls:

Government payrolls (trend of state/local budget cuts bringing govt employment down):

Updated Job Picture Under President Obama

How's the job picture look under President Obama's term in office so far? Not only did payrolls stop the inherited plummeting but also private sector jobs have strongly, steadily grown since turning around in February 2010. Meanwhile, aside from the Census spike, steady govt cuts -- mainly at the state and local levels -- have taken government payrolls in the opposite direction.

We have here a good, solid private recovery that's impeded by heavy govt cuts diminishing it from how good it'd be otherwise. Below, we can see roughly the hypothetical difference that govt cutbacks (aside from the brief census surge) have made to the overall employment picture by looking at total employment assuming private sector hiring had still followed exactly the path it did and govt payrolls had held steady at February 2009 levels.

The adjusted line likely understates how much it would have helped to avoid the govt cutbacks. After all, those laid off govt workers couldn't buy as many goods and services, so there would arguably have been more demand fueling more private sector jobs and making the private component grow faster if we hadn't had cutbacks. But for the chart above, the only adjustment reflected in the green line versus the blue line is a freezing of govt payrolls at precisely the February 2009 level. A more complete picture of the difference cutbacks made would reflect an estimate of anticipated higher private payrolls resulting from avoiding the govt layoffs.

What Part Was The Mistake Rep Ryan? The Jobs Perhaps?

"Representative Paul D. Ryan said on Thursday it was a mistake to have requested funds in 2009 from the federal stimulus bill after voting against it."

So what part of that was a mistake? Could it be the effort to help create jobs for his constituents?

"The Congressional Budget Office said the stimulus increased employment by 1.3 million to 3.3 million people."

So why would it be a mistake to increase employment? Could that be because the Republicans figure that anything that helps employment during President Obama's term hurts their 2012 election chances? Could that be because they've cynically decided that helping the American people is against their political interests? Could that be because they've fanatically decided that they know what's best for us so much that they figure it's OK to hurt us for a while as long as it helps them get back in power in the long run?

Private Payrolls Versus Govt Payrolls

Over the course of the Great Recession, we naturally dipped a bit in our percentage of all payrolls from private employment. At first, over the course of 2008 and very early 2009, private payrolls were dropping significantly faster than government payrolls. That has since reversed.

The dotted red line indicates the level of the first full month of President Obama's tenure.

As 2009 wore on, the bleeding in private payrolls slowed (from -0.73% in April to -0.29% in May and eventually dwindling to -0.04% in November). The change in private payrolls turned positive in March 2010 and the tally's been growing every since. Meanwhile, except for a spike in May 2010 from Census hiring, govt payrolls fluctuated in the same narrow band from late 2008 until plummeting after the Census work. By January 2012, govt payrolls dropped to a five year low at a level not seen since July 2006.

Private payrolls on the larger scale at left; govt payrolls on the smaller scale at right.

Growing population casts the drop in government payrolls with an even larger impact. By 2010, we reached a 20 year low as far as the number of government workers per capita.

Year	Govt workers per million Americans	Annual change
2008	73.94	0.36%
2009	73.47	-0.64%
2010	72.70	-1.05%
2011	70.94	-2.42%

As Daniel Gross put it, describing the increasing private share of all payrolls, "Socialism? Hardly."

The Wealthy Don't Create Jobs; Good Jobs Create The Wealthy

What came first, the wealthy or the building blocks of wealth? This is no idle "chicken or the egg" question. Major political players base real policies with serious impact on their own answer to the question. What if most of them are getting it wrong? What if getting it wrong could wreck the system and ransack wealth?

To get the answer, the GOP base are obviously looking at wealthy investors. Our tax-cutting crowd clearly thinks they're the starting point. They say that getting more money to them will mean more jobs. The idea runs that investors bet their capital on starting or expanding a company that can then hire folks, thus jobs. This seems to pass for unquestionable truth among the "starve the beast" set. They figure that the more money the wealthy have the more they'll put into creating jobs. Even leaving aside the question of whether they'd likely choose to invest their money elsewhere, the anti-tax set need to reconsider two questions: 1) Is that usually how jobs are made? and 2) Where'd the capital come from in the first place? These two questions are necessarily linked. You can't explain where the capital came from without considering ways to make jobs without capital.

So where'd the first capital come from? Unless you think it was somehow handed over to man by divine intervention -- capital raining down from heaven or appearing from nothing -- it had to come from work. We can set aside the factor of inherited wealth, since somebody had to collect it in order to pass it down to lucky heirs. That first capital accumulating work -- whatever it was -- was collecting and/or making something that could be sold or traded. In short, it was a job. It may not have been a modern job, but close enough for our question. Somebody did some work. It may have been all on his own. Or the work may have been getting others to do things for him. But whatever it was, somebody did some work that produced a surplus. Perhaps that surplus was then -- directly or through heirs -- reinvested by getting other folks to do more work to produce more surplus. At root, the workers involved still created the surplus. The worker-created surplus was then used to spur more work to create more surplus. The job came first. The assets produced were just a product of the job that lets that job contribute to even more jobs. Get together a lot of surplus produced from a lot of jobs, and you've got wealth. Even if you then use that wealth to spur more work that creates more wealth, the wealth still didn't create itself but rather came as the sum effect of the work ... the jobs.

"Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased." -- Adam Smith 

Ultimately, the idea that wealth comes from somebody investing in business is a myth. If I build a factory and hire 50 people to make widgets, I'm not going to get any return on my investment unless there are people who can be interested in widgets and have enough money to spend on my widgets. If my widgets aren't essentials, those people will only have enough money to spend if they're making a surplus beyond the cost of living. Even if the widgets are essential, folks who don't have an income aren't going to be buying many widgets. If I don't have enough potential customers to break even, I'm not going to be employing those 50 widget makers for long. But if I have enough customers to make a profit, I'll keep employing them. And if I have too many customers for them to keep up, I'll hire more. Then who really created the wealth I reap from my factory? Sure, I made the factory investment that allowed me to sell widgets. But without the customers, that investment would have just been a foolish building that couldn't support long term jobs. It's the customers who really make the difference.

Jobs further wealth in two ways. Obviously there's the surplus collected by the initial business owner. But there's also the circulation of resources wherein the worker's share of surplus is spent at other businesses. The worker's paycheck allows him to be a customer contributing to other jobs that yield other surpluses for other business owners. The paychecks from those other jobs may in turn be spent at yet further businesses or even end up winding back to the initial business. Jobs have no choice but to create wealth, even when they fail to do so directly for a specific employer. Unless they're inefficient jobs, they'll create a surplus. And even if they're inefficient jobs they'll mean money for workers to spend at efficient businesses yielding surplus. The job just can't hold itself back from contributing to the creation of wealth. Wealth, on the other hand, can sit idle. It can be stored in some valuable thing that'll sit collecting dust. Sure, wealth may be further invested in jobs and help yield more wealth. But it can also hang on the sidelines for years or even centuries and do nothing productive.

Clearly it's the job that creates the wealth. We can use that answer to figure out what to do to get our economy rolling again. We want wealth and jobs. We need to push the one that creates the other. If we change our tax structure to get more money to the wealthy, we're just tinkering with accelerating redistribution of income to the rich who may just sit on it. That risks having it grind to a halt if too much money is removed from the system to just sit idly in the stockpiles of the wealthy. I'm all for building wealth, but not at the cost of having all the money locked down to the point where it no longer flows from business to business through employees and customers. Since wealth ultimately comes from jobs, those of us who want both more jobs and more wealth need to focus on jobs in order to get both. With more wealth, there doesn't necessarily have to be more jobs. With more jobs, there will be more wealth.

Now we've got a situation where there isn't enough demand for products and services to spur widespread hiring. Too many people don't have enough money to spend. And unemployment causes much of that current lack. Private industry can't fix the situation because it won't make any sense for them to hire until there's demand for products and services. There's only one credible way out: govt must step in to fill the void. Govt must stop hiding their heads in the sand and pretending that we can count on the wealthy to hire out of the goodness of their hearts -- without enough demand causing it to make sense as an investment -- if we just help a bit more money stick in their accounts. Govt must stop laying off workers and start hiring so there will be more paychecks to spend on goods and services. And to do that, govt is going to have to start leveling with us and facing that we'll have to rack up a future bill in order to make things work here and now ... and for the future.

Why Business Hires, and the Deficit Isn't It

Why would you hire a new employee for your business assuming you had one? All of the answers generally come down to one root: to make the company better.

Better could be a lot of things: producing more products/services, reducing vulnerability to some risk, producing better products/services, improving public image, broadening supply resources, strengthening relationships with vendors/clients/customers, etc. They all more or less seek the same goal. You want your company to bring in more income and do so more reliably.

What's this have to do with the deficit? Nothing.

Seriously, how many businesses can you name that consider the deficit when making a hiring decision? A few financial companies may occasionally see some impact from really big deficit changes on the need to create or eliminate positions related to bond trading. That's most of the jobs that are impacted by the deficit in any real way. Ordinary businesses hire because they need more employees to cover their production or to pitch their products, with absolutely no factoring in the size of the deficit.

None the less, Republicans want us to focus on cutting the deficit despite that many of them campaigned on the idea that they would improve the job situation. So now they're trying to make people think there's a connection between what they promised and what they're trying to do.

"Cutting the federal deficit will create jobs" -- Rep. Cantor (R-VA)

That's completely and utterly divorced from any sort of reality on where we get jobs. The GOP have begun spinning elaborate stories to try to pretend there's a connection. Why is Rep. Cantor making that claim? Voters are concerned about jobs. The Republicans know that right now there's no better pitch for anything than jobs. And they wants to eliminate any govt program they can get their hands on. There's no way to get more support for their plans to ransack govt than to convince voters that it'll help what voters really care about: jobs. Unfortunately, the truth is quite the opposite. The truth is that -- during a troubled economy -- the sort of cuts the Republicans are pushing are worse than doing nothing at all.

Cutting the deficit won't give businesses more customers. Cutting govt spending takes customers away from businesses that provide goods and services to the govt. That's most businesses. Indirectly, that's all businesses. During good times, when the economy is humming along at a fast pace, a govt cutback wouldn't necessarily be a big problem. With the economy struggling to recover from the massive credit crunch and layoffs that were the finale of the Bush II administration, we can't afford so many businesses losing demand from govt purchases. The most obvious reason to hire is to handle greater demand. The most obvious reason for layoffs is because of a drop in demand. There's no more surefire way to drive ourselves back into recession -- or worse -- than massive budget cuts. That's a recipe for even higher unemployment.

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On a related note, for a decent catalog of the Republican record as far as jobs, see ""Where Are The Jobs?":The GOP's Two-Year Campaign Against Job Creation and Economic Growth"

SOTU: Guns vs Jobs

Some, including Mayor Bloomberg and the Brady Center to Prevent Gun Violence, were disappointed that there was no overt mention of gun control in the 2011 State of the Union.

They missed the point. Apply some perspective.

Yes, gun control is a big issue. Yes, it's ridiculous to fail to restore restriction on the size of gun ammo magazines back down to a sane level as per the collective failure that's been going on since the assault weapon ban expired.

But the President of the United States can't ignore the big picture. We're living in a time of high unemployment. Too many people call for massive cuts that would likely throw us into an avalanche of crushing unemployment. Too many people call for insane moves like blocking the debt ceiling that would likely jam the entire world economy into a tailspin. These economic issues have the potential to bring widespread violence through collapse if the President doesn't talk them down from that fiscal ledge. If we went there, it would not be the first time that unemployment heated anger to boil over. The first priority of the President of the United States must be to keep our economy from grinding to a halt. Everything else depends on this. All the refinements of civil society to protect this or restrict that depend on our economy running at least well enough to keep our civil institutions going.

Gun control -- even the most sane and obvious restrictions like a cap on magazine size -- can be a very contentious and partisan issue.  Maybe he could have pulled it off.  But were the President to go there in the State of the Union, it would risk focusing his entire message on that issue.  Yes, it's important.  But even bigger concerns loom over our Union.  We have 535 members of Congress who can worry about championing all of the secondary and tertiary issues.  When the basic stability of the nation is at stake, the President needs to be focused on the jobs that make it possible to keep our society together.

Govt And Job Creation

Someone said, "It's not congresses job to create jobs, the market creates jobs."

It is the govt's job to stabilize job creation. Too much growth can be bad (bubbles, inflation). Too little growth is very bad (unemployment, etc.). When the market is over-performing, we need the government to step in and put on the brakes with rate increases and such to limit inflation. When the market is under-performing -- such as now -- we need the govt to step in and do everything it can to accelerate the economy.

The only time the govt should avoid having an impact is when things are humming along at a healthy pace. We're not there right now.

Someone replied, "I disagree, the free market manages job employment, the bubbles and depressions are caused by the government dicking around with the market. Just like how the government pushed sub-prime lending and artificially dropped interest rates, which helped lead to the housing crisis."

History does not seem to agree. When left to itself, the free market has shown itself to be perfectly capable of creating its own bubbles and depressions (see the "Panic of 1857" for starters, but there are plenty of others).

While it seems convenient to blame the govt for "pushing" sub-prime lending, plenty of get-rich-quick lenders were perfectly happy to gamble before getting any "push" from the government. All many of them needed to dive in head first was to see the pool and get the government to step out of the way ... to deregulate and/or avoid sufficiently regulating new products such as CDOs. Indeed, Fannie and Freddie did not lead the charge into risky lending. Fannie and Freddie came late into that game, after the private lenders were aggressively pushing them to the sidelines of the lending market with their sub-prime feeding frenzy. Fannie and Freddie might have been better off staying on the sidelines, but that wasn't the conventional wisdom at the time. Those voices in the wilderness calling out for caution were marginalized by the private sector zeal for profit. Claiming that they only did it because the government was pushing them is like saying a football team would sit in the bleachers for the entire game if the cheerleaders didn't call out for them to score.  Did govt missteps make it worse?  Probably.  That doesn't mean the private sector wouldn't have formed the bubble on their own.

Yes, the government can take the wrong steps and bungle into making matters worse. But that doesn't change the fact that -- whether specific administrations and Congressional sessions do it well or not -- it is the govt's job to strengthen and stabilize the economy, which generally means job creation.

Should you need proof of the govt working to create jobs in our early history: Among the more obvious examples from way back in history to gain any sort of current renown is the 1798 "Act for the Relief of Sick and Disabled Seamen" passed by the 5th Congress (featuring Thomas Jefferson as President of the Senate) and signed by President John Adams. The primary point of the law was to encourage the growth of American commerce (jobs and wealth) by reducing the loss of that specific labor pool to poor health. It also served as an incentive to join that labor pool by making it easier to get health care as a member thereof. More mariners meant more commerce. More commerce meant more American jobs. Voilà. Good job, 5th Congress.

The Cost of Cuts

To break even on employment, we need around 2 or 3% growth in GDP.

"Putting this in our current context we can see that growth has to do two things. First it has to cover, or absorb, growth in the workforce due to population changes. A good rule of thumb in the US is that GDP needs to rise by about 2.5% for unemployment just to stay even with such changes." from "Sticky unemployment – Okun’s Law" by Peter Radford

Our GDP, the amount of goods and services we produce, comes from the amount that is spent on American goods and services ... the supply rises and falls to meet the demand. Of that spending (or demand), private sources (individuals and corporations) spend only a portion of the total that makes up the GDP. The government also spends, and that spending makes up a portion of the total demand for goods and services.

Supply doesn't discriminate. Supply is blind to the source. It doesn't care whether the demand comes from private or public sources. No matter what portion of the demand comes from each, supply doesn't care about anything other than the total. If the total demand rises, supply will meet it and require more workers to do so. If the total demand falls, supply will meet it and require fewer workers to do so.

Government's share of GDP has mostly risen over the years, although not in an exactly straight line. Some hate this fact; but whether you call it positive, negative, or neutral, there it is. Government's shared of GDP has been estimated at 25% (or even 43.85% by one source) for 2010. For the sake of avoiding any exaggeration of the impact of government spending cuts, let's go with that smaller 25% figure. At 1/4 of GDP, a 10% cut in government spending would mean about a 2.5 % reduction in GDP. Let's simplify the numbers so that is easy to see. Imagine if we had a total GDP of 100 million dollars and 25 million of that were from the government:

100 - (25 * 0.10) = 100 - 2.5 = 97.5

So there you have it, a 10% cut in govt spending would shrink our GDP by 2.5%. Of course, this assumes that what we're cutting is to make up for deficit spending, i.e. govt foreign borrowing. Considering that the main reason there's talk of cutting government spending in the US is to reduce foreign borrowing, that seems a safe assumption. Borrowing brings in money from outside, so a reduction in debt-based spending does not get offset inside the system. If we had a balanced budget and were cutting spending in order to lower taxes, the offset might just be shifted from public to private spending. But that's not where we are. We're looking at cuts to reduce the amount of GDP we cover by bringing in money from outside, which means we'd reduce the total spending in the system, the total demand, the total GDP.

But what does it mean to have a cut in government spending reduce our GDP? This brings us back to that minimum GDP growth of about 2.5% in order to keep employment stable. Estimates vary, but many forecasts for 2011 US GDP growth are around 3%. So if we cut our government budget by about 10%, that'd subtract 2.5% and give us a GDP growth of about 0.5%, which is roughly 2% below the level needed to sustain stable employment. That means we'd have rising unemployment. Of course, rising unemployment lowers payroll tax revenues. Dropping payroll tax revenues increase the deficit. Deficit increases make people think about cutting more from the government spending. See how this could spiral?

To balance the 2011 budget, we'd need to cut government spending by about $1.27 trillion. The total spending for 2011 at this point is estimated around $3.83 trillion. This means that we'd need to cut the budget by around 33% in order to balance revenue with spending.

Assuming the lower 25% share of GDP, thus less impact, a 33% drop in government spending strictly to avoid taking on more debt would slash 8.25% from our GDP.

100 - (25 * 0.33) = 100 - 8.25 = 91.75

Downward spiral

Pulling 8.25% from our GDP growth would leave us with a GDP growth of around -5.25 for 2011, which is a severe contraction. Remember that we need around 2.5% growth to keep unemployment stable and higher than that to see a reduction in unemployment. So with a -5.25% contraction in GDP, unemployment would go up, up, and up some more. That rising unemployment would promptly lower our revenue (and increase our costs for the unemployed) and give us a deficit again. That deficit might make people cut more, which would lower our GDP further and bring more unemployment.

"What you see is that unemployment tends to fall when growth is high, rise when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising." from "Growth and unemployment" by Paul Krugman

Bad recipe. Clearly, we can't cut our way out of this deficit. We have no choice but to find a way to grow. If we had high GDP growth (like 7%), we could to cut meaningful amounts (like maybe 10%, assuming 7% GDP growth), and still have rising employment, reducing unemployment. Rising employment would also mean more payroll tax revenues, thus lowering the deficit directly. Growth such as this is the only way to spiral upwards. During slow growth, cuts force a downward spiral.

We can't afford cuts. We have to find a way to grow.