Monday, January 16, 2012

Job Creation or a Race to the Bottom?

Republicans filing to run for seats in  the  Montana Legislature last week predictably touted their success in passing “job creating” legislation in the 2011 session. As usual, they were referring to bills to cut business taxes, eliminate “burdensome” regulations, and reduce workers compensation costs (and of course benefits). All of this is supposed to improve the business climate and make Montana more competitive with its neighboring states. Naturally, that’s going to create a lot of  jobs.

Except that it won’t.  As Louis Jacobson points out in a recent bulletin of the National Council of State Legislatures, most economists agree that “states can do a few things, though not a lot, to help create jobs.” (You can read on the on-line version of Jacobson’s piece here.)  That’s obviously discouraging news, and it suggests that all of us running for office should be realistic about claiming we can create jobs. And we need to understand why we are limited in what we can do.

One of the problems is that the Great Recession resulted from a collapse in demand. As the housing market collapsed and the value of household assets crashed, families reduced spending on consumer goods. And as credit markets froze up, business firms reduced purchases of capital goods. Under the circumstances, what was called for was increased government spending to fill in the holes left by the collapse of private sector demand. But for a couple of reasons I’ll discuss in a future post, that’s tough for states to do; Federal government spending provides a lot more demand stimulus, dollar for dollar, that state spending does. For right now just remember that Republicans generally oppose any stimulus by any government. 

The Republican solution is rather to try to bring jobs to Montana by lowering taxes and relaxing regulations.  And who knows? For a little while, it might work. But as Jacobson notes, the effect of these measures is not really to create new jobs, but rather to move jobs from one place to another. In other words, it’s beggar your neighbor job creation, and the trouble is (besides its not being particularly neighborly) your neighbor is going to respond in kind. The result is a race to the bottom that dismantles state environmental protections and slashes state revenues (or shifts taxes away from businesses and onto families) and a stalemate in the zero sum competition for jobs.