Tuesday, June 12, 2012

Job Creation, Job Destruction

As you have no doubt heard, Mitt Romney thinks he can end the recession and do a bang up job managing the nation’s economy because, as a successful former businessman, he “knows how to create jobs.”

Romney has taken a lot of flak about this claim from the Obama campaign, which discovered that Bain Capital, Romney’s former firm, in some cases acquired companies, fired their employees and still made money on the deal.   The President’s campaign has run ads showing the distress that these firings cost, with the clear implication that Romney was one of those greedy, thoughtless business types who destroy jobs in the name of profit, rather than being one of the good business people who create them.  At least one Democrat, Newark mayor Cory Booker, thought Obama was out of line and called the ads “nauseating.” And Bill Clinton even declared that Romney’s record at Bain was “sterling.”

What we have here is yet another example of campaign rhetoric running off the rails. But get used to it - there’s no doubt more to come.

I don’t know if Romney really believes, or wants us to believe, that businesses only create jobs. I would hope not.  But I would also hope that Obama doesn’t believe that only wicked business owners lay people off.  Because like it or not, people are in business to make money, not to create jobs. Good businesses are supposed to make money by producing at the lowest possible cost something people want and are willing to pay for.  And that, in principle, is what we want and expect them to do.

But when businesses create jobs, that is, hire people, they incur costs in the form of wages, training, payroll taxes, and the like. And since the whole idea is to keep costs low – and remember, we want businesses to keep costs low – they will hire as few people as they can get by with. Sometimes, when production can be profitably expanded, that means more workers get hired.  But other times it means they get laid off, as companies contract or send the jobs to China.

An awful lot of jobs are being lost all the time.  From the beginning of 2008 up through the end of April this year, 103 million workers lost jobs and filed for unemployment.  That’s an average of a little more than 455 thousand per week.  Of course all those workers didn’t stay unemployed.  As jobs were being cut in one place, about the same number was being created in another.  When times are good, more jobs are being created than lost, and we experience net job growth. But during recessions, when job creation falls short of job destruction, there is net job loss. From 2008 to 20010, for example, there were more than 5 million private sector jobs lost, on net. And during that time, business people were doing what it was expected of them, given the heartless logic of the market.

So, if “knowing how to create jobs” uniquely qualifies business people to manage the economy, does knowing how to destroy jobs about equally well uniquely disqualify them? No, because neither conclusion makes much sense.

Businesses respond to the macroeconomic environment that surrounds them - consumer and investment spending, inflation, interest and wage rates, international value of the currency, consumer confidence, financial system stability, and so forth – and  that means that sometimes they add jobs and other times they eliminate them. Business people like Mitt Romney may well know how to take advantage of favorable macroeconomic conditions to create jobs. But don't expect them to know how to create those favorable conditions in the first place. That’s the job of macroeconomic policy makers, and it requires political and economic expertise that business people don’t typically have. If you want to predict how well Romney would do managing the economy, you should probably look at his record as a policy maker when he was governor of Massachusetts. He doesn't talk about it much, but it's probably more relevant than all those years snapping up companies at Bain Capital.