In the recently completed election season, every candidate promised to be the one to trust to “create jobs.” Indeed, in spite of some pretty heated rhetoric, jobs remained the most-used four-letter word on the campaign trail.
But how many of our elected officials can answer the following question: How are jobs created?
I doubt many could provide a very coherent response, but if they want a cheat sheet for the next campaign, here’s the right answer: Jobs are created when an entrepreneur takes a risk supported by saved capital.
More to the point, an entrepreneur creates jobs anticipating a profit-making opportunity. Whether he is projecting increased future demand for an existing product, or demand for a newly created product, the move is speculative and involves a certain level of risk.
Entrepreneurs hire workers when they believe that the cost of paying the new employees will be outweighed by the increased revenue collected by the added productivity generated by them.
More often than not, however, the new employees do not work in isolation – their labor is combined with complementary factors of production. For instance, the added cashier may require an additional register, or the new R&D engineer needs the appropriate computer software to design a new product.
Now that we understand the role of the entrepreneur, what resources are required to facilitate job creation? The answer is capital.
Capital, in the most basic sense, can be defined as any asset of value owned by businesses or individuals. Examples include money, machinery, factories, land, semi-finished goods, unsold inventory or even personal possessions.
For instance, the cash register needed by the store owner to complement the new cashier is capital. Monetary savings that banks lend to a manufacturer to purchase a new factory is also capital.
Accumulated capital, therefore, is the necessary foundation of economic growth and job creation. Without it, there are no resources available to replenish worn-out factors of production or to finance expansions of the economy’s productive capacity.
When actors in the economy consume too much capital (via consumer spending) relative to saving it, the reduced supply of capital can only support a smaller volume of production and labor. In this case, jobs are lost.
It becomes clear, then, that any policies that work against the entrepreneurial appetite for risk, or favor consumption over savings, will hamper economic growth and destroy jobs.
Taxes and politics
For entrepreneurs, high tax rates reduce their rate of return, compelling them to avoid new business ventures or expansion as a lowered rate of return becomes unworthy of the risk. North Carolina levies the highest tax rates on businesses in the Southeast, and the rates are among the highest in the nation.
Furthermore, political uncertainty can make projects too risky for many entrepreneurs. Here in North Carolina, a looming $3.2 billion budget deficit and the use of gimmicky “temporary taxes” that may or may not expire contribute to uncertainty. The governor’s continued use of targeted tax incentives and subsidies serves to cloud the future of many business owners, as entrepreneurs don’t know if a competitor may be granted a subsidy or tax break in the near future.
In regards to capital, big government spending – particularly on social welfare programs – reduces the state’s stock of capital. Social welfare programs typically transfer massive amounts of capital from those who would save to those who will consume. As stated before, promoting consumption over capital savings will result in economic stagnation and a loss of jobs.
It may make many feel better thinking that the government is helping the poor, but there is a costly trade-off. Wealth redistribution schemes substitute government dependency for economic opportunity, replacing a paycheck with a welfare check.
Government cannot create jobs. At best, it can only rearrange jobs to those of their liking (think “green” jobs). What government can do, however, is create a policy environment that better rewards entrepreneurial risk and promotes the accumulation, rather than the consumption, of capital.
If politicians are serious about delivering on their promises of job creation, they would be wise to first understand how jobs are created and implement policies conducive to the process.
This op-ed was originally published in the Fayetteville Observer on Thursday, November 18, 2010.