On Tuesday, September 13,
Peter Schiff, the CEO of Euro Pacific Capital, www.europac.net will testify before the House of Representatives
Subcommittee on Regulatory Affairs, Stimulus Oversight and Government
Spending. The hearing entitled, "Take Two: The President's Proposal to
Stimulate the Economy and Create Jobs" will examine federal job creation
efforts. Mr. Schiff, author of many best-selling books including "How an
Economy Grows and Why it Crashes" is well known for his views on how
federal regulatory activism and irresponsible monetary and fiscal policy is
actively destroying jobs in America. The following statement from Mr. Schiff
will be read into the Congressional Record this morning. Within a few days, video of the hearings will be available on
the Committee's website.
Testimony by Peter D. Schiff
Offered to the House Sub-Committee on Government Reform and Stimulus
Oversight
September 13, 2011
Mr. Chairman, Mr. Ranking member, and all distinguished members of
this panel. Thank you for inviting me here today to offer my opinions as to
how the government can help the American economy recover
from the worst crisis in living memory.
Despite the understandable human tendency to help others, government
spending cannot be a net creator of jobs. Indeed many efforts currently under
consideration by the Administration and Congress will actively destroy jobs.
These initiatives must stop. While it is easy to see how a deficit-financed
government program can lead to the creation of a specific job, it is much
harder to see how other jobs are destroyed by the diversion of capital and
resources. It is also difficult to see how the bigger budget deficits sap the
economy of vitality, destroying jobs in the process.
In a free market jobs are created by profit seeking businesses with
access to capital. Unfortunately Government taxes and regulation diminish
profits, and deficit spending and artificially low interest rates inhibit
capital formation. As a result unemployment remains high, and will likely
continue to rise until policies are reversed.
It is my belief that a dollar of deficit spending does more damage to
job creation than a dollar of taxes. That is because taxes (particularly
those targeting the middle or lower income groups) have their greatest impact
on spending, while deficits more directly impact savings and investment.
Contrary to the beliefs held by many professional economists spending does
not make an economy grow. Savings and investment are far more determinative.
Any program that diverts capital into consumption and away from savings and
investment will diminish future economic growth and job creation.
Creating jobs is easy for government, but all jobs are not equal.
Paying people to dig ditches and fill them up does society no good. On
balance these "jobs" diminish the economy by wasting scarce land,
labor and capital. We do not want jobs for the sake of work, but for the goods
and services they produce. As it has a printing press, the government could
mandate employment for all, as did the Soviet Union. But if these jobs are
not productive, and government jobs rarely are, society is no better for it.
This is also true of the much vaunted "infrastructure
spending." Any funds directed toward infrastructure deprive the economy
of resources that might otherwise have funded projects that the market
determines have greater economic value. Infrastructure can improve an economy
in the log-run, but only if the investments
succeeds in raising productivity more than the cost of the project itself. In
the interim, infrastructure costs are burdens that an economy must bear, not
a means in themselves.
Unfortunately our economy is so weak and indebted that we simply
cannot currently afford many of these projects. The labor and other resources
that would be diverted to finance them are badly needed elsewhere.
Although it was labeled and hyped as a "jobs plan," the new
$447 billion initiative announced last night by President Obama is merely
another government stimulus program in disguise. Like all previous stimuli
that have been injected into the economy over the past three years, this
round of borrowing and spending will act as an economic sedative rather than
a stimulant. I am convinced that a year from now there will be even more
unemployed Americans than there are today, likely resulting in additional
deficit financed stimulus that will again make the situation worse.
The President asserted that the spending in the plan will be
"paid for" and will not add to the deficit. Conveniently, he
offered no details about how this will be achieved. Most likely he will make
non-binding suggestions that future congresses "pay" for this spending
by cutting budgets five to ten years in the future. In the meantime money to
fund the stimulus has to come from someplace. Either the government will
borrow it legitimately from private sources, or the Federal Reserve will
print. Either way, the adverse consequences will damage economic growth and
job creation, and lower the living standards of Americans.
There can be no doubt that some jobs will in fact be created by this
plan. However, it is much more difficult to identify the jobs that it
destroys or prevents from coming into existence. Here's a case in point: the
$4,000 tax credit for hiring new workers who have been unemployed for six
months or more. The subsidy may make little difference in effecting the high
end of the job market, but it really could make an impact on minimum wage
jobs where rather than expanding employment it will merely increase turnover.
Since an employer need only hire a worker for 6 months to get the
credit, for a full time employee, the credit effectively reduces the $7.25
minimum wage (from the employer's perspective) to only $3.40 per hour for a
six-month hire. While minimum wage jobs would certainly offer no enticement
to those collecting unemployment benefits, the lower effective rate may
create some opportunities for teenagers and some low skilled individuals
whose unemployment benefits have expired. However, most of these jobs will
end after six months so employers can replace those workers with others to
get an additional tax credit.
Of course the numbers get even more compelling for employers to
provide returning veterans with temporary minimum wage jobs, as the higher
$5,600 tax credit effectively reduces the minimum wage to only $1.87 per
hour. If an employer hires a "wounded warrior", the tax credit is
$9,600 which effectively reduces the six-month minimum wage by $9.23 to
negative $1.98 per hour. This will encourage employers to hire a
"wounded warrior" even if there is nothing for the employee to do.
Such an incentive may encourage such individuals to acquire multiple no-show jobs
form numerous employers. As absurd as this sounds,
history has shown that when government created incentives, the public will
twist themselves into pretzels to qualify for the benefit.
The plan creates incentives for employers to replace current minimum
wage workers with new workers just to get the tax credit. Low skill workers
are the easiest to replace as training costs are minimal. The laid off
workers can collect unemployment for six months and then be hired back in a
manner that allows the employer to claim the credit. The only problem is that
the former worker may prefer collecting extended unemployment benefits to
working for the minimum wage!
The $4,000 credit for hiring the unemployed as well as the explicit
penalties for discriminating against the long-term unemployed will result in
a situation where employers will be far more likely to interview and hire
applicants who have been unemployed for just under six months. Under the law,
employers would be wise to refuse to interview anyone who has been unemployed
for more than six months, as any subsequent decision not to hire could be met
with a lawsuit. However, to get the tax credit they would be incentivized to
interview applicants who have been unemployed for just under six months. If
they are never hired there can be no risk of a lawsuit, but if they are
hired, the start date can be planned to qualify for the credit.
The result will simply create classes of winners (those unemployed for
four or five months) and losers (the newly unemployed and the long term
unemployed). Ironically, the law banning discrimination against long-term
unemployed will make it much harder for such individuals to find jobs.
At present, I am beginning to feel that over regulation of business
and employment, and an overly complex and punitive tax code is currently a
bigger impediment to job growth than is our horrific fiscal and monetary
policies. As a business owner I know that reckless government policy can
cause no end of unintended consequences.
As I see it, here are the biggest obstacles preventing job growth:
1. Monetary policy
Interest rates are much too low. Cheap money produced both the stock
market and real estate bubbles, and is currently facilitating a bubble in
government debt. When this bubble bursts the repercussions will dwarf the
shock produced by the financial crisis of 2008. Interest rates must be raised
to bring on a badly needed restructuring of our economy. No doubt an
environment of higher rates will cause short-term pain. But we need to move
from a "borrow and spend" economy to a "save and produce"
economy. This cannot be done with ultra-low interest rates. In the short-term
GNP will need to contract. There will be a pickup in transitory unemployment.
Real estate and stock prices will fall. Many banks will fail. There will be
more foreclosures. Government spending will have to be slashed. Entitlements
will have to be cut. Many voters will be angry. But such an environment will
lay the foundation upon which a real recovery can be built.
The government must allow our bubble economy to fully deflate. Asset prices,
wages, and spending must fall, interest rates, production, and savings must
rise. Resources, including labor, must be reallocated away from certain
sectors, such as government, services, finance, health care, and educations,
and be allowed to into manufacturing, mining, oil and gas, agriculture, and
other goods producing fields. We will never borrow and spend our way out of a
crisis caused by too much borrowing and spending. The only way out is to
reverse course.
2. Fiscal policy
To create conditions that foster growth, the government should balance the
budget with major cuts in government spending, severely reform and simplify
the tax code. It would be preferable if all corporate and personal taxes
could be replaces by a national sales tax. Our current tax system discourages
the activities that we need most: hard work, production, savings, investment,
and risk taking. Instead it incentivizes consumption and debt. We should tax
people when they spend their wealth, not when they create it. High marginal
income tax rates inflict major damage to job creation, as the tax is
generally paid out of money that otherwise would have been used to finance
capital investment and job creation.
3. Regulation
Regulations have substantially increased the costs and risks associated with
job creation. Employers are subjected to all sorts of onerous regulations,
taxes, and legal liability. The act of becoming an employer should be made as
easy as possible. Instead we have made it more difficult. In fact, among
small business owners, limiting the number of employees is generally a goal.
This is not a consequence of the market, but of a rational desire on the part
of business owners to limit their cost and legal liabilities. They would
prefer to hire workers, but these added burdens make it preferable to seek
out alternatives.
In my own business, securities regulations have prohibited me from hiring
brokers for more than three years. I was even fined fifteen thousand dollar
expressly for hiring too many brokers in 2008. In the process I incurred more
than $500,000 in legal bills to mitigate a more severe regulatory outcome as
a result of hiring too many workers. I have also been prohibited from opening
up additional offices. I had a major expansion plan that would have resulted
in my creating hundreds of additional jobs. Regulations have forced me to put
those jobs on hold.
In addition, the added cost of security regulations have forced me to create
an offshore brokerage firm to handle foreign accounts that are now too
expensive to handle from the United States. Revenue and jobs that would have
been created in the U.S. are now being created abroad instead. In addition, I
am moving several asset management jobs from Newport Beach, California to
Singapore.
As Congress turns up the heat, more of my capital will continue to be
diverted to my foreign companies, creating jobs and tax revenues abroad
rather than in the United States.
To encourage real and lasting job growth the best thing the government can do
is to make it as easy as possible for business to hire and employ people.
This means cutting down on workplace regulations. It also means eliminating
the punitive aspects of employment law that cause employers to think twice
about hiring. To be blunt, the easier employees are to fire, the higher the
likelihood they will be hired. Some steps Congress could take now include:
a. Abolish the Federal
Minimum Wage
Minimum wages have never
raised the wages of anyone and simply draw an arbitrary line that separates
the employable from the unemployable. Just like prices, wages are determined
by supply and demand. The demand for workers is a function of how much
productivity a worker can produce. Setting the wage at $7.25 simply means
that only those workers who can produce goods and services that create more
than $7.25 (plus all additional payroll associated costs) per hour are
eligible for jobs. Those who can't, become permanently unemployable. The
artificial limits encourage employers to look to minimize hires and to
automate wherever possible.
By putting many low skill
workers (such as teenagers) below the line, the minimum wage prevents crucial
on the job training, which could provide workers with the experience and
skills needed to earn higher wages.
b. Repeal all Federal
workplace anti-discrimination Laws
One of the reasons
unemployment is so high among minorities is that business owners
(particularly small business) are wary of legal liability associated with
various categories of protected minorities. The fear of litigation, and the
costly judgments that can ensue, are real. Given that it is nearly impossible
for an employer to control all the aspects of the workplace environment,
litigation risk is a tangible consideration. Given all the legal avenues
afforded by legislation, minority employees are much more likely to sue
employers. To avoid this, some employers simply look to avoid this outcome by
sticking with less risky employee categories. It is not racism that causes
this discrimination, but a rational desire to mitigate liability. The reality
is that a true free market would punish employers that discriminate based on
race or other criteria irrelevant to job performance. That is because
businesses that hire based strictly on merit would have a competitive
advantage. Anti-discrimination laws titled the advantage to those who
discriminate.
c. Repeal all laws
mandating employment terms such as work place conditions, over-time,
benefits, leave, medical benefits, etc.
Employment is a voluntary
relationship between two parties. The more room the parties have to negotiate
and agree on their own terms, the more likely a job will be created. Rules
imposed from the top create inefficiencies that limit employment
opportunities. Employee benefits are a cost of employment, and high value
employees have all the bargaining power they need to extract benefits from
employers. They are free to search for the best benefits they can get just as
they search for the best wages.
Companies that do not
offer benefits will lose employees to companies that do. Just as employees
are free to leave companies at will, so too should employers be free to
terminate an employee without fear of costly repercussions. Individuals
should not gain rights because they are employees, and individuals should not
lose rights because they become employers.
d. Abolish extended
unemployment benefits
In addition to being a
source of emergency funds, unemployment benefits over time become more of a
disincentive to employment than anything else (although the disincentive
diminishes with the worker's skill level -- i.e. high wage workers are
unlikely to forego a high wage job opportunity to preserve unemployment
benefits). For marginally skilled workers unemployment insurance is a major
factor in determining if a job should be taken or not.
Even if unemployment pays
a significant fraction of the wage a worker would get with a full time job,
the money may be enough to convince the worker to stay home. After all, there
are costs associated with having a job. Not only does a worker pay payroll
and income taxes on any wages he earns, the loss of unemployment benefits
itself acts as a tax. Plus workers must pay for such job related expenses as transportation, clothing, restaurant meals, dry cleaning
and childcare, and they must forgo other work that they could do in their
free time (providing care for loved ones, home improvement, etc.).
Understandably, most
people also find leisure time preferable to work. As a result, any job that
does not offer a major monetary advantage to unemployment benefits will
likely be turned down. This entrenches unemployment insurance recipients into
a class of permanently unemployed workers.
It is no accident that
employment increases immediately after unemployment insurance expires for
many categories of workers. In fact, many individual will seek to max out
their benefits, and remain unemployed until those benefits expire. If they
work at all, it will be for cash under-the-table, so as not to leave any
money on the table.
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For a great primer
on economics, be sure to pick up a copy of Peter Schiff's hit economic
parable, How an Economy
Grows and Why It Crashes.
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