As the unemployment rate crossed the double digit barrier for
the first time since Michael Jackson learned to moonwalk, President Obama
announced that he will convene a "jobs summit" to finally bring the
problem under control. Using all the analytic skill that his administration
can muster, the President is determined to figure out why so many people are
losing their jobs and then formulate a solution. That's a relief; for a while
there, I thought we were in real trouble! In fact, the absolute last thing
our economy needs is more federal government interference. If Obama really
wants to know what's behind entrenched joblessness, he should start by
looking at the man in the mirror.
Obama is pursuing, with unprecedented vigor, the same policies
that have for decades undermined our industrial base and yoked us to an
unsustainable consumer/credit driven economy. This doubling down on
Washington's past failures is destroying jobs at an alarming rate. Today we
learned that the September trade deficit surged by 18.2%, the largest gain in
ten years. Much of the deficit resulted from Americans spending
Cash-for-Clunkers stimulus money on imported cars - or "American" cars
loaded to the sunroof with imported parts. In exchange for more domestic
debt, we have succeeded only in creating foreign jobs.
An article in this week's New York Times by veteran
writer Louis Uchitelle confirmed a fact that I have been alleging for years.
Uchitelle pointed out that foreign outsourcing of component manufacturing has
led to consistent overstatement of U.S. GDP and productivity. The connection
goes a long way to explain why we keep losing jobs even as GDP is apparently
expanding.
As our economy becomes less competitive due to higher taxes,
burdensome and uncertain regulations, and capital flight, more manufacturing
and services will be outsourced to foreign firms. However, the flaw in GDP
calculation allows the output of those foreign workers to be included in our
domestic tally. Since we count the output but not the worker responsible for
it, government statisticians attribute the gains to rising labor
productivity. To them, it looks like companies are producing more goods with
fewer workers.
The reality is that we are producing less with fewer workers.
The added "productivity" comes from higher unemployment and larger
trade deficits. This is a toxic formula that will have lethal economic
consequences.
Don't expect the brain trust at the President's job summit to
fret much about these details. That public relations stunt will likely ignore
the root cause of the economic imbalances and instead stress the need for
government spending on training and education, i.e. more public debt. The
unemployed do not need government theatrics, they need actual jobs. But as
long as the government props up failed companies, soaks up all available
investment capital, discourages savings, punishes employers, and chases
capital out of the country, jobs will continue to be lost.
To really fix the unemployment problem, the President must look
past his peers in government and academia to understand how jobs are actually
created. In the private sector, all individuals have a choice to either work
for themselves or someone else. Since labor is far more productive when
combined with capital (office equipment, machinery, business models, and
intellectual capital), those who lack these assets themselves often choose to
work for others who have sacrificed to accumulate them. This increased
productivity is shared between the worker and the owner of capital, and both
are better off.
However, for one person or company to choose to offer a job to
another, there must be an incentive to do so, and they must have the
necessary capital. In the first place, employers must commit to paying wages
and benefits, comply with government mandates and regulations, and subject
themselves to potential lawsuits from disgruntled employees. All of these
costs must be measured against the extra profits an employer hopes to earn by
hiring an additional worker.
If profit opportunities exist, jobs will be created. Otherwise,
they will not. Of course, anything the government does to raise the cost of
employment, such as a higher minimum wage, mandated heath care, or greater
regulatory burdens, not only prevents new jobs from being created but also
causes many that already exist to be destroyed. Anything that diminishes the
profit potential of extra hiring will diminish the number of job
opportunities that are created. Also, since it is after-tax profits against
which employers measure risk, the higher the marginal rate of income tax, the
less likely employers will be able to hire.
Finally, in order to hire workers, employers must have access to
capital to expand operations. Anything the government does to discourage
capital formation automatically diminishes job creation. By running the
largest federal deficits in history, Barack Obama is diverting all available
capital to the Treasury, and is in effect waging a war against private
capital formation.
If the President's summit truly intends to find the root cause
of unemployment, his advisers don't need Bureau of Labor statistics or
complex modeling software, just the courage to drop their dogmatic belief in
central planning and embrace the laws of economics.
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inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter
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Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Also
by Peter Schiff
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tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
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