This week, it was announced that the unemployment rate in the United States had fallen to 7.8%, the lowest rate since President Obama took office in 2009.  The data show that 325,000 jobs have been added to the economy during Obama’s tenure, numbers that are sure to be used as a talking-point in his favor in these last weeks preceding the November election.  At a rally at George Mason University, Obama noted, “We’re moving forward.  This morning, we found out that the unemployment rate has fallen to its lowest level since I took office… More people are getting jobs.”  This, a claim made all the more ironic, as GMU has perhaps the highest concentration of economists resistant to the Keynesian model on which the President bases nearly all of his fiscal and monetary decisions.

Keith Hall, from The Mercatus Center at GMU, points out that job growth over the last two months has largely been due to an increase in government jobs and that the private sector actually lost 4000 jobs in that time period.  Veronique de Rugy and Jason Fichtner, also from the Mercatus Center, include numbers of discouraged workers (those who have ceased all attempts at finding work) and part-time workers who desire full employment, resulting in an unemployment figure of 14.7%.

Many a commotion are made over the perceived need to at once lower the unemployment rate to what is considered to be a “natural” rate of around 5%.  Last year, President Obama proposed the American Jobs Act, which was expressly designed to “put more people back to work”.  Mitt Romney, in responding to a question in last week’s presidential debate, said, “This is about getting jobs to the American people,” demonstrating that concern over unemployment numbers, or at least the appearance thereof, is a trait that crosses party lines.

Though unemployment can be a telling statistic in understanding the health of an economy, all of the rhetoric about the need to create more jobs obfuscates that which is far more critical:  the need to maximize production.

Allow me to illustrate this point with an admittedly simplistic example.  Imagine for a moment a business that manufactures paper clips.  Suppose the owner, in meeting the demand of consumers, has a quota of 5000 paper clips per day, and must decide the best way to go about making paper clips.  On the one hand, he could employ 250 blacksmiths to toil away at making 20 small, delicate paperclips each, every day.  Or perhaps he could invest in machinery capable of producing even greater than 5000 paper clips daily while only hiring ten employees to run and maintain the machinery.

It is plainly obvious which example would be preferred by the businessman.  Using the machinery he would be able to produce more paperclips at a cheaper rate, expand his market share, and receive far greater profits.  It is also quite apparent that using the machinery would benefit the consumer, as the paper clips would achieve supply levels to match demand and would be far cheaper than had they been made by hand by a skilled tradesman.  Yet even in clear examples such as this, when the question of the well-being of the workers is asked, invariably there will be heard an outcry concerning those displaced workers who could otherwise have been employed had the businessman simply chosen to do things less efficiently.

On the contrary, even those unemployed tradesman are better off, in the long run, because of the increased production and efficiency.   When production is maximized, opportunity costs are decreased substantially which results in diminished marginal utility for various goods.  When this happens, individuals are able to spend money and resources on projects that would otherwise have been too expensive or frivolous.  Have you ever wondered why there were no nail salons in the middle ages?  Was it because everyone had perfect nails or else no one considered making their nails look better?  No, it was because most people had to toil in the fields just to have enough food to eat that wasn’t stolen by feudal lords.  With the advent of technological improvements, capital savings and investment, and private property rights, farmers became capable of producing far more food than they would need for themselves, with far fewer man-hours.  This generated wealth, not just for the farmers, but for everyone, as now resources could be spent on things much less necessary than food production, such as nail salons, motion pictures, and exercise clubs.

What Not to Do

Full employment is the easiest thing in the world to get.  Simply force industries to do things less efficiently, or else force people into slavery.  The Soviet Union had full employment by doing those very things, and also no food in the stores and millions of citizens starved to death.

Full employment is simply the means with which to achieve full production.  When taken as an end unto itself, it is easy to justify policies that destroy production, and by extension wealth, just to achieve a condition which is simply one indicator of a healthy economy, and by itself does not a healthy economy make.  The broken window fallacy fools us again.

Understanding what Hazlitt refers to as “the fetish of full employment” will allow us to recognize the disastrous policies put forth by politicians, as in, for example, President Obama’s American Jobs Act.

One proposal was to spend $35 billion to “protect the jobs of teachers, police officers, and firefighters.”  Sounds noble; who doesn’t like those people?  However, I recognize two immediate problems with this proposal.  First is that the best this type of spending can accomplish in the long run is to break even on the jobs numbers.  The government doesn’t have money to give out (unless it prints it, but that’s a different article).  The federal government cannot create wealth, and so the bill is funded through revenues collected from taxpayers.  The $35B to maintain public-sector jobs (notice, it doesn’t even say to add new ones) is $35B that could have been spent to employ private-sector employees, either directly or through investment into new industries.  And since there will need to be a substantial bureaucracy to manage the disbursement of those funds, there will more than likely be a net loss. 

Secondly, if teachers, officers, and firefighters are in danger of losing jobs, might that not be a signal of the decreased demand for those occupations?  It is at least a possibility.  Imagine a bill to maintain the employment of the paper clip blacksmiths from the earlier object lesson.  That money would have to be taken from taxpayers with which they would be incapable of hiring workers in other areas and would also result in them having to pay higher costs for paper clips than they otherwise would have.  This kind of government spending to stimulate or maintain employment levels only benefits certain privileged groups while harming all others.

Incidentally, another section of the American Jobs Act, proposed spending $15 billion on a program that would “hire construction workers to help rehabilitate and refurbish hundreds of thousands of foreclosed homes and businesses.”  In a flourish of largely unrecognized irony, the president suggested increasing employment by literally fixing broken windows.

What to Do:  Increase Employment While Maximizing Production

If increasing employment is desired while not harming production, there are a number of pretty simple things that the federal government could do, though most are not politically popular, so much so that some, I think, will never happen in my lifetime.

The first thing to do is to eliminate the federal minimum wage (and then have all the states eliminate their minimum wages as well).  It is often times not well understood that wages are simply prices; the price of labor.  Wages cannot exceed the value added to a product or service by the labor itself.  When a minimum price is set for labor, this simply means that workers are prevented from taking jobs in which the value of their labor would not be equal to that cost.  This prevents low-skilled workers from obtaining first jobs in which they could acquire the skills and experience necessary to move up to higher paying jobs.  These low-skilled workers are disproportionally young and are ethic minorities.  For this reason, it is my opinion that minimum wage laws are among the most racist laws currently in practice.

Another option would be to repeal business regulations that protect certain workers from competition or otherwise restrict entry into certain labor markets.  In some cities, such as New York, the cost of licensing to operate a taxi cab can be hundreds of thousands of dollars.  These fees are justified as protecting consumers from phony cab drivers who might try to harm them; but whom are they really protecting?  Why, of course, the big taxi companies who are the only ones capable of paying the prohibitively high fees.  The restrictions keep people from working a job they might otherwise be capable of doing, and raise prices for consumers.

Yet a third option would be to eliminate welfare programs that incentivize unemployment as a means to live off the government dole.  These programs are often written with the best of intentions; to prevent those people who are down on their luck from falling into poverty.  Oftentimes, however, this creates a scenario in which workers are only working for the difference between their wages while employed, and the money they receive in idleness from government relief.  I believe that the extension of unemployment benefits to 99 weeks was a terrible idea and likely resulted in increasing or else extending unemployment.

In conclusion, we must not be fooled by policies that would claim to increase employment only to do nothing of the sort, or even worse, to diminish production and create worse problems.  As Henry Hazlitt correctly identifies:

“The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living?”

Notes

Many of the ideas found this this article were first revealed to me in Henry Hazlitt’s Economics in One Lesson, in particular chapters 7, 8, 10, and 19.  You can find the text of the entire book here.

  • diaz

    Another thing to add is when Obama says that there is more job growth, most the jobs that are being added are the low wage jobs that people live on check to check. There’s enough lawyers and burger flippers but we don’t have enough jobs in between. Making the gap between classes larger.
    Also I’m not particularly sure what removing min-wage would do to benefit the economy.
    The welfare removing idea I understand, I know people who smartly live off the government b/c they know they’ll make more money that way and loose money getting an actual job, that says something about our government if these type of programs are discouraging people to work.
    I feel you should write about your opinion on student debt.