Nice Speech, But Don’t Expect Much in Terms of New Jobs

I just looked over the President’s Jobs Speech, and have to say I was spot on in my pre-game, I mean pre speech analysis. To recap, there really wasn’t much he could propose that really would make a meaningful difference.

Let me explain with a little lesson in micro economics (yes that was the econ class that turned virtually everyone off from economics). Let’s assume we have a little economy that produces 1,000 widgets a month. And, on average, our little economy consumes 1,000 widgets a month. (For those who chose to sleep through their micro class, a widget is a unit of production; it could be a product or represent a service, like a month’s worth of landscaping). Now let’s further assume that our little economy consists of 100 workers. So each worker, on average, produces ten widgets a month. However there are 11 people that want to be workers and currently only ten are employed. So our government says to our businesses that they will pay the entire salary of the 11th worker, if we just hire him. We oblige, and now our little economy is making 1010 widgets a month! This is great! Except, we are still only consuming 1000 widgets a month. After 10 months we have now created an inventory of 100 extra widgets which is a month’s production for one of our workers. Inventory is not a good thing because it costs our companies money to transport and store our inventory. Our “free” employee is not really free. So even though the government asked our businesses to hire an extra worker, they have to lay him off. In fact, since they don’t want any excess inventory, they layoff one of their original 100 workers until their inventory gets back down to zero. This is called a “recession.” This is also called “The Law of Unintended Consequences.” The government intended to increase employment, but unintentionally caused a reduction in employment by causing a recession.

Unrealistic?  Too simple?  Not really. Let’s look at my little world. If the President said, “Bill if you hire an extra assistant, I will pay their salary.” Would I hire someone? No. Why? Because I don’t need someone sitting around my office doing nothing while my paid assistant does all the work. Even worse, they share the work load, and then when the government stops paying my extra assistant, and I lay them off, my original assistant is used to doing half the work she does now! Why don’t I find more work for my new assistant? Because to find new work I need new customers that require more work. And this is the crux of the problem with the President’s job proposal.

Employers don’t need new employees, they need new customers.
So while all the business incentives are great, they may even keep businesses from closing their doors. They may even help boost profits. But they will do nearly nothing in terms of boosting employment. An employer (other than the Government) is only going to hire someone if they expect to have more customers tomorrow than they have today (or same number of customers, but they spend more.) Period. So what is in this job plan to create consumers that will make employers need to hire workers?

Below I highlight and comment on the major components of the plan. A complete copy of the White House’s Fact Sheet from his speech can be found here.

1.Tax Cuts to Help America’s Small Businesses Hire and Grow.
Cutting Payroll Taxes. If costs go down, maybe some businesses will spend money on things like capital improvements that have been put off. But it will be e very indirect affect. And only if the economy stays in a recovery mode and doesn’t slip into a recession.

Payroll Tax Holiday for New Hires. I think I made my point on this one.

Extending 100% expensing deduction. This is an extension, doesn’t offer anything new.

Reforms to provide access to capital. Right. Ask your banker about this one. It sounds good, but banks are in no position to take on risk, unless they can pass through the risk. And the government can’t afford anymore bad loans. Political speak only.

2. Putting Workers Back on the Job
I’m all for all of this. I’d rather pay people to build/rebuild something than collect unemployment. Trouble is, when the money is gone so are the jobs. Just as we are seeing now as States are laying off workers hired with the last stimulus money. Infrastructure bank is much needed and has proven successful in other countries. Customers? Yes. $140 billion worth? Not so sure.

3. Pathways Back to Work for Americans Looking for Jobs.
You can train ‘em, you can subsidize ‘em, but without new customers no one is going to hire ‘em.

4. Tax Relief for Every American Worker and Family
Cutting payroll taxes in half – how is this really any different than the Bush Tax Cuts that ruined our country (allegedly)? Studies have shown that one time tax relief is a waste of government money. One time tax relief is more likely to be used to pay down debt, replete savings, or buying something really frivolous, like groceries.

Allowing American’s to refinance at mortgages at 4%. Sounds good, but more campaign speak.  Here’s the deal, the banks will write the rules as they do now. We already have a refinance program for homeowners that are in “imminent” risk of default. Try to prove “imminent” to a bank. I rent to a credit repair, budgeting and financial planning firm. It’s taken them over a year to get people refinanced, if at all.

5.Fully Paid for as Part of the President’s Long-Term Deficit Reduction Plan.

Bottom Line.
Typical Keynesian backwards economics. If you build it (hire people) they (consumers) will come. It’s the other way around. Businesses don’t hire more workers unless they expect more business. To the extent that that tax benefits lower costs in 2012, any benefits are lost in 2013 and 2014 when Obama Care taxes, penalties, and higher premiums all kick in. Businesses aren’t going to take on multi-year costs for a onetime cost reduction.

We had zero job growth last month. The $35 billion allocated to teacher rehiring should be enough to hire 450,000 teachers, for one year. That is about enough new jobs to keep the unemployment rate from rising for five months. OK, I’m happy for the teachers and the students, but to call this a “jobs” speech? Sorry, way too little and a lot too late.


1 Response to “Nice Speech, But Don’t Expect Much in Terms of New Jobs”

  1. 1 Mark Ryan September 9, 2011 at 4:21 pm


    Well said! I really like the Econ lesson as well… Surprising how those silly little facts keep getting in the way of the push towards socialism… If he cam out ad said you know what I am going to stop the class warfare, cut all the regulations on business, get rid of Obama care, cut taxes… Basically get out of everyone’s way… Then hey businesses would invest and things might start to get better…

    We really need housing fixed before any real recovery happens however… Maybe we can go back in time and just spend all that money to just pay off everyone’s mortgage… Imagine the consumer engine that would unleash…LOL

    Good stuff… I will keep reading.


    Mark Ryan

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.


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