The word rolls off the lips of our elected officials or candidates as easily as the sound “da” is uttered by a baby.
Trust me, babies probably know more than politicians.
Jobs, at least ones that contribute a marginal increase to tax revenues and a healthier economy, are a result of growth in the Gross Domestic Product (GDP).
There is a definite correlation between employment and GDP, as you can easily see from the chart below.
But what drives GDP? Will the historical relationship between the change in GDP and employment remain in lockstep?
These are very difficult questions to answer, yet both President Obama and Governor Romney seem to think they know the answers. If they truly did, they would be able to explain how job creation works. Instead, we hear the equivalent of an old Seinfeld series expression – yadda, yadda, yadda.
For those who believe in the president’s approach of using stimulus spending as the tool of GDP growth and job creation, consider this: the multiplier effect of government stimulus only works if spending is applied efficiently.
For example, a recently completed freeway project connecting Reno, NV to the state capitol Carson City – a distance of 30 miles – cost $550 million and will shave only 6-8 minutes off the existing commute. There were serious safety issues with the old road, but improvements could have been made for $125 million, bringing US 395 to interstate standards, rather than constructing a whole new interstate highway through rugged terrain, which included a bridge rising 300 feet above the valley floor.
The freeway is complete and the construction jobs are gone. Could we have put the excess $425 million to far better use? Can anyone say if there was a real net improvement to GDP as a result of this project?
I’m sure the $425 million windfall to Nevada must have made Senator Harry Reid happy.
By the way, there are high wind issues that may render the bridge unusable to high-profile vehicles during the winter.
The multiplier effect of government spending has been estimated between .3 and 1.8 by a 2009 IMF study and from .5 to 2.0 by a UC San Diego economist, according to an article in Forbes. That allows for a wide range of error when modeling the effects of government spending. A multiplier of less than 1.0 decreases GDP, which will likely decrease employment.
Not all government spending has the same impact on the economy. When spending is determined by partisan political motives, such as the loan to Solyndra, the risk of a failure is increased and GDP could suffer. On the other hand, spending on stem cell research has great potential to improve GDP through the creation of cures for deadly and debilitating diseases.
There is a high likelihood that the shotgun approach to the stimulus spending since the recession began has resulted in a multiplier effect less than 1.0. It would be the same as going to the race track and placing bets at random. Chances are, you are going to lose.
By contrast, Governor Romney backs a strategy of reducing spending, which frees up capital for private industry. His assumption is that the private sector will create jobs.
It’s a perfectly logical argument, but there are some holes in this approach. For one thing, companies are already sitting on large cash reserves. How much more capital do they need, especially when worldwide demand is sluggish? Will increased production create enough jobs; will it even create enough jobs to absorb the employment requirements of a growing population? After all, steady improvements to productivity bring into question the need for the private sector to create new jobs in an expanding economy.
One wild card neither candidate has addressed is how quickly the baby boom generation will retire. Who knows? But it could make or break any jobs forecast. Many boomers lost much of their retirement nest eggs. Some never had adequate retirement funds set aside to begin with. Retirement will not be an option for many of that generation anytime soon. The bottom line is that the longer the boomers have to work, the fewer employment opportunities will be available for those entering the work force.
Add to that, neither candidate has the power to tweak the world economy through their policies. The United States has yielded much influence to increased international competition over the post-World War 2 era. The trend is irreversible.
The bottom line is that promises to create significant job growth are empty ones. We cannot rely on the historical correlation of GDP growth and jobs. It is a new world in search of new solutions to achieve prosperity. The presidential campaigns of Obama and Romney amount to the most expensive pandering ever unleashed on the American public. Sad to say, based on the dozens of Facebook posts I receive every day, it appears too many people are falling for the charade.
It is bad enough we are being manipulated at a national level. In Los Angeles, the three insider candidates for mayor – Greuel, Garcetti and Perry – also like to talk about job creation.
Councilman Garcetti was the latest to trumpet jobs. No details, of course, other than partnering with local colleges to attract high technology firms, as if such companies have not worked with Southern California’s academic sector before.
It is critical that the insider candidates are asked tough questions about job creation by the public and outsider candidate Kevin James, a former federal prosecutor and radio commentator.
The track record of the mayor and City Council leaves something to be desired. A case in point – despite promises by city officials to end the steady decline of film production in the city, only two of 23 new hour-long dramas will be shot in Los Angeles. The multiplier effect of the lost filming is devastating to the local economy.
As stated in a Los Angeles Daily News editorial: “If only public officials from Washington to Sacramento to city halls were as effective at boosting employment as they are at talking about it.”