Romney in September, in a speech detailing a 59-point job creation proposal. (AP photo)
Rhetoric aside, since when do businesses care about job creation?
COMMENTARY | January 11, 2012
Henry Banta points out that corporate leaders’ goal is to make a profit, and that ‘any sane businessman wants to employ as few people as he can.’ If jobs get in the way of profits, the jobs go – as Mitt Romney well knows.
By Henry Banta
We’ve been hearing a lot from Governor Romney about how his experience as a businessman makes him an expert on job creation. While there has been some challenge to his claim of actually having created jobs, the basic notion that business experience gives a special insight into the creation of jobs deserves a lot more attention from the press than it has gotten. In particular, how do the policies promoted by the business community actually relate to the creation of jobs?
Start with a simple fact: The role of businessmen in our economy is not job creation. Businesses and their leaders are not rewarded for the number of people they employ. They are in business to make a profit. They have no incentive to create jobs per se. Capitalist markets reward profit, not employment. Indeed any sane businessman wants to employ as few people as he can. If jobs get in the way of profits, jobs go. (This is one aspect of the matter that Romney should remember well.)
We are, of course, greatly concerned about how well the economic system as a whole produces jobs. But we do not expect this to be the goal of any particular business. Since 1946 the federal government by statute has had a role in promoting and maintaining an adequate level of employment throughout the economy.
This problem of promoting and maintaining an adequate level of employment throughout the economy is very different from the profit-maximizing problems confronting any particular business. Experience in one is of little help in the other. Dealing with nationwide unemployment requires a wholly different kind of understanding of our economy. The politician, in the first instance, must be concerned about creating and maintaining an adequate level of consumer demand which, as we are endlessly reminded, is 70 percent of the economy. The responsibility of seeing that the economy operates at something close to full employment is what is expected of the government.
The problems involved and the decisions required are not the same as those confronting a particular business. Paul Krugman demonstrated the difference by a simple example: a businessman who increases his firm’s profits by exporting jobs to a low wage country is a success. A political leader who is responsible for exporting jobs is a failure.
Of course there is an argument to be made that in seeking profit business must make investments that promote employment. But whatever appeal this idea has in the abstract, it comes apart when subjected to scrutiny. The corporate world spends billions of dollars on efforts to influence public policy. The question is, what kind of policies do they promote? Do they promote policies that would increase aggregate demand and raise employment across the economy? Or do they simply promote measures that would advance their own narrow special interests?
It is impossible to review all of the various public policy positions currently being advanced by the legions of corporate lobbyists, but almost all of them fall into two categories. The first are the broad and vague, like the all time favorite, “comprehensive tax reform,” or the elimination of “job-killing regulation.” And, of course, there is the ever-present plea for lower taxes, principally in the form of keeping the Bush tax cuts. If these could raise overall employment we would have exited the Bush Administration in economic nirvana. The truth is that the corporate world has no broad economic proposals to address unemployment other than to call for a continuation of the failed Bush policies.
It is worth remembering when evaluating general appeals for lower taxes and less regulation that the period from the end of World War II to the mid-1970s was the longest period of sustained growth and increased productivity in our history. It saw the greatest period of gain for the middle class – and it was also the period denounced by President Reagan as a time of high taxes and excessive regulation.
The second category of policy concerns for business are quite narrow and specific. They are, however, largely indifferent to any notion of job creation. For example, Governor Romney, in common with the other presidential candidates, has talked about the high rate of taxes applicable to U.S. corporations. It is argued that anything that lowers this tax rate makes U.S. corporations more “competitive” and therefore helps U.S. jobs. What gets lost is the notion of “effective tax rate” – that is, the rate actually paid. There is a serious hostility in the corporate world to any discussion of the tax advantages enjoyed by multinational firms even though these advantages, in effect, subsidize the export of American jobs.
Martin A. Sullivan reported (Tax Notes, September 13, 2010) that between 1999 and 2008 employment by majority-owned foreign affiliates of U.S. parent corporations grew from 7.8 million jobs to 10.1 million, a 30 percent increase. At the same time the number of U.S. employees of U.S. multinationals declined 8 percent, from 23 million to 21.1 million. In effect, the multinationals were shrinking their manufacturing in the United States.
There is no need to imply that corporations and their leaders are doing something wrong. Presumably they are responding to economic forces in seeking the highest return for their shareholders. The point is simply that maximizing profit is not the same thing as creating domestic jobs.
It’s hard to ignore the immense effort put out by the business community defending the tax break given to hedge fund and private equity managers by treating a large part of their income as “carried interest” on which they only pay a 15 percent tax, and then only when they chose to repatriate it from whatever tax haven they claim to have “earned” it. If there is a job creating effect of this tax break, it is hard to see.
In sum, businessmen who claim special expertise in creating jobs deserve a great deal of skepticism.
High Unemployment Boosts Profit
01/15/2012, 11:52 PM
Thanks for the insightful piece Mr. Banta. You should also explore the fact that high unemployment gives employers financial leverage over the labor pool. There is little need to give extra benefits or more than bare minimum compensation to run of the mill labor when there are replacement workers clamoring at the door. A lower level of unemployment reduces this leverage and is not in the best interest of business overall.
But if labor here were less expensive ...
Pat Goudey OBrien
01/16/2012, 03:09 AM
Some who want to keep their heads in the sand and refuse to recognize the truth in what you say will try to claim that taxes and regulations and the expense of hiring in the US is the problem, and all this off-shoring and exporting of productivity wouldn't be happening if our "business climate" weren't so non-competitive. So, the solution -- get rid of onerous controls and regulations on how businesses conduct their business, and also allow them to pay their labor force any old pittance they like, and they'll stop offshoring our jobs and everything will be fine and dandy. Right?
01/16/2012, 03:43 AM
One company's cheap labor force is found in America.Ikea.
01/16/2012, 06:37 AM
Mr. Banta gets it exactly on point. Only economic circumstances cause the creation of jobs. Not tax breaks or deregulation. In fact, deregulation not only loses jobs for us, but it creates significant dangers for the businesses, that do not participate in "offensive" practices.
As we saw in food services, one bad actor caused harm to the entire spinach, tomato and meat industries, just to name a few.
While "offshoring" of jobs is only possible, because of the creation of acceptably stable political environments. As the stability of these environments crumbles -- on account of the austerity measures, brought on by bad actors engaging in "offensive practices" -- We get pleas for lower taxes/"repatriation rewards", as businesses seek more stable political environments, to avoid the risk of losing their entire investments to potential nationalization etc. Many of those low wage countries, actually mismanage governance, which causes the self defeating instabilities that drive jobs away.
Thus, one can theorize that cuts to our own social programs, actually makes the nation less hospitable a place for jobs to return too.
Of course, Ayn Rand, as an economist, needs to have her degree recalled, because she fails to apprehend the value of the "social contract" that makes it possible or desirable, for people to work for corporations in the first place.
History shows that people will fight to the death, rather than simply starve to death, thus does the "social contract" become a necessity rather than a luxury!
01/16/2012, 05:58 PM
I am one of those business-people whose small business actually has created jobs in the past few years - including over 50 manufacturing jobs. I took a lot of risk to get to this point and I consider job creation one of my main accomplishments. And I have to say - Banta is right!