If You Have Never Managed So Much As A Hotdog Stand, Can You Successfully Manage A $14 Trillion Economy?
As we approach a decision on what is looking like a $1 trillion dollar so called “stimulus” package, we need to look carefully at the policies of the man in charge – President Barack Obama. This is a man without any history of running anything larger than a pickup basketball game let alone a 2 million employee federal government and the largest economy in the history of the world. And I think that is reflected in the policy decisions and comments we have seen so far.
In the last few months we have heard from the President on job creation. He has said at various times 2.5 million, 3 million and now 4 million jobs “created or saved” – the “saved” comments being classic Obama-speak. If unemployment a year from now is 10% he can say he say it would be 12% if he hadn’t saved 3 million by his policies.
He has also said 80% would be private sector then changed it to 90% which means if job creation is 3 million then we are talking about somewhere between 300,000 and 600,000 government jobs. If you were a betting man I would bet a lot closer to 600,000 than 300,000.
After all this is a Democrat and we all know how popular public jobs are with Democrats, especially union jobs. One can only imagine the pressure being put on the President by the American Federation of Teachers and the American Federation of State, County and Municipal Employee Unions. Unions gave him $10’s of millions in campaign contributions and now they want to be paid back. They did not give him all that money to see public jobs cut. Talk about special interest groups.
It is because of the absolute certainty that government job creation will happen no matter what package is ultimately passed that I have placed the asterisk next to the title. That’s because the 10% unemployment rate I am talking about is the private sector rate not including the public sector (government) rate that will certainly fall during the Obama administration.
According to the BLS (Bureau of Labor Statistics) as of the end of 2008 the unemployment rate overall was 7.1%. But if you break out the public vs. the private sector you will see private sector unemployment is 7.9% and public sector is 2.3%.
Currently there are about 500,000 government workers unemployed (vs. 10.5 million private sector). If we assume the minimum number of new government jobs at 300,000 that would drop the number unemployed government workers to about 200,000 or about 1% of total unemployment. Doing the math that means if you read in the newspaper that national unemployment is 8.7% then public sector or real unemployment will be at 10%.
Rest assured the government workers would be hired whether the construction, factory and office workers are or not.
So here are my 10 reasons non-government job creation will suffer under Obama:
1. Raising taxes on dividends, capital gains and death.
a. Each of these policies will decrease investment and therefore limit job creation. If investment is constrained now, how will raising taxes on investment increase it? If you tax something (investment) you will certainly get less of it to the detriment of job creation.
b. Taxing invested capital (the Death tax) is never a good idea. In fact it is such a bad idea former socialist countries India, China, Russia and Sweden have dropped it. Maybe Obama should talk to Putin about this. Imagine if they taxed your 401K just because it was worth more than an arbitrary amount. That’s what the death tax does. It taxes investments made after taxes have already been paid on the original investment.
2. Government paid health care for those who can afford to pay for it.
a. This is a classic case of building government jobs at the expense of private sector jobs. The recent passage of a new SCHIP (State Children’s health Insurance Plan) allows families with incomes up to $85,000 to get coverage via the government even if they already have private insurance. Obviously if you take customers from a private insurer they will cut jobs. If you have the government provide the same service they will add jobs. Presto more government employment, more private sector unemployment. This is true of every government health care program.
b. The largest health insurance company in the country, Wellpoint, made about $77 profit per policy last year or about 21 cents a day. How many of those 21 cents do you think a government run health insurance plan save? Or do you believe as I do that government employees will have higher compensation, immunity from layoffs and early retirement and thus will increase cost tremendously?
3. Green energy projects.
a. Subsidizing energy just raises the cost of energy. In order to make “green power” competitive, government must subsidize it with credits and tax refunds. Only taxpayer subsidies allow ethanol, wind and solar to be competitive. On their own they would not be viable businesses. In effect taxes from taxpayers become profits for owners of “green” companies because without the tax subsidies there would be no profit for those companies. This is how Al Gore is becoming a billionaire.
b. So in the case of wind for example you actually pay three times:
1. Pay for the green wind power.
2. Pay for the conventional thermal power to back it up.
3. Pay for the tax credit and subsidy.
This raises energy costs for everyone and therefore is detrimental to job creation.
c. See here for Why Wind Power Won’t Work.
4. Demonizing coal and nuclear energy at the expense of competitiveness.
a. Our major competitors – especially in manufacturing – are China, India, Indonesia and S. Korea. All of them are expanding energy via coal and nuclear, the two most efficient sources of electricity. Even green Germany has 26 coal-fired power plants under consideration.
b. Less competitive energy prices means more jobs go overseas and fewer jobs stay here.
5. Attacking free trade decreases exports, one of the few job growth areas in the US.
a. Implying renegotiation of NAFTA and imposing “Buy American” in the stimulus package will invite trade retaliation from other countries. This will hurt exports and cost many more jobs than will be saved by restricting trade. On his last day in office, March 3, 1933 Herbert Hoover signed the “Buy American Act.” The Great Depression followed shortly thereafter.
b. Foreign countries can buy Airbus rather than Boeing, Nokia rather than Motorola and Kubota rather than John Deere – and they will if we arbitrarily institute trade restrictions.
6. The “Employee Free Choice Act” will discourage investment and stifle job creation.
a. This extremely “Un-free” act will disallow secret ballots in union elections. The intimidating nature of union organizing encouraged by this act will most certainly result in more unionization. Are foreign companies more likely or less likely to move work to the US if they know they will face this kind of labor hard-ball? And are American companies more likely or less likely to expand operations here instead of overseas?
b. How can anyone look at Detroit and say this legislation is good for workers? Detroit has been completely controlled by liberal Democrats for three decades and as a result now faces an intractable 20% unemployment rate. Union coercion is good for unions and for the politicians that receive union political contributions. It is not good for an out-of-work person looking for a job because it will mean less business investment and thus fewer jobs. There is no better example of this than the United Auto Workers Union.
7. Raising the minimum wage and not radically reforming the public school system.
a. Statistics show that raising the minimum wage results in layoffs of the least skilled and least educated workers. If a restaurant owner has to suddenly and arbitrarily pay a dishwasher $7.25/hr instead of $5.50/hr he may well buy a washing machine for less than the $300/mo he would save by firing the dishwasher. Or he may hire his children to do the work and keep the money in the family. His third option is to hire a more skilled and experienced worker making $7.00/hr to replace the less skilled one since he will have to pay them both the higher wage. In any case the dishwasher is without a job.
b. Radically reforming public education would create more educated workers who would get better paying jobs by reason of knowledge and skill rather than government mandate. Detroit with its heavily unionized and liberal Democratic government is a prime example of what doesn’t work. If 79% of your high school students do not graduate what good does it do to have a high minimum wage?
8. Giving money to failed blue institutions, public or private.
a. Imagine if Illinois received $2 billion. The first use of the $2 billion would be to pay the backlog of bills sitting in the comptrollers out box. Giving Federal money to pay for what they already owe will not create a single private sector job though once again it may save or even create new government jobs.
b. Subsidizing private companies is just as bad. After giving GM $17 billion taxpayer dollars to stave off bankruptcy Democrats now want to give $7,500 taxpayer dollars via a tax credit for each GM car sold. Obviously this is not a viable business and should be forced into bankruptcy. An economic policy that invests in failure will cost jobs and at great taxpayer expense.
9. Raising taxes on the “rich.”
a. Obama’s plan to lower taxes for 95% of all taxpayers while making up the difference from those making over $250,000 will result in fewer jobs created because 70% of all hiring since 2000 has been from small business owners. These are people who typically take profits as income for tax purposes and if you tax their income at higher rates then they will have less money to invest in new facilities, equipment and employees.
b. According to my calculations, the two highest individual income tax rates, 33% and 35%, would have to be raised to 44% and 47% in order to make up for the difference. Add to that 12.4% for social security taxes Obama is recommending on high-income earners and you have a marginal tax rate increase from 35% to 60% of income. Now a small businessman must always consider the risk/reward ratio of investing his capital in expansion of facilities, equipment and employees. Under Obama’s plan if he is right and profits ensue from his risk taking, the risk-free government gets 60% of his profits whereas if he’s wrong he absorbs 100% of the losses. It is only logical there will be much, much less investment under this policy.
Number ten is “all of the above.” Although each of the 9 policies enumerated above reduces private sector hiring by an incremental amount combined they add up to an economic philosophy that does not work. This is a result of liberal elitist decision makers having no real experience in the private sector and therefore no real understanding of investment returns as they relate to risk.
They see all profit in the private sector as “reward” without taking into account the “risk” that preceded it. Making a profit is easy and somewhat suspect to people who have been so called public servants all of their professional life. Barack Obama and Joe Biden fit that description to a tee.
And there are many examples of liberal economic policies that do not work. Just look at Michigan whose governor was called “the best governor in America” by Obama in Oct 2008. Fellow Harvard Law grad Jennifer Granholm has managed to enact a series of taxes during her 6-year reign that has brought Michigan’s economic activity to a halt and has resulted in the highest unemployment rate in the country, 10.6%, up 70% since she took office. In contrast her predecessor, Republican John Engler, decreased taxes 32 times resulting in a 3.2% unemployment rate in 2000 the lowest unemployment rate in Michigan’s history.
However, Granholm has managed to increase the revenue of one major organization in the state: the state government itself whose budget has gone up by $7 billion during her time in office. Her latest tax fiasco was new business taxes enacted in 2008 designed to increase revenue by $1.3 billion. Her illogical argument was the state would take this money from businesses and “invest” it in a manner that would encourage business expansion. Sounds a lot like Obama, doesn’t it?
This shows how out of touch these liberal Democratic elitists are – they really believe they know how to invest your money and manage your affairs better than you do. This arrogance is the result of being educated in the “American Madrassa” we call our education system. If you spend year after year (19 in Granholm and Obama’s case) sitting in classrooms being taught that government activity is good and commercial activity is bad then you develop the “belief” that you need to “change” the capitalist system.
This then is the source of “change we can believe in” and the conceptual framework of governance we will see going forward over the next four years. But overconfidence in the face of ignorance must ultimately result in failure.
So if you like the way Michigan works under Granholm then you will love the way America will work under Obama. Just hold on to your wallet though because the elitist pickpockets are coming. That’s one thing they both learned at Harvard.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation.