Sunday, May 27, 2012

Does the Government Know What It Is Doing When It Tries to Create Jobs?

Published in The Tennessean, Sunday, May 27, 2012 and Forbes with archives.
  
by Richard J. Grant
   
Listening to the pundits debate over which presidential candidate would be best at “creating jobs” is a distraction. From a governmental perspective, job creation is at best a passive activity. Otherwise, government intervention destroys jobs and wealth.

When Republican presidential candidate Mitt Romney claimed that his business activities created up to 100,000 jobs, it was relatively easy to see what he meant. As a result of business decisions in which he was involved, the affected businesses grew such that, at some point in time, their operations employed 100,000 people.

But most business startups fail; and if they must fail, then the sooner the better. Pursuit of an unworkable idea uses up more resources than it is worth. Losses are society’s way of saying, “We would rather you not do this.” There are better ways to use your time and resources.

Among the resources that you would employ are people. Despite the losses to your company, you might want to keep them employed. But society disagrees and will eventually force you out of business by draining you of your capital. Those people are better employed elsewhere.

If government steps in with a bailout to thwart this process, then it too is thwarting the will of society. It is forcing people to pay more for a particular use of resources than that use is worth to them. The politicians might crow about the number of “jobs saved,” but they are oblivious to the net social loss of those business and employment relationships that will never be created.

In a very real sense, government bailouts of businesses destroy more jobs than they create. The only exception would be if the government agents happened to act just as an insightful private entrepreneur would have acted. Not only is this unlikely, if the best the government can do is to mimic private business, then the government adds nothing. Further, the government agents have access to a different source of capital, a source that is ultimately not voluntary. Even if the “saved” business is turned around and becomes profitable again, we are unable to say that society is better off. We are unable to say that a private solution would not have been superior.

In a free society, which implies a free market, businesses survive only by providing services of greater value than the resources they use in production. The less free a society is, the less confident we can be that a company is truly profitable. Many companies are profitable only because they receive government subsidies and regulatory protection, which means that they are not really profitable. The bailout of GM, for example, cost far more than the current value of the whole company.

In what sense can a government create jobs or, more broadly, wealth? Those who claim the government cannot create wealth are correct only to the extent that private provision of those services would have been superior. In the few cases — such as national defense, foreign relations, policing, judicial, and infrastructure-management services — where we are able to agree on collective provision, we can claim a net benefit. But it is limited. There are private aspects and competitors to all of these services.

The best president will be the one that is able to provide these basic services while destroying the fewest number of private-sector jobs. That would rule out the incumbent.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1


Copyright © Richard J Grant 2012

Sunday, May 20, 2012

Do American States And Municipalities Believe They Can Play Greek Games And Get Away With It?

Published in The Tennessean, Sunday, May 20, 2012 and Forbes with archives.
by Richard J. Grant
Athens was not built in a day. Whatever its geographical advantages and disadvantages throughout the centuries, the attitudes and decisions of its citizens have played no small part in its fate to the present day. Although we might wish to look fondly on Greek contributions to philosophy and culture, recent political choices have wrought economic and cultural consequences that have made the word “Greece” synonymous with “failure.”
As if to demonstrate that there are no Third World countries, but only Third World governments, recent Greek governments have raised expectations and spent far more than they are capable of collecting as tax revenue. The corruption and economic stagnation that accompany the growth of any government’s reach and power, untempered by respect for private property rights, now threaten all those foolish enough to promise bailout money.
Many of the same people who just voted for socialist political parties now withdraw as much cash as possible from their bank accounts. Everyone knows that an exit from the euro would be engineered only to enable the Greek government to issue its own currency in the hope that it might use that power to tax away from its citizens the purchasing power that they will not freely give up.
Someone must pay for government spending. If an informed electorate is willing to accept the commensurate tax rates, then it is sustainable.
Seemingly unaware that First World status is social capital that must be maintained through eternal vigilance, the government of the United States has heaped new regulatory burdens upon its citizens, and 40 percent of its annual spending is borrowed. Were Archimedes an economist, he might now warn us that with a bit more leverage we too could move toward Greece.
California has just discovered that its budget deficit will rise to almost double what was predicted at the beginning of the year. Many of the same Californians who voted for higher spending, higher tax rates, and heavier regulations have been moving to more-conservative, lower-tax states such as Tennessee.
Even states like Tennessee have pockets of foolishness. Nashville’s mayor is requesting a 13-percent increase in property-tax rates. In case taxpayers balk, they are threatened with police layoffs and reductions in teacher hiring – a classic political ploy. Knowing that such services are voters’ highest priorities, the mayor acts as though they are his lowest priorities, which he would cut first.
Three years ago, the Metro government accepted an $8 million federal grant to hire 50 police officers. But the money would have to be paid back if Metro failed to keep the officers after three years. With this explicit obligation and the expectation of sufficient future property-tax revenues, Nashville’s government leveraged its property speculation.
Now the city is forced to do what it should have done before: live within its means and set its own priorities. Instead, it jeopardized its 10th Amendment protections by taking federal grants with the inevitable strings attached.
On joining the European Union, Greece put its sovereignty at risk. The profligacy and shortsighted governance that led to its dependence on bailouts gradually reduced the value of that sovereignty.
Living on the confidence of past prosperity, many American states and municipalities believe they can play the same game and get away with it. It might be a long way from Nashville to Athens, but they have more in common than a Parthenon.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1 

Sunday, May 13, 2012

Do we have a shortage of money?

Published in The Tennessean, Sunday, May 13, 2012 and Forbes with archives.

by Richard J. Grant

A reader asks why people believe that “the printing of money by the U.S. government is such a bad idea.” It seems to her that it would not cause inflation “in a society that is glutted with goods, services, capacity and unemployed people as is America today.”

Let us set aside for a moment the question of how you can inflate without causing inflation and what it means to be “glutted with goods” in a world of scarcity. She asks a very important question: “What if the government simply created new money to buy things such as disaster relief or infrastructure repair or research to benefit society?”
She is not alone in believing that no one would be hurt by this. On the surface, it really does appear that “no one would have to borrow it, lend it, or be taxed to pay it back.” We can skip over the roundabout process through which federal government spending is financed by issuing Treasury bonds and then having the Federal Reserve buy those bonds with money it creates. The net effect is that the government spends money it creates from nothing.
The belief that no one would “be taxed to pay it back” is widespread. That is why inflation of the money supply has been so popular with governments throughout the centuries. At first glance — which is more than the average citizen gives it — it does appear that we are getting something for nothing.
We see more government dollars; and we see those dollars going into disaster relief, infrastructure repair, and research. What we don’t see are those goods that are never produced and services that are never provided because the current resources were bid away by government spending. Even at a time when people and resources are unemployed and wages and other prices are falling, inflation of the money supply keeps those prices higher than they would have been.
Although in the short term it appears that more money means more wealth, all we really have is more money. If prices are higher than they would have been, it means that each dollar buys less than it would have. It is like the story of Yogi Berra at a restaurant. When the pizza arrived the waiter asked, “Mr. Berra, would you like this cut into four slices or eight?” Mr. Berra replied, “Cut it in eight pieces; I’m extra hungry tonight.”
If you have twice as many slices (or twice as many dollars), could you share half of them with the government and still have as much pizza (or wealth) as you had before? You are giving pizza (or wealth) to the government. You are paying a tax. When the government creates money to finance its spending, anyone who holds assets denominated in dollars is paying a tax.
The transfer of resources to the government affects overall spending patterns. The short-term effect that money creation has on interest rates will affect investment patterns, often setting us up for future reversals. Some people will gain, many will lose. But in total, we won’t get something for nothing.
When money is created for political purposes, including the purposes of special-interest groups, it is less useful for its natural social function, the facilitation of trade. It is not more money that we need, but more of what it can and cannot buy.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays. 

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1
http://www.forbes.com/sites/richardgrant/2012/05/13/do-we-have-a-shortage-of-money/
Copyright © Richard J Grant 2012



Sunday, May 06, 2012

We Are All Austerians Now

Published in The Tennessean, Sunday, May 6, 2012 and Forbes with archives.

by Richard J. Grant

It is not incorrect to use the word “austerity” to describe an economic policy that places limits on, or cuts, government spending. But it can be misleading. An austere government is strictly frugal and avoids spending on programs that are viewed as nonessential. That is not the same as, nor does it lead to, an austere economy or standard of living.

The best demonstration of this is to note that those governments now embarking on what they call “austerity programs” were not good examples of austerity before now. As with any family, those who made bad decisions in the past have less control over the choices available to them in the future. Those who lacked the discipline to work and save (and to invest wisely) in the past will have fewer resources with which to be frivolous in the future.

This applies to governments as surely as it applies to families. A government that continues to increase its debt-service burden more quickly than its revenue will eventually lose its ability to keep its promises. There is no shortcut to prosperity. There is no end-run around reality. Though touted as an easy path to prosperity, government subsidies and stimulus programs lead us into a trap block as reality runs over us.

That is where people and governments now contemplating “austerity programs” find themselves. They can change or fail.

But change means moving private resources, including people, from one use to another. That always requires thought, time and effort. The changeover leaves many people and resources temporarily unemployed. In societies with heavy government regulation it takes longer and is harder to complete. Usually such societies have higher unemployment anyway. Spain, Greece and Italy did not suddenly stumble into crisis.

Critics of austerity programs claim the programs are not working in Europe and cannot work here. But such critics also have a tendency to treat symptoms rather than causes — they don't seem to know the difference between the two. That is why they rushed us into “stimulus” programs in the face of recession.

Many people are still waiting for recovery from the recession. As conventionally measured, recovery began when the recession officially ended. But a more sophisticated view would recognize that recovery began even before the aggregate symptoms of the downturn appeared. That is why those symptoms of recession occurred: Recession is correction.

If our recovery has turned out to be one of the weakest in American history, it is a direct result of governmental attempts to remove the symptoms of recession. The arbitrary wealth redistribution of so-called stimulus programs and the increased intrusion by regulators continues to misdirect resources and to reduce our adaptability.

Our economic problems don't begin when a downturn begins but long before. It is easier to misdirect business activity during boom times when people are less cautious. Subsidies, special tax breaks and low-interest-rate policies rarely meet with much political resistance. But prosperous times also cause us to underestimate the future damage of new, well-promoted regulations.

Most critics of government austerity have a view of the world that’s too shallow and too short. They fail to recognize the greater sustainability of investment choices guided by private knowledge and how government interference can misdirect those choices long before a recession appears.

The long-term choice is between an austere government and an austere economy.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012