Can America Come Through With Wealth Creation and Good Jobs

8/14/2019 Can America Come Through With Wealth Creation and Good Jobs

1/5

1January 23, 2010

Can America Come Through with Wealth Creation and Good Jobs?

By Michael Rozeff

A correspondent not versed in economics admitted to being confused over consumerism vs.saving. He thinks that it is good for the economy that people consume but also good that they

save so that businesses can invest. This confusion permeates the press and government, reaching

into the highest levels of American policy-making. Unless this confusion is cleared up, America,led by a blind Congress, will continue to stumble into its own lost decade or worse.

Productive jobs are created in the private sector. People find profit opportunities and

exploit them. They do this in all organizational forms: individual proprietorships, partnerships,and corporations. They do this in small, medium, and big businesses. The private sector is the

primary source of productive jobs. Finding and exploiting profit opportunities CREATES

WEALTH by producing goods and services whose value exceeds their costs.

As an example of the direction that America has taken, look at this chart of manufacturing

employment in California over the past 20 years.

Manufacturing jobs, which are the good jobs that pay more because the workers are more

productive in those jobs, are down from near 2 million to fewer than 1.3 million.


2/5

The government sector largely has unproductive jobs, i.e., jobs that do not produce more than

what they cost the taxpayers. For this reason, the more that government taxes and spends, the

more this spending impedes the economy. Government largely DESTROYS WEALTH.

During the same period, government jobs in California have risen substantially:

The unproductive government sector drains capital from the productive private sector. What isworse, the government sector impedes the creation of productive jobs in the private sector in

three other ways: taxation, regulation, and bad laws.

It is obvious that America cannot be a dynamic wealth-producing economy again until this

situation is ended and reversed. Government jobs are good jobsfor those who have them. Thats

because of their high pay relative to the requirements, but everyone else loses. A dynamically

growing economy with wealth creation creates good jobs in a general and widespread fashion,not just for a select few who manage to secure jobs that extract taxpayer wealth.

Funding or financing the private sector, especially to smaller businesses, is currently a problem

because American banks are insolvent. They are holding large amounts of real estate loanswhose value is far less than their book values. These need to be written off. But if the banks

wrote them off, they'd have to go out of business. Despite all the bailouts, Congress has notaddressed this problem.

So far, the Congress, under both Bush and Obama, hasn't come up with a growth program.

None of their new programs have had the proper features, and they actually have been counter-productive. A temporary tax cut, such as was enacted in the 2008 rebates, does not alter


3/5

incentives in the private sector. Spending programs have a negligible or perverse multiplier

impact. The extension of unemployment benefits does nothing to promote growth. Taking over

and funding moribund businesses doesnt create wealth. Stimulating lower mortgage ratesdoesnt promote production in any sustainable way. Entering war after war in foreign lands

absorbs and destroys tremendous amounts of wealth.

The Congress acts as if it is incredibly ignorant of these simple economic facts. It is. It acts as if

it has learned nothing from past experiences that illustrate these truths. It hasnt. It acts as if these

measures will produce enough of a recovery to get them re-elected. Congress does not seem torealize yet how different matters are this time around. The cumulative impact of past misdeeds

and misdirection is now so huge that there is no easy way out.

Meanwhile, everyone knows that a tax INCREASE will occur by yearend. The tax increase willhappen when the tax cuts of the 1990s expire due to a sunset provision. This affects the economy

NOW, as history shows.

It is no wonder that the economy is sputtering.

Another jobs program la FDR or the New Deal will not solve these problems. It will justcreate even more debt. The increases in debt that have already occurred are very large.

They are creating future tax BURDENS and INCREASES that crimp the economy and hold back

productive job creation.

As long as Congress maintains these benighted policies, the economy will suffer and go

downhill. There is no movement on Capitol Hill to reverse the policies of the last 50 years. Whatneeds to be done is simultaneously to cut expenditures and lower tax rates. Laws and regulations

that are impeding entire sectors and industries need to be wiped off the books.

You will notice that I have said almost nothing about the things that worried my correspondent:

consumerism and saving. I focused on what needs to be fixed.

Consumerism means that consumers spend on goods and services. This is NEVER a problem.

The consumer has an infinite appetite for goods. That's an iron law of economics. What

constrains the consumer is INCOME. The government has NO CAPACITY to increase incomeby its own spending. The government only gets resources by taxation and borrowing. They

merely transfer income from the private sector to government. There is no NET increase by such

a transfer.

The private sector can CREATE WEALTH. More wealth provides more INCOME. Income isthe return on wealth. Irving Fisher showed this in 1906 in his famous bookThe Nature of

Capital and Income. Wealth is created whenever anyone finds a profit opportunity that creates ahigher value than the costs of engaging in the activity. Wealth creation is the source of the

income that allows the consumer to spend.

That is why I focused on wealth creation and said that Congress needs to do what it takes to

encourage wealth creation.


4/5

Congress has focused on spending money that it thinks the consumer is not spending. This gets

nowhere. It actually impedes wealth creation by absorbing funds from consumers that they wishto save, where it can be used to finance wealth creation.

This brings up the other item: saving. There are ALWAYS more wealth creating projects outthere than there is funding. But they won't be undertaken if business is uncertain about the future

or if the taxes and regulations impede them. The saving is allocated to the projects, rationed

among them, by the existence of interest rates and required returns on risky endeavors.

The interest rate market at the same time determines how people allocate their wealth between

immediate consumption and saving. At higher interest rates, they save more and consume less.

The wealth created by such higher saving is worth more to them than additional consumptionright now. The choice people always face is between consumption now and greater consumption

later. There is no need ever to worry about this balance. It is the outcome of billions of individual

optimizing choices. This should not even be a public policy decision variable.

But we do have to worry about the conditions under which people are forced to make these

consuming, saving, and investing choices, especially when government influences them for theworse.

People will not fund risky projects (save and provide credit) if the future cash flows are highly

uncertain or if they are going to be absorbed by taxes and compliance costs. Introducing newhealth care and carbon legislation has introduced large uncertainty. So has the prospect of much

larger government deficits going forward and government control over large sectors such as

energy, autos, banks, and health care. Wealth creation cannot operate under these conditions.

In such conditions, people fly to safety. They buy short-term securities issued by the

government. Business then fails to get funded. Wealth creation takes a back seat toCongressional manipulations.

Long-term secular bull markets in stocks begin with stock prices that are very low, such as in1932, 1942, 1949, 1974, and 1982. At such times, prices are discounting the very worst or very

nearly the very worst that can occur. The problems at such times are dire, as they are at present,

but the prices get low enough that, from the point of view of being long stocks, this no longer

matters. The upside option value predominates. The prospect that things can only get better makethe stocks into good investments, even though the majority opinion thinks otherwise.

Furthermore, there are usually some fundamental changes made in the political economy, or at

least resolution of the most serious problems, that allow it to begin a long-lasting growth phase.

In March of 2009, a good many stocks reached such very low bear market bottom levels, but not

all did. At present levels, with many of these stocks having rebounded by large percentageamounts, they are no longer bargains. The Dow-Jones Industrial Average yields 2.76 percent.

This is by no means cheap. A 6-7 percent yield is typical of really major bear market bottoms

from which multi-year bull markets are launched in which prices of the averages are able to rise

hundreds of percent. At such yields, the market anticipates no growth; it hopes to achieve its


5/5

required return solely through dividends paid. To reach a 6 percent yield, the Dow has to sell at

4680. At its current level, which is more than twice this price, the market anticipates an economy

that is more-or-less business and growth as usual. Either that or Mr. Market is a lot less risk-averse than seems warranted.

Documents

Can America Come Through With Wealth Creation and Good Jobs