During the election campaign the need for jobs got attention, but neither candidate took the trouble to explain how, exactly, jobs are created. Contrary to what politicians claim, jobs start not with government but investors. In the wake of election rhetoric, the realities of investment need restating.
Investors are people in a position to invest money in a business endeavor. They could be owners or managers who want to grow their companies, and must invest in order to do so. Whatever the case, the investor intends to create output, to increase productive capacity, and to make money. The jobs come as a result of the investment, which is expensive activity.
Everything takes time, and many projects face government obstacles. On top of that, the risk is very real. In fact, most investments fail and many fall short on the profit side. Even so, human creativity and the entrepreneurial spirit can produce useful products that people are willing to buy. That generates profits and jobs, but it all begins with investors, not government.
With apologies to Governor Romney and President Obama, the government can create only government jobs that must be paid for out of taxes. Government works projects may employ independent contractors, but such jobs are temporary, and this has nothing to do with creating jobs in the long run. There is, however, plenty the government can do to help the job-creation process.
For example, the government can avoid punitive levels of taxation that reduce the potential after-tax reward accruing to the investor. Punitive taxes can drop the potential reward below the point where it balances the perceived risk. When that happens, investments dont get made and jobs dont get created. To aid job creation, the overly complex tax code should be changed in favor of something simpler and more uniform.
The government should also consider how every regulatory decision impacts investment. Regulations may be completely necessary but they neednt be punitive. Regulatory agencies need not be staffed with zealots eager to control industries they despise. When onerous regulation discourages investment, jobs will not be created.
The government should promote a stable currency value. Investors have a tough enough time assessing prospective investments under the best of circumstances. In an environment where the value of the currency is unstable the task is nearly impossible. Runaway inflation, as in the late 1970s, will promote malaise, not job growth.
Government should also aim to create certainty because business investment decisions are mostly long-term. The payoff, if it comes at all, will come over time, not next year. The cloudier the future, the more difficult it is to make investment decisions, and in an uncertain environment the easiest decision is Noand that dynamic employs nobody.
As Solyndra and other stimulus debacles confirm, governments are not good at picking winners. So as much as possible, government should keep out of the investment business. But government should do all in its power to rout crony capitalism.
Businesses are always eager to overcome competitors by any means necessary. Becoming the favorite of one politician or another has a long and ugly tradition. No political partys hands are clean. Government should ensure that businesses compete on a level playing field. The business that competes well is most likely to invest well, which means it will create jobs.
Administrations change but government activity always has consequences. Punitive taxation, onerous regulation, economic uncertainty and cronyism will only prolong the current malaise. On the other hand, if government encourages job-creating activities, American business will likely reemerge sooner rather than later.
Politicians who share that goal should keep one reality in mind. It all starts with investors, people in a position to invest money in a business endeavor.