Wednesday, March 28, 2012

The Myth of Government Job Creation

Seemingly every political campaign nowadays boils down to the economy and jobs. Most conservative leaning parties make it their number one issue. The Conservative Party of Canada is widely acknowledged to have been elected in 2011 due to their incessant messages indicating that they are the only party capable of "strong" stewardship of the economy and of job creation. In America, the Republicans sound like a broken record on two issues: cutting government spending and job creation (never mind that the two are in conflict). The Republican message is one of massive tax cuts to corporations and leaving the market to itself so that the big employers can create lots of jobs. Many provincial governments in Canada mimic this pattern of the job creation message in election campaigns. Who can blame them? After all, it has proven very effective. People are motivated by fear and the fear of not having a job tops the list for many people.

But there are some major problems with this approach of governance. Firstly, governments are not traditionally in the business of creating jobs. Certainly the government is a very large employer itself, but in order to create government jobs there must be increased government expenditure (and therefore taxation) and most conservative minded voters are against "big government" in which the government itself employs lots of people. Traditionally the role of government is to implement law, and to run social services with tax revenues, not to "create" jobs. Now, of course, government legislation can have an effect on the economy and on job creation and unemployment rates. But, not nearly as much as people think.

The first myth is the one of corporate tax cuts. There is a belief that cuts in taxation to corporations will actually create more jobs and therefore decrease the unemployment rate. While there is some truth to this, the link is not nearly as strong as most voters think it is. In Canada, the Conservatives cut the corporate tax rate by 2% to bring it down to one of the lowest rates in the Western World. Yet, it has had virtually no effect on the unemployment rate whatsoever. In fact, the latest numbers in Canada suggest that the unemployment rate has inched upwards a bit. Many, many corporations these days are in the business of moving money around with relatively few employees rather than in the business of employing large numbers of people in manufacturing or service positions. We all know that large manufacturing corporations produce their goods in China and other places outside the country, so giving them a tax break doesn't help employ Canadians (or Americans in the States). Even of the large corporations in Canada, many do not have a massive effect on the employment rate as the corporate tax rate changes. Many of the wealthiest Canadians and Americans are in the business of trading stocks and investing, not in the business of employing people to make things. As many as 85% of the wealthiest North Americans aren't in the business of making anything at all. Cutting corporate tax rates does two things: it makes corporations richer and, not surprisingly in the modern economy of very little competition, that wealth is usually not passed on to consumers by way of lower prices. The rich get richer. Secondly, the tax cut to corporations must be made up elsewhere by the government, and of course the place it is made up is in personal tax revenues. The poor get poorer.

The second myth is that we need constant growth and job creation. Think of the unemployment rate over the past several years or even decades. It really doesn't change dramatically. It shifts up and down a few points here and there as the economy goes up and down in cycles. But an economy that creates many jobs really doesn't ever get rid of unemployment. Even in relatively negative economic times, there are always job ads in the newspapers. There are almost always jobs available. Only in the Great Depression (and not since) were there basically no jobs even for those willing to work at anything. So, a government that is elected on a "job creation" mandate is destined to fail even if they are successful in the short term by "creating" some jobs (or allowing the free market to do so). Because in the long run, the population simply goes up, immigration increases, and the actual number of unemployed stays roughly the same. At the next election cycle, the same old message of job creation can be run again, often with the same success. Nothing changes.

The third myth is that there is actually any difference between political parties in terms of job creation. Recently in Canada, a new leader was chosen for the New Democratic Party. The NDP, traditionally a left-of-centre party that has never been in power was most recently elevated to become the Official Opposition in the 2011 federal election. The new leader, Thomas Mulcair, was immediatly (on the same evening as his election to party leader) attacked by the Conservative Party as being a socialist who will raise taxes and kill job creation. The NDP undoubtedly will raise the corporate tax back up by the 2% that the Conservatives lowered it, should they be elected. But that will provide some tax relief to the rest of Canadians in their personal income taxes. The effect on job creation will be nill.

Ultimately, as so often in politics, it all boils down to fear. Without fear amongst voters the Conservatives never would be elected in Canada. Without fear the United States never would have invaded Iraq (or become involved in the Vietnam War, or countless other engagements such as the first Iraq war in 1991). Without fear, people like Rick Santorum or Newt Gingrich would never stand a chance in politics. I wish for a day when more and more voters can think for themselves rather than having politicians tell them what to think. Sadly, we seem to be going in the opposite direction.

There is an old adage that the best salesman is one who begins by selling you the problem and then conveniently has the only solution to the problem they created. That seems so true in many walks of life. In religion people are sold the solution to hell after the same salesman has created the problem for them. In politics, the modern successful politician sells voters the problem of job creation and then tells them that he alone has the solution. 

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