December 10, 2009

December 10, 2009 | Commentary on Jobs and Labor Policy

Still Killing Jobs

In his economic speech yesterday, President Obama made it clear that his administration will take a step forward on job creation. Unfortunately, it's also taking three steps backward -- which all adds up to more unemployment.

The good news is that Obama understands why unemployment has risen so sharply.

Media coverage strongly implies that joblessness has risen because layoffs are up -- but that's only part of the equation.

The number of jobs lost by firms rose 15 percent from the start of the recession to the first quarter of this year. These layoffs are real and painful for the workers involved. But they're not the driving force behind the doubling of unemployment.

The US economy usually loses millions of jobs each month as technology and consumer preferences change. But in normal times, new and expanding businesses create millions of new jobs -- more than replacing those that disappear. Twelve years ago, for example, Google didn't exist; today, it employs 20,000 Americans.

In regular economic times, most workers who leave jobs find new ones in two or three months. On balance, job creation offsets job losses, keeping unemployment under control.

In this recession, however, those new jobs aren't being created. Business startups have dropped 18 percent. Expanding or startup companies are creating 25 percent fewer jobs than before the recession. That represents 1.9 million jobs not created in the first quarter of the year.

Rather than investing in new projects that would create jobs, businesses have retrenched wherever they can.

In other words, unemployment has risen mainly because of the new jobs that entrepreneurs haven't created.

Obama understands this: "We are not creating jobs at a [sufficient] pace," he said yesterday; to reduce unemployment, America needs to "accelerate the pace of private-sector hiring."

So he announced one small step toward doing that: eliminating capital-gains taxes on small businesses and extending write-offs for small-business investment. Both these moves will indeed encourage entrepreneurs to take the risk of investing in their businesses -- and thereby create new jobs.

But then there are those three large steps back.

First, the president announced another stimulus (though without calling it that). He wants to use hundreds of billions in unspent TARP funds on more government spending: more highways and "cash for caulkers" home-weatherization funds.

And, despite Obama's rhetoric, most of his "pro-employment" proposal consists of such government spending to create more taxpayer-funded jobs.

This government spending doesn't make new businesses more likely to succeed. So it won't encourage entrepreneurs to invest, unless they receive the federal contracts. Bigger government doesn't encourage entrepreneurs to create jobs.

Worse, it discourages them. The more resources Washington consumes, the fewer entrepreneurs have to invest in their own projects.

The academic research is quite clear that government jobs are created at the expense of a greater number of private jobs -- with the one reliable study (Algun et al, in Economic Policy, April 2002) suggesting that for each 100 jobs "created" in the public sector, another 150 private-sector jobs vanish.

So it should surprise no one that private-sector hiring has remained low -- and unemployment has kept rising -- since the last stimulus became law.

Second, Obama reiterated his support for the health-care reform bills before Congress. But a trillion-dollar government health-care takeover won't create jobs. Indeed, these bills would raise taxes on employers and make providing health coverage (i.e., employees) more expensive while penalizing employers who don't offer it. Such laws would make businesses more likely to fail.

Yet the president yesterday signaled his determination to press forward with health "reform" no matter what it does to business prospects. How are entrepreneurs likely to react?

The third step back came Monday -- an administration action that's guaranteed to make businesses fear the future. The Environmental Protection Agency announced it had classified carbon dioxide as a pollutant under the Clean Air Act. Unless stopped, the EPA will start regulating CO2 -- giving it enormous power over every business in the country. Energy will grow far more expensive, and business costs will rise -- and no one knows just how bad the damage will be.

Obama yesterday did nothing to relieve the confusion or assure businesses that EPA's actions won't destroy jobs en masse. Waiting to see what the EPA does is the rational choice for many entrepreneurs. Why risk millions on a business project that might become unprofitable under new regulations?

Unemployment has risen because private-sector job creation has fallen. It won't fall until private-sector investment and hiring return to normal rates. Obama's tax breaks for small business are a small step forward. But his plans for spending hikes and health-care "reform," plus the EPA's impending carbon regulations, are three large steps back.

James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

About the Author

James Sherk Research Fellow, Labor Economics
Center for Data Analysis

First Appeared in the New York Post