Job Creation Squeezed

by John Browne

Productive, private-sector jobs – the lifeblood of a sound economy – are under assault by politicians in the United States and Western Europe, who have unwittingly taken a number of steps that make future job losses a foregone conclusion.

In the 1980s, as a member of the British parliament and elected chairman of the Conservatives' small business committee, I led discussions on the issue of job creation. At that point, the British labor market was dealing with technological advances that threatened traditional industries and an influx of highly competitive Eastern European workers who drifted westward in the waning days of the Cold War.

Pushing back against those who wanted to preserve an untenable status quo, the Conservatives recognized that defensive measures like excessive regulation, high taxes and favored bidding for government contracts were antithetical to business growth. Fortunately, Margaret Thatcher was prime minister. Her understanding of economics, combined with her ability to communicate and lead, resulted in the adoption of pro-business polices. The British economy soon flourished, creating many profitable new jobs.

Despite the rhetoric of President Barack Obama, his administration is actually leading the US in the opposite direction. By raising taxes on business owners, monopolizing credit and increasing business regulations at a frightening pace, present policy is turning the employment landscape into a rather sterile promontory.

Meanwhile, the media have selectively focused on the recently passed jobs bill, which includes meager tax credits for new job hires. If this bill has any effect, it will be to encourage cash-strapped entrepreneurs to make hiring decisions that are unjustified by current business activity.

In reality, employment's future is being decided in the credit markets. Here, the US Federal Reserve's zero interest rate policy is redirecting investment capital towards government. When banks can borrow from the Fed at zero percent and buy long-dated US Treasuries yielding 3% to 4%, there is little incentive to take the risks inherent in business lending. Business credit is, therefore, tighter than even a severe recession would ordinarily dictate. This lack of credit is starving the private sector's ability to create jobs.

Furthermore, the "progressive" activism on display in Washington is breeding great uncertainty in the board room, making businesses even more cautious in an exceptionally difficult planning environment.

In fairness, the seeds of job destruction in America were sown years before Obama rose to power. In recent decades, in response to intense lobbying by big banks and corporations, some key changes were made that reduced market flexibility. These included abolition of the Glass Steagall Act and the weakening of anti-trust laws, without concurrent efforts to remove preferential treatment for those companies deemed "too big to fail". These moves appeared to extend the free market, but in reality they allowed big banks and corporations, like Citigroup, AIG and GM, to squeeze out smaller competitors in good times and fall back on government support in bad times.

The increased powers of the crony capitalists were used to drive down the prices of suppliers, many of whom were small businesses or farmers. At the same time, financial profiteering created ownership wealth on an unprecedented scale, greatly increasing the wage gap between owners and workers.

Finally, the creation of the largest speculative asset boom in history by former Fed chairman Alan Greenspan led inevitably to a massive bust, causing economic hardship and dislocation for millions. If the likely double-dip recession occurs, even more jobs will vanish.

Most American job losses in recent decades were due to outsourcing to more competitive economies because of the harmful effects of our domestic government policies. Big spending by government now is unlikely to cure this deleterious situation. The only realistic solution is to shrink government and remove subsidies and guarantees to big business.

The United States must become fundamentally competitive once again by unleashing the power of the entrepreneurial spirit. Otherwise, the "giant sucking sound" of good jobs heading overseas, as Ross Perot famously described it, will only grow louder.

March 12, 2010

John Browne is senior market strategist for Euro Pacific Capital.

Copyright © 2010 Euro Pacific Capital

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