Monday, October 27, 2014

Hillary Clinton was Correct. Businesses Do Not Create Jobs

Mrs. Clinton recently drew a little fire for the following comment made while shoveling red meat to her base (Reason has the video clip).
Don't let anybody tell you that it's corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly. One of the things my husband says when people ask him what he brought to Washington, he says I brought arithmetic.
My excellent friend and professor Don B has already dismissed this remark as flippant political kayfabe, worthy of mention only to establish the economic illiteracy of a politician who later claimed that it was the benevolence of Prez 42 that so generously offered raises to the workers of America.

I'd like to parse the statement a little closer, if you'll indulge the conceit.

(1) "Don't let anybody tell you that it's corporations and businesses that create jobs."

This is correct. "Corporations and businesses" do not exist to create jobs. They exist to overcome the difficulties of contractual organization in order to produce. Jobs are a byproduct. If a corporation or business could produce exactly the same output with zero employees, they'd be insane not to. If a firm is operating correctly, they're matching labor and capital margins in order to destroy jobs. This is a very good thing: it means that firms are being creative, finding new ways to better and more cheaply satisfy customer desires. This also frees up labor to find new market opportunities.

Adam G's Umlaut piece this week is an ode to the Internet. It is very good, but it would have been utterly unfathomable even a couple of generations ago when something like 80% of Americans were farmers. The destruction of jobs has been a truly lovely thing, allowing the flower of modernity to blossom in serene comfort under plentiful, warm electric light.

(2) "You know that old theory, trickle-down economics. That has been tried, that has failed."

Also correct. There is no such economic theory called "trickle-down," but there is some political kayfabe that uses the term. The economic argument is that lower marginal tax rates (particularly capital gains taxes) will reduce the cost of borrowing, allowing firms to grow and produce more stuff. There's nothing in the economic theory that has anything to say specifically about the quantity of labor employed. The theory predicts productivity. Since Mrs. Clinton was referring to employment specifically, it's not unreasonable that when she claims "failure," the metric she's using is cyclically-adjusted total civilian employment (or an alternative measure; follow IW for KE's excellent labor market analysis). Since "trickle-down economics" was interpreted as "lower marginal tax rates on earned income," rather than capital gains, and also included a whole host of other regulatory interventions, it probably did not produce the effects it was never intended to have, apart from the economic ignorant ravings of career politicians.

(3) "It has failed rather spectacularly."

Political kayfabe without exaggeration is hardly political kayfabe at all.

(4) "One of the things my husband says when people ask him what he brought to Washington, he says I brought arithmetic."

I'll leave this one to Adam Smith.
The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.
 Economics is not arithmetic, people. But if you expect a political elite to speak otherwise, then perhaps you need a clearer idea of the incentives they face and the institutions that govern their pronouncements. From the point of view of the career politician, their pronouncements are not euvoluntary; a mis-utterance could reduce them to a terrible BATNA of actually having to work for a living.




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Do you have suggestions on where we could find more examples of this phenomenon?