What is Job Creation?

Tuesday the Washington Post’s fact-checker awarded three Pinocchios (“significant factual error and/or obvious contradictions”) to Mitt Romney’s claim to have created 100,000 jobs through his work at Bain Capital.

Meanwhile, Romney’s opponents were assailing him as a job destroyer, a “predatory corporate raider” according to a pro-Gingrich SuperPAC. Rick Perry accused Bain of looting companies and “getting rich off failure“.

Lost in all this attack-and-defense is the question: What does it mean to create a job, anyway? Let me repeat something I wrote a little over a year ago:

A bunch of factors need to come together to create a job. There has to be something worth doing, a worker willing and able to do it, a capitalist to pull together all the tools and materials of production, and a customer willing and able to pay for the product or service.

So the economic environment needs to supply an opportunity and people need to fill three roles: worker, capitalist, and customer. Conservatives assume that workers and customers always appear by magic, so a job is created whenever a capitalist shows up. If that were true, then conservative economics would make perfect sense: Keep rich people’s taxes low, and they’ll be able to fill the capitalist role in more and more places, creating more and more jobs.

In fact, though, any one of the three roles might be scarce. Picture a rural hospital that would love to have a cardiologist. The money and the customers are there, they just don’t have a worker. (We don’t usually think of cardiologists as “workers”, but they are.)

During construction booms, production might be held up by all kinds of worker shortages — plumbers, electricians, carpenters. Maybe the only thing holding up a new restaurant in Tulsa is that the local workforce doesn’t include the right kind of chef. In these cases, it’s the worker who is the “job creator”, not the capitalist. What triggers the existence of the job is the arrival of the scarce worker, who could be hired by any of a number of interchangeable capitalists.

In the recent recession, workers and capitalists have both been abundant, but customers have been scarce. Business Insider puts it like this:

If a company is going to hire someone, then a crucial question they must ask is: Is this person going to help make or do something that someone is going to buy. You can talk all you want about taxes or regulation, but if end demand for a product or service isn’t there, there’s no reason for a company to hire.

That’s the logic of stimulus: Put more money in people’s pockets and they will create jobs by becoming customers.

(That insight, by the way, provides the proper response to the slogan “I never got a job from a poor person”. You’ll also never get a job from a capitalist with no customers, no matter how rich he is or how little tax he pays.)

Finally, let’s consider the economic environment. Suppose a new interstate gets built, with an exit near a town that has a lot of unemployment. Three local businessmen want to build a fast-food franchise on a choice piece of land near the exit, and the Burger King franchisee outbids the McDonalds and Dunkin Donuts franchisees. So the Burger King gets built and employs 15 burger-flippers.

As soon as the new interstate changed the economic environment, all three roles were abundant. So who “created” those 15 jobs? The government did, by building the interstate. Government infrastructure projects have created jobs as far back as the Erie Canal, which made Buffalo into a grain-processing center.

But wait. Government can’t create jobs. Everybody knows that: Rick Perry, Ron Paul, Herman Cain, Eric Cantor, everybody. If you’re too stupid to understand why not, this conservative economist will explain it to you.

Maybe they all need to think it through again.

But let’s get back to the original topic: How many jobs did Mitt Romney create or destroy during the business career that netted him a quarter billion dollars?

Quite possibly none. If capitalists weren’t the scarce commodity in the deals he did, Romney might have been just another interchangeable cog in the economic machine. He probably is no more responsible for the jobs at Staples than the clerks who man the counters or the people like me who get our copying done there. Maybe the store would be in a different place, wear a different name, and employ different people, but as far as the overall economy is concerned it would make no difference.

Ditto for the job destruction in companies like AmPad. Money was there for pirates to capture, and there were plenty of them around. Mitt was the pirate who captured that particular treasure ship (and he’ll have to work out the ethics of it with his conscience and his God) but did he change anything? Ultimately, probably not.

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  • Bob Lee  On January 16, 2012 at 1:39 pm

    Doug, I think that your “interstate” analogy is flawed. An interstate typically replaces the road that goes through the center of town. Yes, the Burger King at the exit ramp will employ 15 people, but more jobs are lost in the mom-and-pop businesses on main street as people breeze past the small town to get to the Wal-Mart a few exits away.

    • weeklysift  On January 16, 2012 at 4:17 pm

      I think we’re picturing different towns. A lot of small towns in the heartland would get no traffic at all if an interstate weren’t nearby.

      I grew up in a hole in the interstate system. The first two hours of any family vacation were always spent on some winding two-laner. That isolation didn’t prevent any of the phenomena you’re talking about. Discount warehouses on the outskirts killed the downtown department stores. You don’t need an interstate for that. A blacktop is sufficient, if it’s wide enough for one pick-up to pass another.

      • Bob Lee  On January 16, 2012 at 6:52 pm

        Understood. I’m just saying that “progress” infrastructure isn’t always a good, job-creating thing. In the case of my home town, the interstate killed more jobs than it created. Half of the storefronts downtown are empty. The only retail businesses that are thriving are the franchises near the exit ramp. People who used to drive through town now don’t slow down unless they have to refuel.

        I guess this tangent is pretty far from your main point, though, so I’ll let it drop. Thanks for writing such an enlightening, thought-provoking article.

  • Kim Cooper  On January 16, 2012 at 11:02 pm

    I was under the impression that the steel plant Romney wrecked was doing fine before he got there. Is that not true?
    Then, there’s also the Disaster Capitalism version where they make their own disaster. Isn’t that what they are doing in Europe now? They manipulate a country into borrowing money from them, then they call the loan and bankrupt the country. I know it’s more complicated than that, but that’s the outline. None of this depression needed to happen.
    What Bain did was obtain a company, borrow money on it, then walk away with the money, leaving the debt. They couldn’t have borrowed money on it if the company was in bad shape — who would have lent it?
    The base problem is that the stock is valued on percentage of increase in profit rather than on how the company is actually doing — we need a structure where a company only needs to make a steady profit, not an accelerating profit, to be valuable, for a sustainable future.

    • Bob Lee  On January 17, 2012 at 10:44 am

      Kim, the company I used to work for had a mantra: “Grow or die”. I asked “Why?”. I’m with you – if a company is making a sustainable profit, it doesn’t need to take risks. This fixation on growth makes little sense to me.

      • Kim Cooper  On January 20, 2012 at 1:26 am

        Bob Lee — the fixation on growth is because of the stock market: stock goes up if you are showing not just growth, but increasing rate of growth. If a company makes a steady profit but isn’t increasing as a percentage, then the value of the stock goes down. the next problem is that the stock market used to mean something: it was used to get an infusion of cash into a company so it could grow. Now, less than 1% of the money that goes through the stock market is used that way, the rest of it is just speculation and gambling — the company whose stock it is does not profit from the stock in any way except in that the company is valued according to how the stock is valued — a completely false setup. New small markets are starting to emerge that actually finance small companies now, as the stock markets did when they started. But it’s small yet. If you are interested in this, I can recommend a couple of books to read: Locavesting by Amy Cortese and The Divine Right of Capital by Marjorie Kelly

  • Allison  On January 17, 2012 at 10:29 am

    Planet Money has been doing some podcasts along similar lines- what does it mean to create a job? If you aren’t already a listener you might want to check them out.

  • Lola  On February 1, 2013 at 7:24 am

    I couldn’t get the email link for the May Elders Shop Notes to dlnaoowd the file properly and I was unable to get the file to dlnaoowd from your web archive. Are you able to email me a copy of the PDF file? Thanks very much.Dana Young732 Ashley Lane NEThompson, ND 58278


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