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Economic Microcosm: Job Creation March 12, 2012

Filed under: Cents and Cents' Ability — camcat888 @ 11:35 am
Tags: , ,

With the economy chasing the rock bottom of a bottomless pit, there is much being said about “job creation.”  In most areas, unemployment is holding steady or rising with no relief in sight.  The idea is that money can be thrown at creating jobs to get the economy moving in the right direction.  People that are currently jobless will have jobs and all will be well again.  Golly gee, that sounds wonderful, but allow me to point out the major glitches in this utopic plan.

Bob owns a grocery store in a Littleton.  Having great acumen, his efforts are very profitable.  He has hired just enough help to maximize profits with the resources he already commands.  [Here we assume that Bob has already met the existing demand for Littleton, and we consider nothing beyond his small town.]  Customers are happy because Bob’s prices are reasonable, unlike so many other grocers whose food no one can afford.  This is of particular concern because many citizens of Littleton are without jobs.  In response to growing concern over unemployment, Mayor John provides a “stimulus” (taxpayer money) to Bob and tells him to hire 10 more employees.  As we said before, Bob’s business was already balancing the supply/demand equation, so even with the stimulus money, the town’s demand remains unchanged.  And a stimulus is just what the word implies:  a boost or kick start; it is not enough to maintain the increased labor cost long-term.  With that money, Bob pays the new employee salaries for the first month – there’s the “boost.”  Afterward, he’s left to pay 10 more salaries with no additional work to be done (remember, no additional demand).  If adding 10 employees would have improved efficiency or bolstered profits, he would have done so of his own volition and without taxpayer funds.  Instead, Bob has no choice but to reduce the hours of the current employees to “create” jobs for the new ones.  In order to sustain the new employees, he has three options:  1) take a huge cut in profit (i.e., substantially decrease his own salary); 2) reduce all employees’ salaries proportionately; or 3) raise the prices of his products to keep from losing (while certainly not gaining) any profits.  Let’s look at these options individually. 

I imagine most of you favor Option 1, especially since you aren’t Bob.  If you were Bob – with over 20 years of your blood, sweat and tears invested in a business that has finally paid for your kids’ college education – you’d feel a bit differently.  It’s easy to picture the “business owner” sitting pretty in the lap of luxury.  He, you think, has more than enough to share so others can put food on their tables.  But in reality, how much Bob makes and what lifestyle if affords him has nothing to do with anyone except Bob.  He’s worked hard and been successful; he should prosper accordingly and without limit, whether that means a new doublewide or a 10,000 square foot mansion.  If you find that hard to swallow, keep in mind that wealth is relative:  though the middle class income is commonly regarded as “enough without too much,” that is a concept invented by said class to assuage their disappointment at not being rich.  You have no more ground for goading Bob to sacrifice his wealth than a panhandler has in demanding some of yours.  What one works for and earns concerns nobody but oneself; the same goes for you, Bob, and yes, even Bill Gates.  Our society would do well to mind its own financial beeswax.

Option 2 may also sound plausible…if you are not visualizing yourself as a current employee whose wages are to be docked.  Although hourly rates will not change, fewer hours mean less money.  The original workers were thankful to have had jobs.  The people without jobs received unemployment or welfare or both to help them stay afloat (again, taxpayer dollars).  Now, instead of some making ends meet and some struggling to do so, there are many are making too much to receive assistance but too little to break even.  There was no true economic incentive for Bob to add employees, so while 10 new jobs were created, Bob and his existing employees have all suffered for it. 

Bob could also resort to that last, despicable option:  raising prices.  This is least popular because everyone suddenly considers that the hardship would affect their own lives.  While “job creation” sounds universally beneficial, the government assumes the average American understands very few implications beyond that simply stated purpose.  One of the consumer protections of a free market is price control via competition.  You can rest assured that unless a particular owner wants his business to tank, he won’t arbitrarily increase his prices.  A savvy owner like Bob doesn’t jack up the price of a gallon of milk to $10 for the sake of profit, because Jim, Tom and Walter all sell milk for $5 at their respective stores.  No one would patronize Bob if his prices weren’t competitive.  However, upon any interference with fair competition (handicaps, head-starts, government control, etc.) the delicate market balance spins quickly and irreparably out of whack.  Jim, Tom and Walter were struggling because of Bob’s better milk price of $4, which they couldn’t match because they hadn’t achieved the market balance.  Since Bob has been burdened with 10 unnecessary employees, he must now charge $6 for milk to offset the increase in labor costs.  The ironic outcome is that Jim, Tom and Walter actually benefit by having the higher price (now the lower one) because Bob was selected to employ the 10 workers based on his viability and bigger profits.  Not only will Bob carry the baggage of too many employees, his business will suffer because of the unavoidable price increase.  Well-meant government meddling forced Bob to raise prices to stay afloat, but who benefits if Bob’s business ultimately fails because of it, and the new “lowest price” becomes what had been the higher one? 

If this sounds complicated to you, it is – and much more so than it should be.  American citizens in general lack the ability to see things from another’s perspective.  Therefore to most, Options 1 and 2 seem clear winners (especially #1) because they limit the sacrifice to one or a small handful of citizens who bear a larger burden and save the majority from whining about higher grocery prices.  Simply put, it’s better for a few to suffer more than for more (meaning “you”) to suffer proportionately.  However based on that logic, Mayor John should not have interfered at all.  So what if Bob was successful?  Wasn’t everyone – including the unemployed – benefiting from his affordable prices?  No one tells their children that too much success is frowned upon or that becoming rich is to be avoided like the plague.  Just because Bob was achieving his dream to the tune of greater wealth, the government took its cue to cut him down to size and take away the added reward of a life’s hard work.  Ladies and gentlemen, I give you the American Nightmare.

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