The Unemployment Fallacy

There’s a lot of talk about jobs these days. Government needs to create more jobs, illegal immigrants are taking our jobs, etc.

The arguments founded around the idea of employing the unemployed are based fundamentally on the presumption that there is a finite number of jobs to be had. The argument can be made based on the current population, its wealth levels, and the technological efficiency at a particular moment of time. Supply is so much, demand is so much, so this is how many jobs that are needed to meet the demand. Right? This logic, however, is based in the Keynesian economic philosophy which brought us the stimulus bill to maximize employment. There’s something wrong with the theory.

The error in this particular case is in the presumption of a limited, static economy. The number of jobs are not predetermined by economic demand. To create a job, one simply has to create an item, or provide a service, that other people would be willing to trade some of their own work for. If there is insufficient aggregate demand to employ the entire population, it is because the demand in all current industries relative to their current market level price is satiated.

Then to find employment, one must simply use a personal skill to improve the lives of others in a way that they are willing to pay for. For example, one could find an existing product or service and provide it cheaper than current market levels, thus shifting the demand curve up. Or they might build an industry of an existing product or service in an area that is currently under-supplied for the demand at current market levels. Or perhaps it means innovating a good or service that will improve the life of others in a way that has not yet been done before.

Unemployment is a much propagated fallacy of economic theory. There is no unemployment. Those who are unemployed are simply those not employed by someone, who are both unable or unmotivated to find employment with another and are unwilling to employ themselves. Everyone is a potential employer. Thus it is impossible to be unable to find anyone to employ you. If no one else will, you can employ yourself. The idea of unemployment is derived in the unwillingness to self-employ, but is this really unemployment, or laziness?

I will grant that the government rules and regulations have changed this dynamic significantly. The costs of starting a business legally are such that they may make self-employment too expensive for some. This is truly tragic, and must be remedied. Entrepreneurship is the driving force of economic growth, and must be encouraged by government. I may not go so far as to suggest subsidies, but they ought to be easy to create, with little to no additional costs or government red tape to hack through.

We’ve lost the spirit and mentality that each individual has control of their own destiny. We’ve become a worldwide society of dependents, each of us depending on another’s entrepreneurship for our sustenance. As a result, our economic growth, once growing exponentially, has stagnated, and we now grow at a snail-like pace. Except for the occasional recession, we don’t even realize that our growth rate has stagnated, we’re content with the fact that there is growth at all.

I’m tired of listening to people clamor for politicians to focus on job creation. If these people focused their energy on that very job creation that they’re clamoring for instead, the bulls would return.

A New Amendment

I’d love to see a new amendment to the Constitution to the effect of the following:

Congress shall make no laws regulating the right to form voluntary contracts. No federal laws shall be made to favor labor, management, service providers, consumers or any other party to a contract legally agreed upon by consenting adults. Contracts shall be defined to include legally authorized and signed written agreements and purchases or trades under free and voluntary agreement, but shall not include verbal agreements. Contracts shall be declared void, and a punishment predetermined by Congress shall be assigned by judicial review, if either party fails to meet the criteria agreed upon, or if the contract is determined in a court of law to be agreed upon by force or fraudulent presentation.

The intent of this new amendment is simple but broad. Consenting adults may do whatever they choose with other consenting adults if a contract is signed. Provided they do not infract on the rights of another, adults may do as they choose. Policeable offenses should only include those which interfere with the protected rights of another. This is what is meant by freedom. Adults should not require nannying by any federal authority, but shall choose their own fate as they wish.

Adults may enter into contracts with each other as they wish. You can buy what you want, you can do what you want. But goods and services must be as they claim, no exchanges shall be made deceitfully, as this violates the rights of another’s property by the use of fraud. This shall require fairly strict disclosure rules, requiring all relevant information to be given before a contract is signed.

But more to the specific point, this amendment would prevent government from intervening in business contracts, including labor contracts. Labor unions could still exists, but government could not lawfully favor them in any way and force businesses to cede to their demands. Business and labor would have equal footing, thus allowing market forces to determine employees’ value and employers’ power. Without federal union protection, businesses have equal power in contract negotiations, and can do the best thing for their company. This will spike company productivity, lower costs and therefore prices, improve the general standard of living, and accelerate economic growth.

What’s more, this would prevent government from restricting consumption. You can buy what you want: energy-wasting light bulbs, pot, SUVs, experimental medicines, etc. Government would have no power to tell you what to buy. Consumers would have no nanny protection that result in huge price increases to protect them from their own choices. Companies would simply have to be honest about their product and consumers would decide for themselves what risks they’re willing to live with.

But there are maybe a handful people in Congress who don’t have a god complex and think that their job is to save people from themselves. The chances of such an amendment passing are as slim as Nancy Pelosi’s reconstructed nose. But we can always hope…

Let's Make Jobs!

You know what the main concern of the American people is right now, right? Jobs. All of our politicians are huddled together in masses, inventing ideas to create jobs for the unemployed American workers. From this brain-trust emerged the growing concern in our foreign trade deficit, that our imports exceed our exports, that we buy more than we produce, and thus our jobs are lost to these foreign nations. Let’s look at this concern a little deeper.

Let’s suppose that we were to choose whether to purchase a foreign-made product or a good old made in the USA product. The foreign product is cheaper, but of course made in Chilandia. Many argue that, economically speaking, it is far better to buy the domestic product, as it creates a profit for the American company and subsequently grows their employment, while purchasing from the foreign company, who is able to provide much lower costs because the cost of labor unfairly low for them, creates a trade deficit and causes our jobs to be outsourced. Makes sense, right? But let’s follow the money to make sure we understand the full implications of each choice.

Let’s suppose we need 100,000 t-shirts for our beachwear clothing company. We could buy them from California for $1.50 each, or from Chilandia for $1 flat. So we would either spend $150,000 or $100,000, depending on who we purchase from. That $50,000 difference in costs for the company is significant, as we could hire new employees, or invest in new equipment, or lower our costs to the customers. But if we buy from California, we’re helping the California company stay in business. So we’re saving a lot more jobs, right?

Well, let’s keep going. Let’s suppose we choose to purchase from California, so we spend $150,000. What does the California company do with the money? It pays their employees, covers the costs of production, pays its taxes, and keeps the rest as profit, which goes as dividends to its shareholders.

Suppose we instead chose to go with the foreign company. We spend $100,00, saving the $50,000. The Chilandia company is paid in U.S. dollars. It takes the dollars and exchanges it at the local bank for chilands, its own local currency, after which it pays its employees, covers its costs, etc, same as the U.S. company. But let’s keep following the dollars, since that’s what we in America care about. Now Chilandia has our money. What do they do with it?

Dollars are just paper unless used, and the Chilandia bank needs to put the money to work so they can stay in business. Some of the dollars will likely be taken by chilandese companies (in exchange for chilands) so they can buy American goods they need. The rest will be used by the bank to invest in American companies (just like American banks do). So ultimately all the money spent in Chilandia comes back to the U.S. in the form of U.S. exports or foreign investments. Is there a difference between buying American or buying Chilandian? Not really, the money ultimately goes to the same places, and in essentially the same number of steps. The difference is that a few dozen Americans are out of a job instead of a few dozen Chilandians.

So now let’s analyze the economic effect of the different choices. First, it seems obvious to note that the $50,000 difference to the bottom line of the American beachwear company is significant. The company’s success depends on its ability to compete with other clothing companies. Being able to shave off a couple of dollars off the price of their finished products is significant in their bid for market share. So would it be better for the American beachwear company to fail due to higher production costs in order to support another American company (note that ultimately they both fail)?

Perhaps we could force all companies to buy American only, so no one can buy foreign and they compete on equal grounds. This would protect the competing American companies from unfair foreign advantages, such as a lack of labor laws. But what would happen to the costs to the consumer? In this example, the cost of the supply of shirts goes up 50%. Since the actual shirt is a majority, but not all, of the cost of the finished good, let’s say the total increase of the cost of production is 30%. Since the company must maintain its profit margin to stay in business, this cost increase gets passed on to the consumers. The cost of shirts goes up 30%. What does this mean to the economy? The American shirt company is saved. But the American cost of living has just gone up. Americans are paying $13 for a shirt instead of $10. How many Americans? Pretty much all of them. So let’s assume Americans buy an average of 5 shirts a year. That’s $3 per shirt x 5 shirts per person x 300 M people in America. That’s $4.5 Billion in increased shirt costs nationwide.

Ok, you say, but that money is all going to American companies. We’re creating and saving American jobs. This is true… sort of. We are saving jobs in the same way we would if we were to destroy tractors and farm equipment. We’d have a huge increase in the number of farmers, as each farmer would produce much less each year. More employment, right? Or if we destroyed computers, causing a huge surge in clerical workers and postal services. More jobs, right? Or perhaps we could restrict trade to a single city maybe, so you can only buy stuff made in your town. You’d have to do without a lot of things, but it would create a huge increase in demand in each town as people look for things they used to get elsewhere, thus increasing employment. Sounds great, right?

In other words, we could certainly increase employment by making ourselves poorer, but that doesn’t seem like a preferred option. What would happen to our economy if our nation became suddenly poorer? Every time we make ourselves richer, it is because we have made something better, made something cheaper, created something new. These forward steps always create unemployment. We make one product better, the old product becomes obsolete. We make a product cheaper, the more expensive brand goes out of business. We come up with a new idea, it replaces an entire industry, putting them all out of business. So how have we survived so far, after putting so many people out of work year after year?

Quite simply, and notably obvious, when an industry gets replaced, the unemployment is temporary as workers of that industry move to new industries. Perhaps they would work in the new industry they were replaced by, for that growing industry will undoubtedly need workers. Or perhaps there are other industries that are growing and expanding that need the additional manpower to manage their growth.

You don’t solve unemployment by protecting these failing industries. Whether they are competing against unfair foreign business practices or not, they are failing because they are less effective, more expensive, or outdated. Rather than force a universal reversion to ineffective, outdated, or expensive products (which is what protectionist tariffs and regulations are designed to do), would it not be more sensible to allow those failed companies and outdated industries to die and move their resources to growing and improving industries? That is what made America great in the past, and our interventionist politics are exactly why we are struggling to grow now.

Stop thinking in “Buy American” slogans and protectionist theories. They are economically destructive. Not because they don’t provide more American jobs (they potentially could), but because they lower our standard of living. Jobs are not the ultimate goal, it is an improved standard of living that should be our focus. Protecting jobs is not the way to achieve that goal. And when we become poorer because of protectionism, we can no longer afford things we once could, and the economy spirals downward. Counter-intuitive? Only until you make sense of the invisible hand of a free economy.