Beyond the job creation sound bites

It’s time for some straight talk on job creation, today’s leading issue for politicians at every level in the United States. In the political world, like in Wisconsin’s current special session on job creation, almost every idea or bill is passed off as job creation. In the real world, it’s not so easy.
Let’s talk first about what doesn’t work and then about what will help lower the “new normal” unemployment percentage of 8-9%. Here are the dead-end policies:

• Recruiting from other states. It’s an expensive, zero-sum game for the nation, and it makes only a small difference in states like Wisconsin. How many companies has Wisconsin recruited from Illinois since Gov. Walker raced to the state’s border nine months ago to declare Wisconsin “open for business?” Name one.
• Real estate development. After the construction is done, the manning at a building is a janitor and leasing agent. The brick-and-mortar sector is dependent on strong companies that need to expand.
• Stimulus spending. It keeps jobs alive in the public sector employees and for construction workers in the short term. It’s a band-aid unless strategic infrastructure is built that makes the country more competitive. Most stimulus projects don’t meet that test. Besides, only private sector job creation counts; it’s the taxes from private jobs and companies that pay for public jobs.
• Small subsides for companies that add jobs. A couple of hundred or thousand dollars for hiring a new employee is a non-factor in hiring a person who is going to cost a company $30,000 or more with benefits. Only when the company has more orders that it can handle will hiring occur. It’s all about demand, not dinky state or federal tax breaks.
• Regulatory relief. I can’t ever remember taking regulation into account when deciding on employment levels. In the long run, a good business climate helps, but short run hiring is all about demand and the general state of the business.
• Health caré costs. Paying $15,000 for health care benefits, which is what many small businesses face, is a big drag on hiring and could get worse when ObamaCare imposes a $2,000 penalty for not offering coverage in 2014. With innovation (HSAs, on-site primary care, etc.), those costs can be cut in half. That would really help hiring.

Here are policies that would directly help job creation:

• Balanced trade with China. The Chinese trade deficit should more no higher than current levels. The 16% hardening of the yuan vs. the dollar since 2005 has helped to create a trend toward “re-shoring,” bringing jobs back from China. Soaring inflation in Chinese wages and higher transportation costs for containers on the Pacific Ocean also help. Bilateral agreement on a cap for the trade deficit would stem further job erosion to China. Only Mitt Romney has spoken out strongly on this issue.
• More early stage capital. Much more venture money is needed in the Midwest, where the job losses from manufacturing have been severe. Young, high growth companies will lead the economy of the future. Ohio has led the way with its $2 billion Third Frontier Fund. States like Wisconsin have taken only timid steps. However, new companies grow slowly early on.
• Effective technology transfer. The Great Midwestern flagship universities need to be held accountable for turning their vast reservoirs of intellectual property into business startups. Stanford has launched 5000 companies. Patents and licenses are not enough.
• Loans for small companies. Young firms create almost all the new jobs. Large corporations reduce jobs. Large companies have ready access to capital; small businesses do not. More creative sources of debt capital, such as state and local revolving loan funds, need to be broadly expanded. The cost to taxpayers should be low if smart lending results in the payment of most loans.
• Hug market-leading companies. Economists agree that the economy works in clusters, which have a leading company at the top. We need to attend to the strategic needs of the clusters. Cluster councils with the governor and his cabinet members sitting in would make a huge difference. The staged removal of the state income tax from advanced manufacturing and agri-business in Wisconsin is an example of playing to cluster strengths. Improving the state’s business climate through collaborative regulation and legal liability reform helps on this score in the long run.
• Equipment purchase subsidies. Rather than small hiring subsidies, companies should be helped with major equipment purchases. If they buy a piece of equipment, they won’t let it sit there; they will man it.
• Job skills mismatch. The existence of some job openings for which there are not enough skilled applicants is not a problem. It’s an opportunity. Businesses complain to government and schools about the mismatch. I call that whining. Businesses need to restore their training programs, such as apprenticeships. Some companies used to spend 5% of payroll on training. With one of six Americans unemployed or under-employed, it’s time for businesses to step up. The generally responsive technical colleges will quickly match their efforts.
• Low interest rates. Eventually, the Federal Reserve’s policy of extremely low lending rates will pay off in growth at the macro level.

Our leaders spend too much time looking in the wrong places for job creation. So, the projections in states like Wisconsin are for continuing high rates of unemployment through 2015. It’s time for our leaders to be bold, get rid of the sound bites and take action on what works.

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