Criteria for Judging New Jobs Creation Initiatives

The Obama Administration is offering new job creation proposals. The success or failure of these initiatives depends on accurate problem definition.

One major obstacle is stagnant consumer spending. In a previous post we remarked:

Research on private consumption, going back 100 years, more or less emphasizes that individuals balance present and future satisfaction when they make consumption choices. Drops in expected income, when individuals believe they are long-lasting, mean a new “rebalance” in current consumption behavior is in order. This translates to an increase in saving and a drop in current consumption.

Unfortunately the data depict a grim picture. Stephen Roach analyzes the relevant data on consumer spending and states:

While household-sector debt was pruned to 115% of disposable personal income in early 2011 from the peak of 130% hit in 2007, it remains well in excess of the 75% average of the 1970-2000 period. And, while the personal saving rate rose to 5% of disposable income in the first half of 2011 from the rock-bottom 1.2% low hit in mid-2005, this is far short of the nearly 8% norm that prevailed during the last 30 years of the twentieth century.

These data tell us the consumer is still in the process of financial readjustment. Consumer demand accounts for nearly 75% of real GDP, so policies that depend or attempt to trigger a new burst of consumer spending will fail.

But, the way out of our current economic stagnation and high unemployment problem is through an increase in business investment.

The criteria, then, for new jobs creation policies — when the avenue for success is business investment — should contain the following elements:

An overarching vision that supports creating a new set of rules (taxes and regulation) that increase the certainty of reward and decrease the uncertainty which raises risk.

1. For tax policy, certainty must be given on what lower tax rate will apply in the future to income from these new investments.
2. For regulation policy, the scope and scale of existing, soon to be implemented, and future regulations must be viewed and contrasted with their cost on business activity. In particular, regulations related to pollution, health care, financial services, and mobility of business (e.g., the NLRB versus Boeing) must be subject to cost-benefit analysis and possibly moratoriums.

If the new Obama Administration jobs creation initiative ignores these criteria, then do not expect business investment to expand to pick up the slack.

Author: This blog entry was written by Dr. Jim Granato, Director of the Hobby Center for Public Policy.