Business, Not Government, Create Jobs

This whole debate about government stimulus versus austerity, and the impact of these policies on economic growth, misses a key point: It is business, not government, that creates jobs.

The economic power of business is the missing link in the faux debate that is now raging over spending and deficit policies. A brief look at the recent jobs report for June tells this story. After spending more than $1 trillion through so-called government stimulus, we are at best experiencing a grinding and anemic jobs recovery. Private payrolls are growing slowly. The workweek is again shrinking. And average hourly earnings have declined. The unemployment rate dropped to 9.5 percent, but that’s because 650,000 people left the labor force.

Most troubling, the household survey, which captures small owner-operated business employment, dropped 300,000 following a decline last month. In other words, this leading indicator is moving in the wrong direction. More generally, recent economic data suggest that the rate of recovery could be slowing to only 2 percent, or even less. Some fear a double-dip recession.

So what about all this stimulus spending? Well, it hasn’t worked.

When you look at the recent GDP reports, you find that the government contribution to economic growth has been about zero. This is because transfer payments don’t contribute to the output of goods and services. We’ve had three recovery quarters where inflation-adjusted GDP growth averaged a sub-par 3.5 percent. But the federal contribution has been only two-tenths of 1 percent, while the state and local government contribution has been a small drag of three-tenths of 1 percent. In other words, a wash.

Liberal-left Nobel Prize winners like Paul Krugman and Joe Stiglitz believe government spending should be increased substantially. But if it hasn’t worked up to now, why should we believe it will ever work? Taxing or borrowing from Peter to pay Paul does not create new investment or jobs. Nor do extended unemployment benefits.

Businesses create investment and jobs. I call it business power. And this power has been totally ignored in the debate over economic policy.

In a watershed study, former Treasury economists Gary and Aldona Robbins argued a few years ago that tax cuts aimed at capital and business produced the biggest economic benefits. For example, for every tax-cut dollar on capital gains, $10.61 of new GDP is created. For every dollar of accelerated business-investment tax write-offs, $9 of new GDP is created. And for every dollar of corporate tax cuts, $2.76 of new GDP is created.

This bang-for-the-buck analysis contrasts sharply with estimates for increased government spending. According to the White House, every dollar of new government spending creates about $1.50 of new GDP — much weaker than the effects of business tax cuts. And the White House analysis looks like a stretch. The IMF has a model that says every additional dollar of government spending creates only $0.70 of new GDP. So you have to borrow a buck to get 70 cents back. Not a good trade.

Clearly, neither of these spending multipliers holds a candle to the benefits of lower business tax rates. Incidentally, for deficit worriers, corporate tax cuts pay for themselves, as do lower tax rates on capital gains.

Fred Smith, the CEO of FedEx, does not have a Nobel Prize in economics. But he founded from scratch a gigantic global transportation and delivery company that has employed tens and tens of thousands of workers, something the Nobelists have never done. And Smith argues that the best job-creating measure would be a significant reduction in the corporate tax rate and a move to full expensing for business-investment tax write-offs. He’s exactly right.

Japan intends to cut its corporate tax rate. So does Great Britain. But the U.S. corporate tax rate of 35 percent, or 40 percent when states are included, is not even remotely competitive anymore. So why aren’t people talking about the economic benefits of unleashing business power? The rapidly growing Asian economies treat capital and business better than they’re treated in the United States. Same for Europe. What are we waiting for?

During the Reagan 1980s, when a deep recession led to a 10.8 percent unemployment rate, the Gipper cut domestic discretionary spending, lowered tax rates across-the-board (including corporate tax rates), and sped up tax write-offs for business investment. The first two years of that recovery generated nearly 8 percent growth, with hundreds of thousands of new jobs created monthly.

Right now, we are facing one of the largest tax hikes in U.S. history, scheduled for 2011. Taxes on investor capital and business will go up significantly. So will individual income-tax rates. This is exactly the wrong medicine.

When will Washington come to its senses, and unleash the power of capital and business to end all this pessimism and move us toward real prosperity?