The Mystery of Unemployment

posted at 5:20 pm on December 17, 2009 by Doctor Zero

The Associated Press expressed confusion today over an “unexpected” rise in unemployment claims. Rising unemployment rates always seem to come as a surprise to this Administration and its media allies. Maybe I can help explain the mystery of unemployment to them.

Reducing unemployment would, of course, require the creation of more jobs. Jobs are created by businesses, right?

Wrong.

Jobs are not “created” by businesses. They are created in response to demand. Dropping a pile of money on a business does not inspire it to hire more people. Only increases in demand will do that. More specifically, the anticipation of future, steady demand prompts job creation. A business hires people in anticipation of rising demand from its customers.

Almost every business, with rare specialized exceptions, is eager to see increased demand, and therefore happy to hire people. Expansion is a joyous event. No businessman likes firing people in response to falling demand. In fact, it takes some pretty grim sales forecasts to make a business stop hiring, and bleak horizons indeed to provoke layoffs.

The purpose of a business entity is making a profit, through satisfying the demands of its customers. Jobs are a commodity the business purchases to accomplish this. Jobs are not the reason the business exists. A farm does not exist to grow corn, or hire farmhands. Its purpose is to sell corn. The land, seeds, and farmhands are all resources that help it fulfill this purpose.

Sustained job creation requires sustained demand. Temporary surges in demand produce temporary jobs. A car dealership that responded to the Cash for Clunkers program by hiring people to meet the artificial spike in demand it created would have ended up letting most of them go in the following quarter, when sales plummeted.

Government cannot create true demand. It can only create bubbles of spending, which is not the same thing… and its methods of creating these spending bubbles are horrendously inefficient, even discounting the outright theft and larceny of pork-barrel heists like the Obama “stimulus” bill. Of course it didn’t produce sustained job creation. It was nothing but a transfer of over eight hundred billion dollars to favored Democrat constituencies. Handing politically favored groups piles of money to spend does not stimulate economic growth. It only stimulates politics.

Relying on stimulus spending to spur job growth is the kind of Keynesian delusion that only works with small colonies of people on desert islands. Another such growth-killing fantasy is the notion that granting tax cuts in a recession is “dangerous,” because the taxpayers will just use the money to pay down debt, instead of making new purchases. Once again, this concept confuses money with demand. Money is the mechanism for expressing demand. People and corporations purchase goods and services because they want or need them. Needs generate more long-term activity than “wants.” Reducing the supply of money will slow down the purchase of wants, and eventually needs.

High levels of consumer debt also reduce purchases. Businesses carefully consider the amount of interest they’re paying on their debt. Some individuals keep an eye on these figures too, but even the most clueless shopaholic notices when their credit limits are exceeded, or their monthly payments become unbearable. Giving someone the means to pay down their debt does not reduce their demand for goods and services. Leaving them to wallow in debt, while the government remains lavishly funded (and corrupts the money supply with its own astronomical debts) will certainly do so.

The economy is composed of countless transactions in which people and corporations create value by fulfilling each other’s needs. The government also has demands, but they are inherently inefficient, because they are guided by political considerations. Obtaining the best value for the lowest price is never high on their list of priorities, although politicians occasionally find it necessary to pretend otherwise.

The money spent by government to fulfill its demands is not “earned” in transactions that produce positive value. When you hire someone, you are spending money to obtain services you cannot efficiently provide yourself. You value these services more than the money you’re spending. You might need to hire a neurosurgeon to operate on you, because you can’t possibly do it yourself – even if you happen to be a neurosurgeon. The surgeon, in turn, might spend a few hundred dollars hiring a maid to clean his house. He could clean the house himself, of course, but it’s more efficient to hire the maid, because his time is generates far greater value performing surgery, or enjoying leisure activities. Both the maid hiring a surgeon, and the surgeon hiring a maid, are transactions that create value.

Government doesn’t work that way. It seizes its money from taxpayers, who rarely choose to “hire” the government instead of a free-market alternative – certainly not on the scale of a multi-trillion dollar federal budget. Even when a government service is freely purchased, like the Post Office or Amtrak, the product is heavily subsidized by taxpayers, or enjoys legal advantages unavailable to private competitors. Government is a vacuum of healthy demand. Put simply, the primary objective of most government spending is the acquisition of votes, not the creation of value.

The Associated Press, and anyone else baffled by persistent unemployment, should ask themselves what effect draining trillions of dollars from the private sector, nationalizing industries, and running up astronomical federal debt has on the kind of healthy demand that creates value. What can a business do to enhance its sales in a command economy, other than curry favor with politicians? What future do people see when the American landscape is frozen in the wobbling shadow of a system that must, inevitably, collapse?

Your job was not created by your employer. It was created by the people who needed your employer. When the government controls everything, who needs anyone?

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