WINNING THE ECONOMIC POLICY FORMATION AND IMPLEMENTATION GAME:
DEFENSE OR OFFENSE, part 2.
Governments’ job
creation efforts have generally been neutral in their effects at best,
and have usually been more costly than the benefits they produced. Such
efforts have been based on poor assumptions resulting from inadequate,
partial information about the job creation process.
Current job creation
initiatives represent more of the same and will not generate the impact
that is needed. A radically different approach must be implemented and
it must be implemented quickly. In this second part of this article I
shall outline such approach, which is based on the best available knowledge
that we have about the ways jobs are actually created. In this article
I shall focus on the United States, but the case I am making has relevance
for any country that wants to promote prosperity.
In part 1 of this
article, which you can read here,
I suggested that recent economic policy has been defensive, focusing on
financial issues, rather than offensive, emphasizing economic prosperity
and job creation. Today, in early 2010, circumstances have improved on
the surface, but underneath the economic problems are potentially more
damaging than they were when the financial crisis first erupted in 2008.
Several converging trends indicate that the economic hammer will fall
some time toward the end of 2011 or early 2012, if not sooner, and that
the negative economic consequences will be enormous, considerably worse
than what we have seen already.
Even if things do
not get worse, they certainly are bad enough for hundreds of millions
of families around the world to warrant very serious positive action in
any case. Such action must focus on the creation of jobs and prosperity,
based on the knowledge we have, and it must happen quickly. It can be
made to happen quite fast if people demand leadership, for example as
quickly as what happened when General Motors went in and out of bankruptcy
in a matter of months. People seem to have forgotten that it even happened,
but it was an admirable accomplishment as an executed policy, irrespective
of the merits.
The U.S. Labor Force/Jobs Situation
A recent article
in the New York Times, “The New Poor: Millions of Unemployed Face Years
Without Jobs” points to just one of the challenges that economic policy
makers need to meet with respect to job creation. Evidently, the author
of the article does not have much faith that anything can be done to change
the situation.
The facts relating
to job trends are bad:
Some labor experts
say the basic functioning of the American economy has changed in ways
that make jobs scarce…”
During expansions
in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during
the last decade, job growth fell to 0.9 percent annually. Because
people entered the labor force at a greater annual rate during that
time, this means that in the last 10 years job creation fell behind,
even before the financial crisis!
“The pace of job
growth has been getting weaker in each expansion,” Mr. Achuthan said.
“There is no indication that this pattern is about to change.”
Before 1990, it
took an average of 21 months for the economy to regain the jobs shed
during a recession… After the recessions in 1990 and in 2001, 31 and
46 months passed before employment returned to its previous peaks.
6.3 million Americans
who have been unemployed for six months or longer, the largest number
since the government began keeping track in 1948. That is more than
double the toll in the next-worst period, in the early 1980s.
What exactly is the
score when it comes to job creation and prosperity? How far are we behind
actually? To answer these questions we need to consider two sets of numbers,
one set having to do with the way we have traditionally tracked unemployment;
another set having to do with the way we should think about prosperity,
which is better measured by per capita income and distribution. I shall
leave the issue of prosperity to part 3 of this article as most everybody
will be quite pleased just to address the unemployment problem; however,
remember that for many millions of people just having a job does not mean
being prosperous by any imaginative stretch.
Following are the
current relevant labor force numbers.
In January, 2010,
the U.S. Labor Department listed the total labor-age population at
237 million persons.
Supposedly 153
million persons had an interest in jobs, leaving nearly 84 million
people (35%) to be accounted for in other ways. [Note that from a
prosperity perspective, we should pay close attention in asking what
is going on with those 84 million people. It is not clear that many
of those individuals would not like to have good jobs, if available.]
In January, 2010,
128 million of the 153 million were fully employed in some fashion,
leaving 16 million unemployed and an additional 9 million underemployed.
Accounting for
the underemployed at a 50% or half-time work rate, and assuming a
4% full employment rate (6 million), the above numbers (not including
the 84 million) tell us that the job creation score is minus 17.5
million.
In other words, to
get to full employment right now we need to create 17.5 million productive
jobs ASAP. Notice that I referred to the creation of productive jobs,
which entails another discussion outside the purposes of this paper. We
are not going to give points for make-work job creation.
What Is Known About Job Creation?
Ever since the research
done by David Birch starting in 1974 and reported on first in 1979 in
“The Job Generation Process,” and then in his book, Job Creation in America:
How Our Smallest Companies Put the Most People to Work, in 1987, and follow-up
research after that, many people have studied who creates jobs and how
that happens.
We have quite complete
knowledge about the following areas that affect fast and successful job
creation:
- Business growth
and job generation
- Entrepreneurship
and business growth
- Successful
management and business growth
- Venture financing
and business growth
A fifth knowledge
area, community development, entrepreneurship and business growth, lacks
a strong research base, but we can construct a fairly good theory that
we can incorporate as part of effective job creation policy.
Although there are
a large number of facts and issues about each knowledge area that can
be debated, with respect to the formulation of job creation policy the
relevant research has been summarized in a report published by, surprise,
the government Small Business Administration, entitled “High Impact Firms:
Gazelles Revisited.” Following are the key job generation conclusions
in that report (ironically published in June, 2008):
- High-impact,
or faster growing, firms account for almost all employment and revenue
growth in the economy.
- Small (high-impact)
firms with less than 500 employees create about half of the jobs and
large companies with more than 500 employees create the other half.
- Nearly all the
job losses in the economy … are attributable to low-impact firms with
more than 500 employees.
- High-impact firms
exist in all industries in almost all regions, states, MSAs, and counties,
representing 2-3 percent of all businesses.
- An important
percentage of the high-impact companies are young businesses.
A Rapid Job Creation Policy Strategy
When we combine the
facts presented in the above-mentioned report with the knowledge that
exists in the venture development/financing industry, and also tie it
in with community development, we can design a policy strategy that will
optimally create jobs very fast. The policy objectives of that strategy
are as follows:
- Immediately and
directly finance the formation and support of large numbers of start-up
businesses, using appropriate existing business and community development
infrastructures with specialized, well-trained personnel focusing
on fostering successful high-impact companies. (This approach introduces
a virtuous cycle, and can and should be done by the Federal Reserve,
which instead is spending enormous amounts of money on projects that
are part of vicious cycles.)
- Identify existing,
young intermediate- and large-sized high-impact companies and assess
and implement appropriate financing and support activities to stimulate
further growth.
The policy approach
I am advocating here is a more aggressive version of the strategy that
has sometimes been referred to as economic gardening. The gardening
analogy is quite apt as well because we are dealing with statistical outcomes
that can be positively affected with good techniques, just as is the case
with plants.
Rapid Job Creation Policy Implementation
In part 1 of this
paper I referred to an action plan outline and thought experiment that
is published on this site and copied below. The most effective,
high impact job creation plan will include:
- Micro loans
with some leveraging from other sources
- Lending circle
support and accountability
- Strong, low-cost
automated support infrastructure, including Internet communications
and information technology
- Support and participation
of venture development companies and organizations with trained personnel
- Support and participation
of community development and small business development organization
with trained personnel
- Access and participation
in global communications technologies and trade network
A somewhat more detailed
version of the action plan is outlined on fastbizgrowth.com,
entitled "Rapid Business Growth Initiative," which was designed
as part of a regional development template system. That web site also
describes the Enterprise
and Community Support Model that I developed as the needed community
infrastructure that can propel a geographical area toward prosperity.
As I thought more
about the current economic plight, job creation and the role of small
business start-ups, I designed the following simple thought experiment
referred to in part 1 of this article:
Budget: $100
billion ($100,000,000,000), perhaps to be done fastest by the Federal
Reserve
Allocation per
lending circle: $100,000 with 1,000,000 lending circles to be set
up.
Average business
loan: $12,500 (the amount which happens to be the average capitalization
for most people who go into business for themselves.
# of business
projects 8,000,000
Average # of jobs
generated per surviving project in year 1: 1
(6MM projects left, assumes 25% drop-out rate) (net 6,000,000 jobs)
Average # of additional
jobs generated per surviving project in year 2: 1
(4.5MM projects left, assumes 25% drop-out rate) (net 9,000,000 jobs)
Average # of additional
jobs generated per surviving project in year 3: 2
(3.6MM projects left, assumes 20% drop-out rate) (net 14,400,000 jobs)
Total # of jobs
generated over three years: 19,700,000
Total # of job
losses over three years: 5,300,000 with total # of 14,400,000 net
jobs generated over three years.
The point of this
exercise is to demonstrate how much leveraging potential exists with the
kind of job creation model outlined here. Admittedly, it would not be
simple to generate 14.4 million jobs with the suggested strategy, but
the projection is not implausible, assuming good execution and an excellent
support system.
The virtue of this
job creation approach is that it can mobilize existing organizations and
resources very quickly. The policy will need to be executed well, which
require rigorous training and accountability systems, but it does not
need to involve complex top-down processes because it should take advantage
of people’s natural proclivities to benefit themselves. In other words,
the policy takes advantage of natural human incentives without having
to impose complicated and costly controls. In fact, it is critical that
bureaucracy and government intervention be absolutely minimized. [For
example, one improvement that can be made that would have a large and
immediate positive impact would be to exempt businesses with less than
$100,000 in revenues from all taxes and having to file any paperwork,
except perhaps minimal financial and employee information, filing requirements
and sales taxes.]
The job creation
policy strategy recommended here should be implemented even more speedily
than the large corporate bailouts, within weeks not months from the time
that this approach gets the attention it warrants. After all it is rooted
in common sense and is backed by research. This policy will capture the
imagination and support from the public. It combines the best of pro-social
and conservative impulses.
Following are some
implementation steps to be considered:
- Set up a national
task force headed by an executive with strong operating skills and
experience with high-impact business creation and success.
- Establish financing
channels through organizations that will be rapidly trained to adopt
non-traditional but proven lending methods to fund and monitor individuals
(credit unions would be a good option, if the legal niceties could
be dealt with quickly.)
- Recruit executives
with proven business building experience to work with state-wide and
local groups.
- Emphasize rapid
business growth and provide practical and low-cost incentives to businesses
that are successful.
- Establish a training
and support system that uses information technologies and the Internet
to maximize communication, networking, accountability and results.
- Fund as many
people as possible as quickly as possible to start their own businesses.
Do not remove the unemployment and other benefits these individuals
are receiving, except as their businesses begin to generate comparable
profits.
- Open up commerce
and trade opportunities regionally and internationally. With good
support, entrepreneurs will find ways to take advantage.
- Deploy available
business growth and financing methods and tools, such as direct public
offerings, for example, to stimulate the success of high-impact firms.
Job Creation Policy Evaluation and Accountability
Going back to the
game analogy, the political representatives, economic policy makers and
related bureaucracy are the respective executive and coaches in the job
creation arena, where the scores are measured by employment levels, per
capita income and fair income distribution. By any measure these individuals
have failed miserably in at least the last decade, and, in my opinion,
long before that. There are few things more important than jobs, income
and general prosperity. The scores in these areas should determine whether
politicians, policy makers and bureaucrats get to keep their jobs.
How can the proposed
job-creation model be improved, refined and implemented, and its impact
be better estimated and assured? In fact, I came up with the above thought
experiment before I looked at more of the details presented in the referenced
SBA article. It turns out that with the numbers presented in that article
we can actually develop an empirical model that will predict the number
of jobs that will be created with the policy I have outlined here. I have
started tinkering with such a model which would not be difficult to evaluate
and improve.
In part 3 of this article I shall discuss
the relevance of the policy approach presented here in the context of
a wider goal of achieving sustained prosperity.
References
New York Times,
February 21, 2010. The New Poor: Millions of Unemployed
Face Years Without Jobs
David Birch, The Job Generation Process (1979). MIT Program on Neighborhood
and Regional Change, Vol. , 302 pp. 1979
David Birch, Job
Creation in America: How Our Smallest Companies Put the Most People
to Work. New York, Free Press, 1987.
Acs, Zoltan, William Parsons
and Spencer Tracy, 2008. High-Impact Firms: Gazelles Revisited. Small
Business Administration, Office of Advocacy.
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RIGHTS RESERVED MICRO BUSINESS GROWTH, INC. |
Job Creation Fact
Nearly all of new jobs are created by rapidly growing businesses.
Such businesses thrive in environments that support trade and connections.
 The
Jobs Problem Simplified
Articles
Winning
the Economic Policy Formation and Implementation Game: Defense or Offense,
Part 1
Winning
the Economic Policy Formation and Implementation Game: Defense or Offense,
Part 2
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