Jobs creation and government policy

(Foreword to FMF Occasional Paper Jobs creation and government policy by Jerry L Jordan, President and CEO of the Cleveland Federal Reserve Bank, U.S.A.)

FMF Occasional Papers are designed to make available to a wider audience, essays on particular matters of moment or currency. This Paper by Dr Jerry Jordan meets these criteria. Dr Jordan, formerly of President Reagan’s Council of Economic Advisors and now President and CEO of the Cleveland Federal Reserve Bank originally wrote the Paper for a Mexican audience. The relevance for South Africa is obvious. According to definition we have 20-30% of our labour force out of work. In the decade to 2000 some 1 million formal sector jobs disappeared. The only major group of employees which is exempt from this trend works in the general government sector.

Dr Jordan warns us against confusing ‘job creation’ with ‘wealth creation’. In Chapter 1 he notes that while digging an earth dam with spades creates jobs, doing so with teaspoons would create even more. Better by far, of course, to employ fewer workers and use earth-moving equipment. To achieve that target a capital-friendly, profit-friendly environment is necessary.

Jobs are certainly then ‘lost’. Shovel-wielders give way to bulldozers. But as Jordan points out in Chapter 2, the evidence from history, both recent and distant, is that new jobs in wealth-creating industries follow the demise of old jobs in value-subtracting sectors as surely as night follows day.

So should we applaud South Africa’s Skills Development Act? Employers are subject to a training levy by government. The amounts vary with payroll size and partial reimbursement is given if the firm provides approved training for its labour force. This sounds good but Jordan would not approve.

On page 5 he writes that ‘because policymakers have no clear foresight of where entrepreneurial energies will be directed in the future, it’s impossible for them to predict where jobs creation “should” occur’. To steer existing firms into training their existing labour forces into better performing their existing occupations is merely a recipe for stagnation.

Better by far, argues Jordan, to foster an environment where entrepreneurship will flourish. In Chapter 4 he notes that the late Karl Brunner highlighted the only four ways in which a person can influence the use of scarce resources in any economy:

a) he/she can produce goods or services
b) he/she can trade goods or services
c) he/she can expend resources to influence the political process to redirect and redistribute resources to him/herself; or
d) he/she can expend resources to protect him/herself against the wealth redistributing efforts of others.

Only the first two create wealth. Government activity can influence all four.
When government protects private-property rights (physical and intellectual) it fosters production. When government establishes a legal framework that minimises contracting costs and facilitates contract enforcement it fosters trade. If government activity of this sort is insufficient the result is a ‘barren economic landscape’ (p12). Conversely if government overindulges in the redistribution mode the outcome is equally bleak.

Dr Jordan is a Central Banker and in Chapter 5 he expands on the role of the government in maintaining the value of money. The protection of the internal and external value of the monetary unit is vital if the property rights of the individuals and firms that use it are to be protected. Without that protection, owners of capital simply find another monetary regime where their investment does not depreciate in value. The inhabitants of the country from which capital has fled may then misleadingly see themselves as victims of an ‘investment strike’. In South Africa, organised labour has used that term in the public arena on several occasions in recent years. The reality is that the contractual terms of the rand:dollar or rand:pound exchange rates are not being maintained.

The FMF offers this Paper to further discussion among policy makers both in government and elsewhere. Neither the FMF (which has no corporate view) nor its Directors, members or staff, necessarily agree with Dr Jordan’s analysis. Nevertheless, we believe this essay, originally designed for a Mexican audience, can contribute to the debate on jobs, money and economic freedom in our own environment.

Source:Professor W. Duncan Reekie is Bradlow Professor at the School of Economic and Business Sciences, University of the Witwatersrand.

(The Occasional Paper featured above is posted under Publications on the website and is available for downloading. Hard copies are available from the FMF at R30 per copy.)

FMF Policy Bulletin / 18 August 2009