Healthy economic growth
naturally creates jobs. Businesses hire additional workers to produce enough goods and services to meet rising demand. A free market economy
allows small businesses to compete, creating better ways to meet consumers' needs. Because of this, small businesses create 65% of all new jobs
. The proper role of government in this healthy economy is to provide a supportive environment for growth.
However, even a healthy economy is subject to the bubbles and busts of the business cycle. When the economy contracts into a recession, the government must step in through expansive monetary and fiscal policy to stimulate job growth. The best way for government to reignite job creation after a recession depends on what caused the contraction and what is preventing a natural return to expansion.
1. How Confidence Creates Job Growth
A healthy economy will naturally create jobs.(Photo: Tom Boyle/Getty Images)
The oil that lubricates economic expansion is confidence. Government creates confidence when its policies are clear, consistent and concrete. Without this, it inhibits business growth if its allows a climate of uncertainty and fear. Businesses can eventually adjust to any set of taxes, regulations and economic policies, but they can't plan for growth if they don't know what to expect. Consumers, who drive 70% of the economy, won't spend if they don't believe the future will be safe and secure. Therefore, the underlying role of government is to create confidence, powering the economic growth needed to create jobs.
That being said, there are some monetary and fiscal policies that are more cost-effective in creating jobs than others. Here's a summary of most of them, their cost-effectiveness, and an explanation of when they should be used. (For more, see Unemployment Solutions)
Federal Reserve Chairmen Alan Greenspan and Ben Bernanke.(Photo: Getty Images)
Expansionary monetary policy
is when a central bank, such as the Federal Reserve, uses its tools to stimulate the economy. This usually means lowering the Fed funds rate
to increase the money supply
. This action increases liquidity
, giving banks more money to lend. As a result, mortgage and other interest rates decline. With cheaper credit, consumers can borrow and spend more, causing businesses to expand to meet the increased demand. Companies hire more workers, whose incomes rise, allowing them to shop even more.
The Fed can also increase the money supply through quantitative easing. It creates credit out of thin air to buy U.S. Treasuries, mortgage-backed securities and any other debt. The Fed has many other tools, such as lowering the Federal reserve requirement, and lowering the rate on the discount window.
Expansive monetary policy is usually the first step in creating jobs, because decisions can be made quickly through the regular FOMC meeting. Another advantage is that the Fed can quickly put trillions of dollars into the economy by making credit available without increasing the U.S. debt.
One disadvantage is that it doesn't directly put money into consumers' pockets, so it might take longer to stimulate demand. Another con is that, if overdone, expansive monetary policy can trigger inflation.
While fiscal policy creates jobs, it also adds to the U.S. debt. (Photo: U.S. Debt Clock)
If a recession is severe, then the President and Congress can use expansionary fiscal policy to create jobs. They can either cut taxes
, increase spending
, or both. Tax cuts create jobs by putting more money directly into the pockets of consumers and businesses. Discretionary spending
creates jobs by directly hiring workers, sending contracts to businesses to hire workers, or increasing subsidies to state governments so they don't have to lay off workers.
One disadvantage of fiscal policy is that legislators disagree on whether tax cuts or increased spending is more cost effective. The resultant debate can delay action. In addition, expansive fiscal policy can increase budget deficits and the U.S. debt.
Income tax cuts are handing out money to consumers.
Tax cuts create jobs by letting families or businesses keep more of their own money. The idea is that consumers will buy more stuff, stimulating demand. Businesses will use tax cut money to hire much-needed workers. However, all tax cuts are not created equal when it comes to job creation. A Congressional Budget Office (CBO) study found that, for example, the Bush tax cuts create 4,600 jobs for every $1 billion in foregone tax revenue. Payroll tax cuts were even better, creating 13,000 new jobs for every $1 billion. That's because companies use the tax savings in one of four ways, all of which increase the demand needed to drive job growth:
- Reduce prices.
- Increase employee wages.
- Buy more supplies.
- Hire more workers directly.
In fact, the CBO found that the fourth method is the most cost effective way to create jobs. If a payroll tax cut is given only for new hires, then every $1 billion creates 18,000 new jobs.(Source: CBO, "The Economic Outlook and Fiscal Policy Choices," September 28, 2010)
To learn more about why so many people favor tax cuts as the best form of job creation, see Supply-side Economics, Trickle-Down Economics, Laffer Curve.
The successful attack on bin Laden shows how modern defense requires less personnel than WWII.
When people think about the best way for government to create jobs, they typically think of either the New Deal and World War II. A U Mass/Amherst study
found that, here again, all spending is not created equal. One billion dollars spent had the following results:
- Public works = 19,795 jobs.
- Unemployment benefits = 19,000 jobs.
- Education = 17,687 jobs.
- Defense spending = 8,555 jobs.
This finding surprises many people, because it's largely considered that the New Deal failed, while it took World War II to really end the Great Depression. But, it makes sense when you consider World War II was much more labor-intensive than today's defense spending, which spends more on drones, F-16s, and aircraft carriers than the salaries of military personnel. Second, there were no unemployment benefits during the Great Depression, just some soup lines. Benefits create so many jobs because the unemployed have to spend all the benefits received on necessities like groceries, clothing and housing. The added demand allows retailers and manufacturers to hire more workers to meet the added demand. (Source: UMass/Amherst, Robert Pollin and Heidi Garrett-Peltier, Department of Economics and Political Economy Research Institute, The Employment Effects of Military and Domestic Spending Priorities
, October 2007)
For more the job creation ability of government spending, see How How bin Laden Death Could Reduce Unemployment and The True Cost of War.
Not all jobs are created equal.(Photo: John Moore/Getty Images)
When looking at job creation statistics, also remember that not all jobs are created equal. Federal spending on public works creates construction jobs. That will successfully reduce the unemployment rate
, but it may not stimulate demand as much as creating the same number of better paying high-tech jobs. In fact, jobs created after the last few recessions have led to greater income inequality
, as re-hired workers became willing to take jobs that paid less. The high level of long-term unemployed, and underemployed
, in this recession means that this trend will only continue. For month-by-month job creation statistics since 2008, see Employment Statistics
7. Job Creation by President
(Photo: Brendan Smialowski/Getty Images)
- President Obama - Created 3.958 million jobs from the lowest point in February 2010 to August 2012. However, since jobs continued to be lost after he was elected, the total tally from his nearly four years in office is a loss of 263,000 jobs from January 2009 - August 2012.
- President Bush - Lost 3.6 million jobs from the peak in January 2008 to the end of his term in December 2008. However, 2.1 million jobs were added during his eight-year term, from January 2001-December 2008.
- President Clinton - Added 22.7 million jobs during his eight-year term (January 1993-December 2000).
- President G.H.W. Bush - Added 2.28 million jobs during his four-year term (January 1989-December 1992).
- President Reagan - Added 15.84 million jobs between January 1981 - December 1988. (Source: Bureau of Labor Statistics)
For more, see Bush Tax Cuts
, Clinton's 14 Job Creation Ideas
, and Reaganomics
President Barack Obama's job creation strategies. (Photo: Alex Wong/Getty Images)
9. Bill Clinton's 14 Job Creation IdeasLove him or hate him, Bill Clinton did preside over eight years of steady economic growth without adding to the debt. His 14 job creation ideas are worth considering, if only for that reason. Article updated September 17, 2012