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
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)
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.
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.
4. Tax Cuts
- Reduce prices.
- Increase employee wages.
- Buy more supplies.
- Hire more workers directly.
- Public works = 19,795 jobs.
- Unemployment benefits = 19,000 jobs.
- Education = 17,687 jobs.
- Defense spending = 8,555 jobs.
7. Job Creation by President
- 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)
- Cut income taxes.
- Extend unemployment benefits.
- Spend more on public works and other "shovel-ready" construction projects.