The Economic Fundamentals of Jobs

– May 11, 2020 Reading Time: 4 minutes

They would stop you at job creation. Who would? Venture capitalists and other capital allocators if, when presenting your new business idea, you led with how many jobs the venture would create.

No one starts a business to put people to work. It should more realistically be stated that every commercial and technological advance is all about shrinking the amount of labor required to achieve some kind of laudatory outcome. Technology is the process whereby machines and other advances produce exponentially more with fewer hands.

This is so often forgotten by economic types on the left and right as they obsess over “labor force participation” rates. How very backwards. If readers are looking for 100% labor force participation, just travel to the world’s poorest countries. Everyone is realistically working all the time. Life is defined by unrelenting drudgery.

In rich, economically advanced countries work is the norm, but more and more it’s a choice as opposed to a necessity. There are dual-earner couples, and people who work until their dying day not because doing so is a matter of survival, but because work itself brings its own rewards.

Crucial is that work is most rewarding in the parts of the world where jobs are destroyed the most rapidly. Looking at it in terms of the United States, “what do you do?” in 2020 would elicit wildly different answers relative to 1920 when agriculture was still a major part of the U.S. economy, but so would the answer have been very different in 1990, 2000, and 2010.

In rich countries what we call work is constantly changing precisely because technological advances mothball the toil of the past. Contrast that with the poorest countries where “what do you do?” results in the same answer for all-too-many year after year, and decade after decade.

Which brings us to the federal government’s Paycheck Protection Plan (PPP). As always, this plan from our federal minders will have attached to it the non sequitur description that it most certainly rates. No one was clamoring for a PPP two months ago simply because politicians at that point hadn’t happened on the shockingly dim idea whereby they would engineer mass unemployment, business bankruptcy, and desperation as the solution to a new virus.

About the U.S. economy pre-coronavirus, it’s not as though businesses weren’t failing then. In truth, they were going under with great regularity. Such is the way of a dynamic economy: endless experimentation conducted by entrepreneurs, and as a consequence, lots of businesses shuttering all the time. Lest readers forget, growing use of the internet already had certain retailers under the gun.

Needless to say, a certain sign of economic sclerosis is a static business scenario whereby the ones populating malls and other shopping areas are unchanging. Conversely, somewhat rapid turnover signals progress as the present is constantly replaced by the future. In short, with or without the coronavirus, the nature of work and the names of businesses meeting our needs was going to change markedly between 2020 and 2030, and just as reasonably, between 2020 and 2025. Market driven failure is progress.

Back to the rollout of the PPP, it once again wasn’t being called for two months ago even though the future for most businesses was far from certain. But with the forced lockdowns by politicians that wrecked the present and future of all manner of businesses indiscriminately, and for reasons that had nothing to do with “free markets,” government stepped in to throw the money of others at what it broke. The PPP shows yet again why government cannot – ever – play investor, lender, or any kind of resource allocator.

Indeed, with politicians having cruelly put tens of millions out of work as a consequence of bankrupting businesses with their lockdowns, the PPP was created by government so that businesses could rehire some of the very people government had rendered unemployed. And in classic government fashion, this non sequitur of a program required that 75% of the PPP funds go toward employee pay. Maintain jobs at all costs!

That’s how people in government think. In state and national capitols, it’s all about doing less with more people. Hiring to hire. Don’t you get it, hiring without regard to the purpose of the job creates “economic growth!” Actually, productivity powers economic growth, which is why businesses routinely strive to do more with fewer hands. Technology enables all this.

Looking at the present, for many businesses their biggest expenses are rent related, and physical infrastructure. This is particularly true in prosperous cities. A business close to the well-to-do is in some instances going to pay quite a bit more just to be in that location, than to employees working in, say, Beverly Hills, Greenwich, or River Oaks.

Which speaks to why the PPP in so many instances cripples, as opposed to revives businesses. That’s the case because there’s no present way of knowing what the future will look like for companies in terms of human employees. Precisely because some consumers will prefer less human interaction in the future with virus-spreading top of mind, it’s possible that businesses will devise all manner of ways to save on labor while meeting needs of customers that they didn’t express before the spread of the coronavirus.

After that, let’s not forget that businesses will to some degree be impaired going forward simply because previously locked down consumers will be. For government to demand pre-virus levels of employment as a pre-condition of receiving PPP money is for government to set the stage for business failure just as soon as these hideous and unnecessary lockdowns end.

All of which brings us back to the venture capitalists, investors and lenders who will decide whether cruelly impaired businesses will make it in the aftermath of this most political of crack-ups. About the future, it should be said yet again “they would stop you at jobs.” No business will attract funds if it presumes to operate at staffing levels that perhaps made sense before March of 2020.

It’s all a reminder of the persistent truth that’s informed all of these columns since politicians on all levels lost their minds: government cannot ever play investor, lender, or anything else. Crucial is that it needn’t play those roles. The only answer, as always, is to end the lockdowns as soon as possible so that businesses can resume with market-disciplined investors and the marketplace itself guiding their decisions.

Republished from RealClearMarkets