Obama's advisers have the wrong idea on job creation.
The president will hold a summit on Thursday to discuss job creation. Great.
The U.S. knows more than any country about how to create millions of jobs, having done it in the 1960s and again in the 1980s and 1990s.
The answer lies in small businesses that take advantage of freedom, a sound currency and low tax rates. Anytime those three things are available, they hire like crazy.
We also know how to stop job creation, as we learned the hard way in the 1970s and the last three years. A weakening dollar and the threat of high tax rates cause small businesses to freeze.
In the 1970s, tax rates rose because inflation pushed the country's best producers into higher tax brackets. The tax code wasn't indexed for inflation, so it was an automatic tax hike.
Amazingly, we're living in the 1970s again. Tax rates are scheduled to rise automatically at the end of next year, with a flood of proposals to accelerate and even increase those tax hikes. No wonder small businesses aren't hiring.
Which brings me to two disappointing articles from prominent Democrats as the president's summit approaches.
In Wednesday's Wall Street Journal, Christina Romer, chair of the President's Council of Economic Advisers, laid out her thinking on job creation. While the article is well-intentioned, her thrust is clear--to create jobs through government programs and public-private partnerships. Despite the massive 2009 stimulus and the Cash for Clunkers program, she correctly notes: "American businesses appear hesitant to hire and are producing more with fewer workers."
Rather than propose a stronger dollar to bring in capital, and lower top marginal tax rates to encourage private sector investment and hiring, she proposes "partnerships with the private sector," "harnessing the private sector" and techniques to "leverage scarce public funds." But no small business will increase hiring when harnessed more tightly to the government tax collector.
Deep in the article, there is a mention of small businesses, but no plan to offer them relief from their already-exorbitant tax "partnership" with Washington. Instead, Romer offers targeted Washington aid: "Others have suggested incentives to help small businesses invest, grow and create jobs. This could include measures to restore the flow of credit for small businesses and targeted tax cuts. In these types of ways, a moderate and targeted investment by the government might be leveraged into significant employment gains and purchasing power by small businesses."
Romer is one of the president's most respected policymakers. If her government-centered approach to job creation--"targeted, leveraged government investments"--is the outcome of the president's summit, it will be a big disappointment.
Paul Krugman's Nov. 30 column in the New York Times was even more direct. "It's time for at least a small-scale version of the New Deal's Works Progress Administration, one that would offer relatively low-paying (but much better than nothing) public-service employment. There would be accusations that the government was creating make-work jobs, but the W.P.A. left many solid achievements in its wake."
Their voices are clear. Romer and Krugman are advocating public-private partnerships and government jobs as America's path to lower unemployment. That's not the way America is used to doing it. The president may end up using their ideas to fill the policy vacuum, but he would be more effective (and popular) if he rethought the problem. The great American jobs machine depends on small businesses, relatively free of government, yearning for after-tax profitability, earned in dollars that hold their value over the decades. The president could deliver this, but not based using the current economic program.
David Malpass is an economist and president of Encima Global LLC. He writes a column for Forbes.
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