April 2, 2011

 

 

An age old debate rages on in economics. On one side are the classical economists who call for free-trade and competition. The other side advocates a “mixed economy” where the private sector is closely monitored, bolstered, and if needed supplanted by the government. The easiest way to examine the claims of both sides is to look at the two men who started and perhaps best represent the debate at hand.

 

A father of economics, Jean-Baptiste Say, is credited with coining the idea that “supply creates its own demand,” or Say’s Law. This was a generally accepted proposition in the 19th century, and was eventually modified to include the idea of a boom/bust cycle which most see as both natural and inevitable. Say’s Law is one of the basic premises of classical economics.



 During the Great Depression in the first half of the 20th century, a new school of economics rose up to bitterly debate Say and his conclusions. Enter John Maynard Keynes. Keynes argued that while the private sector was the foundation of any good economy, it needed to be controlled. Left to its own devices, Keynes believed the private sector was too unstable, and that ultimately government intervention and an activist monetary policy were required. The debate between classical economics and Keynesian economics, continues to this day.

 

In his Op-ed piece in the Wall Street Journal, Paul Krugman argues for Keynesianism.  He asserts that increased government spending will help the recovery and that decreased government spending would only hinder it. Krugman's views, like all Keynesian arguments, place jobs at the center of the debate.

 

Krugman argues that firing government workers will lead to a down turn in the economy.  Jobs are considered the primary objective, so much so, that they are considered an end in themselves. Jobs put money in the hands of people, and production is thought to be the result of employment. Say believed the opposite--production creates prosperity which results in jobs.

 

 “If you build it—they will come” is a way of expressing Say’s Law. Say argued that you need to produce something before prosperity can occur. Create something new and exciting and the world will come clamoring for it.  New ideas, like flat screen TV’s lead to new demand and often a whole new industry. No amount of money can create the innovation that makes demand possible. That is why dictators can’t buy prosperity.  Say held that the products that come from innovation are the real wealth, and credited innovation with raising the standard of living of individuals. 

 

But Keynes thinking persists, that demand creates supply, and that is why Keynesians put jobs front and center. Most politicians and economic commentators seem to agree with Keynes. You can hear the cry for “jobs, jobs, jobs!” coming from the left and the right. On this many liberals and conservatives agree: jobs create prosperity. And this argument is being used today to protect the jobs created within government.  Cutting any government job is being denounced as anti-stimulus. Instead both sides of the political aisle are calling for the creation of a jobs program. 

 

Yet, the lowest unemployment rate in my lifetime was achieved during the 25 years preceding the recession.  During this period unemployment averaged 4.5 to 5%. There was no jobs program during those years!  There were no stimulus programs. What many do not understand is that not all jobs are created equal. A job in the government sector is not the same as a job in the private sector.

 

When the private sector creates a job it costs you and I nothing.  But every government job is paid for by us.  We are on the hook for every new job created by government, plus the pension and benefits awarded to government employees for the rest of their lives.  Recent studies show that jobs created over the last year in the public sector have cost the taxpayer $413,000 per job!  (Source: Recovery.gov). Eliminating these jobs would not reduce prosperity; in fact it would be an effective way to reduce the deficit.  Yet, the argument to reduce unemployment to stimulate the economy continues.

 

It is not the reduction of unemployment per se that matters, it is the creation of productive and profitable employment that does. Suppose we had a magic wand and with a flick of the wrist could make the 9% who are unemployed disappear.  What would change?  Would there be more production?  Would there be more prosperity?  Would the budget deficit disappear?  Would the national debt be reduced?  No. The only real difference would be a decline in unemployment and health benefits the states and federal government pay out.  That would amount to a drop in the bucket when compared to the total current government spending, deficits, and funding needs.  This is not to say that unemployment is unimportant. To those who are unemployed it is crucially important. To them employment means everything.  But to the economy as a whole, little would change.

Again, jobs do not create prosperity.  Prosperity creates jobs. In fact, jobs in and of themselves are not even necessarily wealth creators. The unemployment rate last year in Cuba was 1.7%!  Is Cuba prosperous? There is full employment in prison camps. And the pyramids of ancient Egypt while creating full employment, never added a thing to the standard of living for Egyptians. Jobs for the sake of jobs create nothing except employment.  Productivity should be the objective of a nation--not simply jobs.  If prosperity is our nation's goal, jobs must be created via innovation and production in the private sector.

It is no accident that government employment has been increasing over the past couple of years, or that government wages and benefits have been increasing dramatically during a recession.  A recession is an opportunity for politicians to try and help the nation. But the stimulus program passed by congress had little to do with stimulating the economy.  It just shifted jobs from the private sector to the public sector, enticing votes by dangling more jobs through new government programs. Employment in the public sector has soared along with pay and benefits, while unemployment has stagnated, and wages have decreased in the private sector.

 

An example of a Keynesian economic agenda is the Obama administrations “green energy jobs initiative.” How many new jobs will be created and at what cost? At 2.3 billion for 17,000 jobs, this “initiative” will cost the taxpayer $135,000 per job.  Compare that to the “cost” of a new private sector job! But the government will pay almost anything to create jobs which remain under their control. Control is what makes the creation of government jobs so enticing to politicians. Even worse, those struggling in the private sector are the ones forced to pay for the public sector boom.

 

So, the next time you hear a politician or commentator say it's all about jobs, and that jobs are our number one priority, ask yourself this: jobs in the private sector or jobs in the public sector and at whose expense? 

 

By keeping the focus on jobs, politicians create what magicians call "misdirection." We lose sight of what really creates jobs. It isn’t money in the hands of people.  Money is simply a claim to wealth.  It is the new supply of goods that are actually the real wealth. Goods people want to buy create productive jobs in the form of profitable production—not government created work programs. Say understood this.  Keynes never did.

 

That is why the real objective right now in this country needs to be removing the non- productive jobs created within government over the past few years, and moving them back to the profitable arena of the private market.  Yes, there will be a transition cost. But the cost will be small in comparison, and only temporary. Besides, it is the only true path back to prosperity.

 

Pay no attention to the Keynesians who tell us daily that to cut government jobs will cause the country to fall back into recession and cause financial calamity.  Freedom, free markets, less taxation, and less regulation over the peaceful pursuit of profits brings prosperity.  Hiring bureaucrats at outrageous wages and refusing to hold them accountable for their work is the worst form of protectionism, and will lead to the slow strangulation of our nation.

 

The national discussion has turned to budget cutting and the main argument against it is that it will destroy jobs. I am all for more Jobs.  But they must be created within the private economy--not the government.  Austerity is the new reality all over the world.  We do not have to slash government spending or eliminate massive amounts of government jobs overnight.  We need to simply back out the way we came in.  Each year we can reduce government to the size it was the year before, and then before that.  We need to revamp our cumbersome tax and regulatory laws and create a simple and intelligible system that will promote economic growth.  We need to restore market incentives to produce, rather than impose government penalties on those that already do.  If we return to classical economic solutions which are the corner stone of the American economy, the net effect will be "jobs, jobs, jobs!"

 

 

Market Update:

 

On Monday of this week we had no less than four members of the Federal Reserve Board comment that it was time to end QE2, perhaps even end it early. Did the stock market fall apart? Not at all. The stock market rose to new highs. On Friday, Jeff Lacker of the Federal Reserve, stated openly that by the end of the year they may be raising interest rates. According to CNBC economic commentator Steve Leisman, this was a “jaw dropper” of a statement. Did the bond market tank?  No, interest rates moved down, the dollar closed unchanged, and commodities were marginally lower.  All of which underscore the fact that QE2 never was the game changer it was said to be.

 

During the last 12 months, M2 has risen by about 5%.  Inflation has gone from .08% year over year to about 2%, which is where the Fed said they wanted it.  Still, home prices continue to fall, and commodity prices are off their recent highs.  The CRB is sitting today at 360, down from its high of 440 of 2008.  And growth rate estimates are being cut for the 1st quarter from around 4% to the 2.5% range.  Since QE2 was launched, nothing much has changed. It has been, for the most part, neutral. Its purpose was to nip the deflationary trend that was developing in the bud. That it has.

 

Meanwhile, the continuous increase in the stock market has the experts still scratching their heads. We are in the ninth consecutive quarter of stock market gains. We just hit a two and a half year high. I don’t know about you, but for the most part I have made more money in a bull market in stocks than in a bear market, at least for the last 10 years. So, I for one, welcome the continuous rise in the market – especially when led by resource stocks.

 

This week the cloud hanging over RBY’s head was lifted together with the stock which soared from 4.25 to 5.20. Both Amazon and Denison mining were up smartly by the week end. And the Canadian Dollar has hit over 1.03 and is rising. Canadians are descending on the U.S. en masse, to buy real estate, see the sights, and shop. They alone are helping to buoy the economy of this country. More on this next week.

 

Also of note is the price of oil has hit 108 dollars a barrel – the highest in some time.  110 is an important number for oil, since it was where oil both spiked to 147 after penetrating that number, and fell dramatically after that support level was broken on the way down. To reference this week’s article on jobs, if we turned the energy industry of this country lose to find and produce all and any energy that is profitable we would both increase jobs immediately and reduce the price of energy to every American. But this kind of freedom will not yet be allowed in this country.

 

 

Portfolio by Weight:

Copper Fox Metals

Cash

Rubicon Minerals 


US Silver Corp

CDE

Lexam Gold

Amazon Mining


Denison Mines


Temex

Rochester Resources LTD