THE BLOG

How to Create Jobs

03/18/2010 05:12 am ET | Updated May 25, 2011
  • Nathan Lewis Fund manager and author of "Gold: the Once and Future Money"

We need more jobs in the U.S. Not only some sort of job, but good jobs -- jobs that take advantage of Americans' great skills and abilities, and provide an environment to develop and grow. In other words, well-paid jobs.

How does a government accomplish this? There are two basic strategies:

1) Government jobs.
2) Private-sector jobs.

Probably most politicians and bureaucrats tend toward the first strategy, which is to create government jobs. Not surprisingly, a whole subgroup of economists has popped up to tell politicians and bureaucrats how smart they are. John Maynard Keynes went so far as to say that, in a recession, the government should pay people to dig holes, and other people to fill them up. In other words, a job which creates nothing of value at all.

A lot of government jobs are like this. But how is this different from paying someone to sit on the couch and drink beer? The only advantage seems to be psychological -- workers are vaguely more satisfied, and maintain a stronger work ethic. I consider these kinds of jobs to be mostly a form of welfare, not an economic plan. In a bad economy, increased welfare provision can be a good thing, but it only goes so far.

At the extreme, this process of creating government jobs becomes a communist centrally-planned economy. I'm not just throwing out those terms to push peoples' ideological hot buttons. One of the advantages of the Soviet Union was that everyone had a job. They also had a place to live, a reasonable guarantee that they could eat, universal medical and dental care, and a provision for retirement and old age.

Alas, as one would expect from an economy that consisted of 100% government jobs, the Soviet Union did not have a healthy economy. Without the profit incentive for innovation, and the hot cleansing fire of business failure, it tended toward stagnancy and corruption.

Let us then assume that we aim to create private-sector jobs. How is this done?

For that, you need the Magic Formula. Here it is:

Low Taxes
Stable Money

In short, you have to create an environment in which businesses can prosper. When businesses prosper, they hire more people.

I don't think it would be controversial to claim that businesses would be most prosperous with no corporate taxes whatsoever, and least prosperous with a 100% tax rate. The same holds true of individuals. Indeed, this idea was part of the American experiment. Europe had high taxes across the continent, which took as much as 80% of people's incomes. From its inception in 1789, until 1913, the United States had no income taxes. During those 124 years, the United States enjoyed the greatest economic expansion of any country on earth.

Despite the amazing economic growth, this arrangement was not entirely successful. Certain problems remained unresolved. As a country grows wealthier, it has the resources to do something about it. Over time, people decided that the government should provide some sort of welfare system. This perhaps began with universal education, and expanded to food provision, unemployment insurance, public pensions, and finally universal healthcare.

Today, the challenge is to provide the services we want -- financed by taxes of course -- while causing the least damage to the private economy.

Often, we have a debate between lower taxes and less welfare, and higher taxes and more welfare. This, I propose, is mostly a conceptual stumbling block. I find that Asian governments don't seem to fall into these intellectual dead-ends. Eastern European governments are also more willing to seek new answers.

We looked at Hong Kong, which is one of the most pro-business places on earth (16% corporate tax rate and 17% top income tax rate). It also has one of the most successful universal healthcare systems on the planet -- along with an excellent education system and the other welfare programs common to developed countries.

We could also look to Slovakia, which has a 19% flat tax system, and also a universal healthcare system. Today there are at least 25 countries with flat-tax systems and top tax rates of 20% or less. Success breeds imitators.

The other part of the Magic Formula is Stable Money. Businesses can't prosper if they are subject to periodic currency disasters. The Eastern European countries have a big problem here, which they are trying to solve. The chronic decay of persistent inflation or deflation -- or just the chaos of a currency that is forever bouncing up and down -- is no help either.

Notice that both Hong Kong and Slovakia also favor currency stability. Hong Kong has a dollar currency board, and Slovakia is making efforts to join the eurozone. Neither subscribes to the ideology of a home-grown central banker jiggering the currency to tweak the economy.

The other reason the United States was such a success is that it had stable money. From 1789 to 1933, the dollar was worth about 1/20th ounce of gold. That was 144 years of unchanging currency value. After the 1933 devaluation, the dollar was worth 1/35th ounce of gold, where it remained until 1971.

In other words, the U.S. had a policy like Hong Kong and Slovakia. However, instead of pegging to the dollar or adopting the euro, the U.S. pegged to the supranational currency of mankind -- gold. Until 1971, central bankers had very limited ability to play their "stimulus" games with the currency.

Since 1971, we haven't had a stable currency in the U.S., although the floating dollar has been more stable than a lot of other currencies. During this time -- the last forty years -- we have also seen the U.S. middle class steadily deteriorate from the high point of prosperity reached in the 1960s. This is no coincidence.

If you look at the policies we have today, we see that they are exactly contrary to the Magic Formula. Taxes are already high, and they are headed higher at both the state and federal level. The currency is hardly stable, and indeed the Fed has a strong bias towards inflation to counteract the "deflation" they perceive in the economy.

In short, the present policies of the U.S. government are a recipe for continuing economic deterioration.

It is not that hard to solve today's economic problems. Will they be solved? I doubt it -- at least, not without the kind of crisis that finally kicks some sense into people.