Create Jobs or Create Wealth?

This has been going on for years. All that we hear from politicians and their ilk is that we need to create jobs. It seems simple enough. We have high unemployment, so creating more jobs would help that. It sounds innocuous enough, and it is true that more jobs are better than less, but I think that we are focusing on the wrong subject. Yes, jobs are a problem, but what about production?

We could have full employment by paying everyone to dig holes in the ground and then refilling them. However, we would all be poorer in the scenario. Instead of those people eventually finding jobs and doing something productive, they would be creating new wealth and we would be paying them for it!

With investment, we measure success by seeing if we earn more than we put in. Thus, if we put $100,000 into a business, but get only $50,000 in value back, then we consider this a loss. Hiring someone, along these lines, is much like an investment. It is only worthwhile if you get more than you put in. So when we hire people for a freeway project or a rail project, are we getting more money back than we put in? I do not think that this is usually the case (at least we have no way to measure the success of this, so maybe government intrusion here has lead to the absolute failure of rational economic calculation).

So sure, we can create full employment, but we need to make sure that the investment is worthwhile. If not, then this focus on employment is just making us all poorer.

St. Louis Fed Inflation Charts

If you've never played with FRED at the St. Louis Fed website, you are really missing out. Let me explain because I know that sounds a little strange. FRED allows you to look at economic data from the Federal Reserve. They have all kinds of data, like consumer price index, wages, GDP, etc. It is all very interesting. So today, as an example of the great things you can do with this program, I will post some intriguing graphs that I made with the program.

So then, it looks like inflation and unemployment are related. The red graph is CPI showing the percent change, and the blue line is total nonfarm employment percent change. So then, it looks like whenever CPI falls that unemployment rises and when CPI rises employment rises. I just have a few issues: 1991 and 2008. In these times we see the opposite being true. In 1991 when CPI rose unemployment fell anyway, and in 2008 when CPI fell unemployment did not really experience a change. In fact, rising CPI right after shows decreasing employment.

So there are a few flaws, but it generally looks pretty good, right? Well, if you have been following this blog you know that CPI understates inflationary changes and so I am not a fan of it.

This graph, I believe, is much more informative. It shows the percent change of M1 (a money stock) and percent change of total employment. Notice a trend? I see huge spikes in M1 during recessions and tremendous falls in employment anyway. Furthermore, look at the period between 1900 and 2000. When M1 was rising employment was rising. However, when M1 was decreasing, unemployment did not change. Is that a big problem? You bet, as the same problem is evident between 2000 and 2005.

Finally, a very simple graph. It shows inflation in food prices each quarter. Notice how food has rarely bee cheaper, and how the rise in food prices today is relatively high? And this is still using a CPI method that understates inflation. Should we be concerned? I think the graph shows that this is very worrisome.

Now I know that I presented some controversial conclusions, but my main point was to show what you can look up with these graphs and how useful they can be. They are fun, but just remember that correlation does not prove causation, the post hoc fallacy, and that government measures are seriously flawed and able to be tampered with. The only good conclusions in economics can come from a priori reasoning, so while this is enjoyable, remember that the basis of truth in economics comes from good reasoning, and empiricism can never show you causation, only theory can.

Related Articles

The Phillips Curve is Wrong, Stupid, and Bogus

Why is Inflation so Bad?

Inflation is a Problem and it is Here Now

Minimum Wage Creates Unemployment

Early into his presidency, Obama liked to talk a lot about how he wanted the minimum wage to be raised and to index it to inflation thereafter. He said that those who get paid minimum wage are not making enough to live on, and that we need to raise minimum wage in order to raise the standard of living of those earning the lowest incomes. But is Obama looking out for the little guy, or is he just playing politics as usual?

Let me put on my conspiracy theory hat for a little bit here. As we all should know, minimum wage increases unemployment. That is because companies do not care what the minimum wage is; all they care about is how much an employee is worth. If that worth is below the minimum wage, the potential employee is illegal to hire. A company is not in business to lose money, which is what the company would need to do in order to hire the employee. It should be clear, then, that minimum wage does not raise average wage, but merely puts out of employment all those who are not worth minimum wage. But that is not the conspiracy theory portion, that is just good economics. Now what follows is based on no evidence, but is merely an examination of the full implications. My conclusion from those implications is the conspiracy theory. Now, since raising the minimum wage will raise unemployment, all those who will necessarily lose their job as a result will now need money coming from somewhere. The main source of relief is government aid: welfare. Now which party typically defends welfare and tries to expand its rolls? The Democratic Party. So those who are receiving the benefits are more likely to vote for those who will keep the money coming in. Raising the minimum wage, then, is a way to secure more votes for Democrats. It is not about relieving the economy, as I have already shown in my post entitled Unemployment Lingers On. Obama must know this, he is not a dummy. He is a politician first and foremost, and this is what they do. Politicians do not care about us, they care about getting votes, and this would be a great scheme to secure votes for his party.

The minimum wage sounds great to most people. After all, how can we defend lowering the minimum wage? How inhumane of us! However, popular opinion has never been something that can be reasoned with, despite all the facts that go against that opinion. The only answer is mature discussion and education. That is the only answer to pandering, and it will take a lot of it to defeat something that has such an appeal to emotion.