Jobs is Jobs 06/15/2011

Is there no distinction between public and private sector jobs as an economic stimulant?  Is whether the government sends money to the states to keep teachers, firemen, police, and other government employees working, or sends the private sector incentives that would lead to private jobs, equal in being effective stimulants?

The distinction is very real and has significant consequences, without regard for the value of the job itself - a public school history teacher may have a greater value to society than a massage therapy teacher at a for-profit college.

The two examples presented here are for the effect on the economy only and make no value judgment on the worth of their respective efforts.

We take the money out of the private sector as taxes (a definition).  Money is sent to the state for the explicit purpose of hiring a clerk at the DMV.  Sears is given a tax incentive to hire a clerk in the auto services department.  The reason for the hire is the same for both openings: both places are busy and the lines to get processed are determined to be too long.  There is a genuine need for each organization to hire.  Each clerk gets paid a salary of $45,000 and have the same cost of employment in the form of benefits and payroll taxes.

When they charge a fee, the government never charges enough for what it sells - except in the case of the Postal Service.  The government never covers the cost of an employee through sales.  An employee never contributes enough in revenue to pay for his salary.  For example, for every ticket sold for an Amtrak ride, another $32 must be kicked in by the taxpayer.

[In the case of the Postal Service, the postage and services were designed to reach a break even point for the USPS.  They were never allowed to make a profit.  This balancing act worked for a while, but we are now seeing it fail.]

The DMV clerk sells license plates and renewal tags, driver’s licenses, and other services at less than break-even for the DMV.  Plus, for his DMV job, some of his salary and the overhead must be subsidized by additional tax money.

The wages earned by the clerk are brought back into the economy when the clerk spends, invests, and saves.  These activities stimulate the economy and help the private sector grow.

He also pays sales taxes, income taxes, food and liquor taxes, telephone taxes, gas taxes, pet taxes, user fees, tire taxes, recreation taxes, property taxes (for the school, the airport, the community college, the park district, the library, the township, the fire department, the county, and the forest preserves), utility taxes, capital gains taxes, and he buys license plates for his cars, his motorcycle, trailer, RV, boat, and boat trailer, thereby supporting his governments.

The DMV itself does not pay any taxes.

Sears received a tax incentive to hire a clerk, but would never have hired somebody just for the incentive.  Sears expects to increase business because of the hire.  That means it expects to increase revenue because of the clerk.  That is done by either reducing expenses or increasing sales. For this example the hire is expect to increase sales.

The increase in sales made by this clerk’s efforts directly or indirectly needs to be enough to pay for her salary, her benefits, workman’s compensation insurance, the company’s side of Social Security and Medicare, her state and federal unemployment insurance, the 401k company match, the company’s side of her health insurance, her vacation and family leave time, and a share of the company overhead.

She supports her government by paying the same taxes that the DMV clerk pays and spends her money in a similar fashion.

Let’s assume that the DMV and Sears have the same overhead costs regarding administration, buildings, maintenance, insurance, vehicles, tools, etc. and capital equipment like machines, computers, phones, desks…

Now, Sears has some additional expenses that need to be covered by the clerk’s contribution to the income.  Sears pays property taxes, vehicle taxes, gas taxes, city taxes, state and federal corporate taxes, sales taxes, phone taxes, utility taxes, and they have to buy license plates for all those service vans.

Add to all that, profit.  The profit that a typical company the size of Sears would have to get to survive and grow is 2 to 5% of its sales.  Not much, but a key ingredient to economic growth over and above what the new hire at the DMV contributes.

Profit is the oxygen added to the fuel of sales to ignite the economy and keep it burning.  Profit gets divided up between a reward for investors for taking a risk in the company, an increase in compensation for the employees, and investment in growth.

Growth creates wealth and it creates jobs.  If a company does not have the profit it needs to grow, it will eventually fail destroying wealth and jobs.  There is part of America that needs to realize that job and economic growth only comes from profit.  And profit is only created by the private sector. The private sector is a perpetual motion machine that accelerates itself through profits.

If you were wondering why the Great Depression lasted 10 years while the government created millions of jobs in public works, only to end suddenly when the government started buying guns and tanks from the private sector to go to war, you can stop wondering.  The private sector profited from the employees making all that stuff.  The private sector used those profits to innovate, create, market, expand, and hire clerks.  They created jobs that self perpetuated and reproduced.

I listened to a recent argument to extend unemployment compensation during this artificially protracted slump.  The defender said that paying unemployment to people who are not working stimulates the economy because the money is spent.  Please, Sir you really can’t take money from one guy and give it to another guy and expect the country to grow.