Job Losses Demystified

The following post is written by Peter Schiff of Euro Pacific Capital.

Every business owner and executive should understand why our job losses are continuing to increase and Peter's article does an excellent job explaining our country's current job situation.
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As the unemployment rate crossed the double digit barrier for the first time since Michael Jackson learned to moonwalk, President Obama announced that he will convene a “jobs summit” to finally bring the problem under control. Using all the analytic skill that his administration can muster, the President is determined to figure out why so many people are losing their jobs and then formulate a solution. That's a relief; for a while there, I thought we were in real trouble! In fact, the absolute last thing our economy needs is more federal government interference. If Obama really wants to know what's behind entrenched joblessness, he should start by looking at the man in the mirror.

Obama is pursuing, with unprecedented vigor, the same policies that have for decades undermined our industrial base and yoked us to an unsustainable consumer/credit driven economy. This doubling down on Washington's past failures is destroying jobs at an alarming rate. Today we learned that the September trade deficit surged by 18.2%, the largest gain in ten years. Much of the deficit resulted from Americans spending Cash-for-Clunkers stimulus money on imported cars – or “American” cars loaded to the sunroof with imported parts. In exchange for more domestic debt, we have succeeded only in creating foreign jobs.

An article in this week's New York Times by veteran writer Louis Uchitelle confirmed a fact that I have been alleging for years. Uchitelle pointed out that foreign outsourcing of component manufacturing has led to consistent overstatement of U.S. GDP and productivity. The connection goes a long way to explain why we keep losing jobs even as GDP is apparently expanding.

As our economy becomes less competitive due to higher taxes, burdensome and uncertain regulations, and capital flight, more manufacturing and services will be outsourced to foreign firms. However, the flaw in GDP calculation allows the output of those foreign workers to be included in our domestic tally. Since we count the output but not the worker responsible for it, government statisticians attribute the gains to rising labor productivity. To them, it looks like companies are producing more goods with fewer workers.

The reality is that we are producing less with fewer workers. The added “productivity” comes from higher unemployment and larger trade deficits. This is a toxic formula that will have lethal economic consequences.

Don't expect the brain trust at the President's job summit to fret much about these details. That public relations stunt will likely ignore the root cause of the economic imbalances and instead stress the need for government spending on training and education, i.e. more public debt. The unemployed do not need government theatrics, they need actual jobs. But as long as the government props up failed companies, soaks up all available investment capital, discourages savings, punishes employers, and chases capital out of the country, jobs will continue to be lost.

To really fix the unemployment problem, the President must look past his peers in government and academia to understand how jobs are actually created. In the private sector, all individuals have a choice to either work for themselves or someone else. Since labor is far more productive when combined with capital (office equipment, machinery, business models, and intellectual capital), those who lack these assets themselves often choose to work for others who have sacrificed to accumulate them. This increased productivity is shared between the worker and the owner of capital, and both are better off.

However, for one person or company to choose to offer a job to another, there must be an incentive to do so, and they must have the necessary capital. In the first place, employers must commit to paying wages and benefits, comply with government mandates and regulations, and subject themselves to potential lawsuits from disgruntled employees. All of these costs must be measured against the extra profits an employer hopes to earn by hiring an additional worker.

If profit opportunities exist, jobs will be created. Otherwise, they will not. Of course, anything the government does to raise the cost of employment, such as a higher minimum wage, mandated health care, or greater regulatory burdens, not only prevents new jobs from being created but also causes many that already exist to be destroyed. Anything that diminishes the profit potential of extra hiring will diminish the number of job opportunities that are created. Also, since it is after-tax profits against which employers measure risk, the higher the marginal rate of income tax, the less likely employers will be able to hire.

Finally, in order to hire workers, employers must have access to capital to expand operations. Anything the government does to discourage capital formation automatically diminishes job creation. By running the largest federal deficits in history, Barack Obama is diverting all available capital to the Treasury, and is in effect waging a war against private capital formation.

If the President's summit truly intends to find the root cause of unemployment, his advisers don't need Bureau of Labor statistics or complex modeling software, just the courage to drop their dogmatic belief in central planning and embrace the laws of economics.

Why Money Isn't Flowing From the Banks

Depending on who you are talking to the recession is over, will soon be over or isn’t going to be over anytime soon. Many small business owners are looking for financing. Many for growth and some because they just need a bridge to help get them through the current economic times. Funny though, regardless of how strong your financials are very few seem to be getting financing.

The SBA ARC Loan Program, a guaranteed $35,000 short-term relief loan for small businesses facing immediate financial hardship to help them ride out the current uncertain economic times and return to profitability, is rarely being received. Very few companies in Colorado, and throughout the country for that matter, have been granted the loan. Why, well amongst other things there is so much paperwork required that the banks don’t make any money. In fact, in many cases, they actually lose money.

Yes, banks should be helping us get out of this bad economy. But they aren’t. They don’t have to lend out money to be profitable. Here are just a few reasons:

• Banks have received TARP (Troubled Asset Relief Program) money to clean up their books.

• They are still making money on their credit cards.

• They borrow money from the Fed for nearly nothing and buy 30-year Treasuries at 5 percent. A nice profit for the banks considering they are using our (taxpayers) money.

• They still have their “toxic” assets that have been written down, and they will eventually provide a profit.

So where else can you find money? Well, that leaves private financing - anything from family and friends to Angels and Venture Capitalists and everything in between. There is private money out there but it is harder to get, more expensive and there is less of it. Since there are a lot of people looking for money our friends with money are pickier than ever in terms of whom they give their money too. And of course, generally speaking, deals take longer to put together.

So what can you do? Well, for education you can go to the Angel Capital Summit Nov. 17^th. You can also work on your business – make sure you have a solid business plan and supporting financial model. To learn more about how to do that attend Planning, Focus & Discipline… 3 Keys to Leading Your Company Out of the Recession on Oct. 21^st or 27^th. Investors want to know where you want to go and how you plan to get there. Having a compelling story with a solid plan to back it up will only help you. And last, but not least, talk to your local politicians. Until the Feds change the rules for the banks money will be slow in coming, which means jobs will be slow to come which will prolong the economic recovery.

What the Stimulus Plan Means for Your Business

The mantra heard most often in business these days is "Do More With Less." For many businesses, cutting costs while trying to grow—or even sustain their place in the market—is easier said than done.

What could help many businesses is gaining access to some of that $787 Billion in Federal Stimulus Package monies. Not surprisingly, many small companies [94% of them according to a recent Intuit survey] said that, "success depends more on what they do for themselves than the government."

Steve King from Emergent Research—when interviewed by Entrepreneur about the survey—said he's not surprised by that attitude. The money has only just started to flow - like only 2% to 5% thus far. Steve is one of the experts tapped to clarify the opportunities presented by the Federal Stimulus Package in an upcoming online event:


The Stimulus Package: What Does It Mean For Your Business
Date: Wednesday, July 29, 2009
Time: 12:00 p.m. MT
Register Now

Featured Speakers:
Steve King, Emergent Research
Chad Moutray, Chief Economist U.S. SBA
Sam Sliman, President, Optimal Solutions

What's unique about this panel event is that it's focused on showing you how to leverage this opportunity, as well as pointing out what won't help, so you can create the right strategy for your company. This way you can be sure to maximize your efforts to get the best results and stay focused on driving the business results you're after. Growth and sustainability.

I encourage you to go register now to find out how your company can leverage benefits from the stimulus package—either directly or by helping your customers do so. [read more business for you, either way].

In the meantime, if you haven't read it, an E-book sponsored by MyVenturePad, SCORE and SAP, The Stimulus Package: What it Means for Growing Businesses, will get you up to speed so you're ready to take action with what you learn from Steve, Chad and Sam during the live event on July 29th.

You can also go follow @SAP4SME on Twitter for more information and updates on this topic.