Monday, June 18, 2012

John T. Harvey —The Real Job Creators: Consumers

... employees are a cost, usually the most significant one faced by firms (Mike Norman Economics). For that reason, every rational entrepreneur’s goal is to reduce, not increase, the number of workers they have to pay....
Second and more fundamentally, no matter how much you lower costs, if you don’t have more customers, you won’t hire more workers. If the demand for goods and services stays where it is today and we only cut industry taxes and regulations, there is absolutely no reason to think that firms would expand employment.... The direct route to reducing unemployment is boosting demand, not reducing costs.
Read it at Forbes | Leadership

The Real Job Creators: Consumers
by John T. Harvey | Professor of Economics, Texas Christian University

29 comments:

lowerleftlimit said...

Save the rich!, found this floating around, hopefully someone else can have a chuckle :)

Shaun H.

y said...

The real job creators: consumers AND producers.

Anyone who works is both a consumer and a producer.

paul said...

"The real job creators: consumers AND producers."

True but now you have defined two distinct classes of "producer".

More semantic confusion will ensue.

Matt Franko said...

a producer is already in a job

y said...

now you have defined two distinct classes of "producer"


How so?

paul said...

"How so?"

My comment was meant somewhat tongue-in-cheek, however…

Generally "producers" are thought of as businesses or companies.

Good to see you include workers in that category.

In fact, I would go further and say that the producers are the workers, and the companies we refer to as producers are in fact "extractors".

I say this because by definition a company is in business to make a profit and thus removes more net dollars from the spending cycle than it produces by accumulating wealth.

This would be mathematically unsustainable were it not for net money creation by the state.

It follows that the net money creation must be targeted at worker-producers.

Ryan Harris said...

Rises in the Government cheese, social security, "earned income credits," unemployment etc cause consumers to demand more without first having jobs. Consumers spend for many reasons in addition to their jobs as producers. Payroll tax cuts give the appearance of adding money to pay checks. With every government medical insurance check, pension check and other insurance spending a confidence fairy gets a new set of wings and allows consumers to spend with less worry.

Mike Norman said...

Thanks for the "shout out," John Harvey!!

y said...

the companies we refer to as producers are in fact "extractors".

They're also investors - institutions that accumulate financial and real capital which possible the production of goods and services that people can benefit from in some way.

Not all companies are bad.

y said...

*which makes possible the production of goods and services that people can benefit from in some way.

Rogue Economist said...

Entrepreneurs and consumers TOGETHER are job creators. It is incomplete to refer to only one as THE one job creator. Entrepreneurs cannot remain in business without consumers. But at the same time, there are always would-be consumers around, and it is up to the able entreprenuer to find a way to commercialize a good or new business, such that new consumers are created, and business activity grows (and hence, ideally, results in more hiring). Otherwise, all would-be consumers remain just would-bes. It's not helpful, for the sake of winning a debate, to focus on just a one-handed view of the situation. It just results in more confusion.

y said...

Rogue, yes but most consumers are also producers. Describing a whole portion of the population as "consumers" as if all they ever do is walk around Walmart all day every day stuffing their faces with cake makes no sense.

y said...

the terminology of "producers" and "consumers" conjures up an image of hard working capitalists (producers) providing for the whims and desires of the lazy mass of the population (consumers). It's practically Ayn Randian.

paul said...

"Not all companies are bad."

I didn't say any companies were bad.

I made a statement that was based on math.

Trixie said...

Sometimes I think the internet is messin' with me. Specifically me, and on purpose:

http://www.npr.org/2012/06/15/155030650/three-frightening-phrases-you-should-understand

fiscal cliff \'fis-kel 'klif\
muddle through \mə-d®l thrü\
hard landing \hãrd 'lan-diή\

paul said...

@Matt,

This has a tinge of familiarity…

http://moslereconomics.com/2012/06/18/greece-after-math/

Matt Franko said...

Remember John Harvey's article was about how to foment the creation of jobs, not how to increase GDP. Where the P stands for "product" which has a common root with "producer".

It's not about production, it's about jobs (employment). These are different terms "Production" and "employment".

John is writing about jobs (employment) which are created when firms have an increase in orders, whether the orders are for ice cream at a Dairy Queen drive-in or for lumber to construct housing.

rsp

Matt Franko said...

Paul,

Yes I think Warren is for sure a "math person" as well (to say the least!) ...

We need more "math persons" in policymaking positions.

And it is indeed like a 'torture chamber' sometimes to be able see these maths and have to witness these morons running everything... argh!!!

rsp,

Unforgiven said...

@Trixie -

With a little entrepreneurial spirit, you could come up with something like:

"Fiscal Cliff Bar"

"Middle Through" (wash your Fiscal Cliff Bar down with one of these and watch the pounds melt away!)

"Hard Landing" - The convenient Canned Cocktail that contains BOTH an emetic AND a laxative. Say goodbye to DUI's!!

Trixie said...

Or? OR? I could continue to pretend that because you are talking to an economist, you get stupid all of a sudden and forget how to pronounce basic words. Even if strung together in a way that you may not be familiar with, in an economic sense.

So I have one:

Bankers /ˈasˌhōlz/

Leverage said...

Matt, why do we need more demand to create jobs? I mean consumer demand.

There is scarcity of things to do that do not imply directly expense of money from consumer to firms?

If we have to increase consumption to create work the system is broken. Consumption of resources should come from the demand to do something! Not the other way around.

Let me clarify with an example: you shouldn't need to buy a couple of shoes to create employment at a shoe shop and a factory shop. Instead you should realize 'we need a couple of shoes, let's build a factory and a shop'. Extend this to whatever you want (clean energy, efficiency industry, social services etc.).

There lies the dispute between supply side and demand side economics and blaming keynesianism for all evils in the world. However, if supply siders don't remove 'moneyness' of the system from the equation they will be wrong too.

You have to diminish the important of financial assets transfer and accumulation so we can have a more supply-side driven system. If you enforce a depression the contrary happens: money (as power) rules.

Helicopter drops then? How we do it (without inflation)?

Matt Franko said...

Lev,

Perhaps to your point, there is perhaps enough 'demand' out there to provide for much higher levels of employment at this time, but not enough 'settlement balances' being made available to the interested individuals to consummate the transactions....

So perhaps we dont need any more pure "demand" per se, we need more balances in the custody of those who currently have "demand" but no monetary means to settle transactions...

this could I guess be done a number of ways (negative income tax, increase of public pensions, etc....).

I dont see any exogenous threat of "inflation" that does not involve monopolist activity.

MMT I believe looks at all price levels as a function of govt 'ratification' of prices either thru the direct payment of posted prices by the govt when it provisions itself, or when the govt allows it's bank partners to use prices in assigning collateral values against the principle portion of all bank loans...

The concept of "inflation" is not well understood as it exists under a FFNC regime...

Resp,

Tom Hickey said...

paul: " I would go further and say that the producers are the workers, and the companies we refer to as producers are in fact "extractors".

I say this because by definition a company is in business to make a profit and thus removes more net dollars from the spending cycle than it produces by accumulating wealth.
"

That is what Marx observed. You have rediscovered it on you own. Congratulations.

Unforgiven said...

@Trixie

Ok, I think they just got the keys wrong:

Fiscal Cliff /dog and POH-nee shoh/

Muddle Through /Running in Mer-kuhlz/

Hard Landing /Deathcab for Middleclass/

Tom Hickey said...

@ Rogue Economist

Will it is true that supply producers) and demand (consumers) are two sides of the same coin, they do function like the blades of a scissors. One blade of the scissors is the cutting edge while the other is the anvil against which the cutting blade presses the material to be cut.

IN this analogy, supply is the cutting blade, demand is the anvil and the meeting point is agreement on price in the market. Of course, without stuff to buy purchasing power is useless, and without purchasing power to rely one, investment at risk and goods production would never be undertaken.

As a some time entrepreneur and consultant, I can state categorically that potential notional demand for the product and effective demand to purchase it at an expected breakeven point and profit margin that justifies the investment risk are the starting point for entrepreneurs. However, it is not the case that all entrepreneuring is "innovative" in the sense of introducing a new product into a new market. Those cases are exceptional and the probability of any firm emerging successful, let alone dominant, is scant.

Trying to create new products in new markets with new venues is super-risky. For every success story there are usually many, many failures.

Most entrepreneurs seek niches in established markets with proven venues, i.e., well-established effect demand for that kind of offering. They introduce competitive products based niches created by positioning, unique features or benefits, specialization, novelty, or some other "lever" that allows them to capture market share without tracking the notice of the big players in the field, unless one's strategy is to shoot for an early buyout due to intellectual property rights.

One the firms is going, it depends on continuous revenue and to be successful continually increasing revenue. This means continuing to maintain or increase market share, and it also implies that the market itself is maintaining or growing. That requires continuous notional demand for the product and the products of that market, as well effective demand that results in sales.

Firms contract or fail for several reasons other than poor management decisions. One is that they fail to establish requisite market share or loose what they have gained due to shifting consumer preferences. Another is shifting consumer preferences that reduces the overall market for that type of product. The last is an economic contraction that reduces aggregate demand.

Entrepreneurs must be demand-sensitive as a result and shift gears with feedback. One great success story is the Tandy Leather Company, which shifted gears and became Radio Shack when the son convinced his father than the old business was dying and that they needed to reinvent themselves. It worked.

The so-called Third World did not and does not lack entrepreneurs or the entrepreneurial spirit. It lacks both investment capital and effective demand. Once sufficient funding is introduced into a reformed system that its run by corruption and extraction, the economies begin to take off.

But too often we think that the investment capital must come first to produce the supply of goods and supply the worker income for effective demand. That funding can be seeded by government through targeted expenditure that creates effective demand. The notional demand is already there for many products. Then the capital investment is forthcoming.

Matt Franko said...

Let's say the deficit this year is trending towards the usual $1.2T that has been exhibited as of late...

The zealous for USD foreign sector is going to get half of that and hoard them ($600B), and the projected S&P earnings are going to account for the other half and those firms are going to hoard this other half...

That leaves the domestic non-corporate sector with NOTHING TO WORK WITH as far as NFAs....

rsp

Unforgiven said...

"...and the companies we refer to as producers are in fact "extractors".

Now throw in pro-cyclical hiring and firing, which certainly seems to accelerate the extraction process. Corporate raiding helps expand the profit margins too, casting off workers in the bargain.

Tom Hickey said...

John's point is simply that customers are workers, not the unemployed. Business is not going to invest until demand sends a signal, and cost cutting to maintain or increase profit margin by laying off workers, reduced aggregate income, hence aggregate demand. It's a variation of the paradox of thrift.

If business is reluctant to invest owing to lagging demand, then either exports have to increase, difficult in the existing global environment, or government has to take up the slack resulting from demand leakage to saving. Of course, firms could step in and increase investment out of their huge savings or borrowing at historically low rates, as monetary policy is encouraging then to do.

But if businesses individually wait for the other guy to take the plunge, as seems to be happening, and net imports are chronic, then either trade policy has to change, which is difficult given both liberal policy and treaties, or government needs to become the demand provider of last resort by increasing the deficit and targeting it wrt multipliers.

Leverage said...

"The so-called Third World did not and does not lack entrepreneurs or the entrepreneurial spirit. It lacks both investment capital and effective demand. ..."

It's important to look at how modern capitalism was developed by the state, states following similar patterns (Brazil, China) have been doing better than "market oriented" ones.

However the FX market is modern world is important, national self-financing is limited to international purchasing power. Where strong gold reserves where important for international commerce, now demand for national currency is important to the ability to self-finance by developing nations.

I think how strong is the demand for this currency is marked by laws and political environment, perceived social stability, etc. When the environment favours capital flows there can be enough demand (created by trade activity) of the national currencies so they can develop financial capital to self-finance real capital and consumption.

Developed nations can learn from this too, if they pursue uncertainty and socio-political chaos they eventually will lose this edge which would make a self-fulfilling prophecy happen and lose negotiation and purchasing power internationally. Europe could learn to stop playing with fire threatening the environment which creates demand for euros, locally and internationally.