Releasing the Brakes and Advancing the Throttle Works Better Than Trying to Push the Train

“Job creation” is of course a key issue in this campaign. Each of the candidates claim that he will outshine the other in this area.

Simply creating jobs is easy. You can pay people to dig holes and fill them up again. You can ban the automatic operation of elevators. You could even eliminate ATMs. The proper measurement is not just “jobs,” but rather jobs that will contribute to overall long-term prosperity rather than subtract from it.

Mitt Romney has argued for five points which he believes will create 12 million jobs. The plan has been predictably attacked as insufficient; for example, Noah Millman, in the publication called The American Conservative (founded by Pat Buchanan, among others) says that “the mismatch between the scale of the challenge and the proposed solution is almost laughable.” But it is Millman’s critique, in my view, that tells us what is wrong with so much current economic and political thinking.

Romney’s first point is energy independence–by 2020. To which Millman says:

Energy independence, if taken literally, would mean higher energy prices (if it was economically efficient for us to be independent, we would be). But what Romney really means is simply to roll back regulation against drilling and mining. More energy development will indeed create some jobs – it’s doing so in Western Pennsylvania, in North Dakota, for example. But it won’t make a big dent in a 12 million job goal.

Energy independence would require higher prices if nothing else changed. But increases in domestic supply shift the curve. In the case of natural gas, higher domestic supplies have allowed us to remain independent of non-US supplies in this area—remember, just a few years ago it was believed we would have to *import* vast quantities of natural gas, via LNG ships–at the same time that prices have fallen. There is no economic reason why the same phenomenon could not occur with oil.

And the argument that the employment in the expanded drilling/mining industries is insufficient to make a big contribution to the 12 million jobs target represents simplistic first-order thinking. In reality, lower energy prices, coupled with more certainty that these prices will not skyrocket in the future, have a huge impact on location decisions for a wide range of energy-intensive businesses…primarily in manufacturing, but also including data centers. And for companies in the process industries (plastics, chemicals, fertilizers, etc), the costs of feedstocks represent a significant portion of the total cost of goods produced, and the availability of cheap natural gas or oil has an especially direct impact on location decisions. See for example Fracking brings manufacturing back to rust belt and Europe left behind as shale shock drives America’s industrial resurgence.

You can be quite sure that the competitive advantage that America gains from shale gas..and oil…will be far stronger with a President Romney than with the fossil-fuel-resenting Barack Obama.

Millman cites Romney’s plan element, “Cut the deficit,” and says, “Cutting the deficit is a meaningless goal if you don’t say how you’re going to cut it…How the deficit is going to go down is a mystery. How, if it did, that would feed back into the job market is also a mystery.”

How cutting the deficit would feed back into the job market is a mystery? Money which is spent by the government on economically-useless activities (by no means all government spending, but a significant part of it) is money which is not available for investment in productivity-and-growth-producing assets and activities…this is true regardless of whether the money comes from current taxation or deficit spending.

Again, Millman seems to be using first-order thinking which ignores interactions and feedback loops. Someone who is hired by a drilling operation or a new process plant, enabled by a more friendly attitude toward fossil fuels, won’t require food stamps and other welfare benefits, contributing to a reduction in government spending levels and the deficit. This reduction in turn liberates funds for productive private investment.

Point five of the plan is cited as “Cut regulations and taxes on small businesses, and repeal the ACA.” Millman says, “I’ll buy that actions to make our regulatory regime more efficient would have a positive economic impact. But a huge one? Big enough to pull us out of the biggest economic slump since the depression?”

Extremism in regulation has in reality had a huge impact on businesses large and small…especially small businesses which cannot afford to hire lawyers and lobbyists to protect themselves. How many children’s apparel makers, science kit manufacturers, homecrafters, etc have been crippled or destroyed by the misguided “Consumer Product Safety Improvement Act”? What is the aggregate harm of fanatical EPA overreach, and how much of the difficulty facing American manufacturing is due to this overreach? In my post Drawing the Fires (about proposed new industrial boiler regulations), I noted that:

Hephaestus, god of the forge, will not stay where he is not wanted, but will depart for more welcoming lands

also

For thousands of years, fire has been a symbol of civilization. Has our society simply become too effete to continue activities which center around the use of fire, whether as coal or gas fires for factory or powerplant boilers, or blast furnaces, or forge and foundry operations?

You can certainly expect such effeteness to run wild if there is a second Obama administration, with entirely predictable consequences for American industry.

A Romney administration will by no means abolish regulation–but is much more likely to conduct regulation on a rational economic and environmental basis, rather than an effectively theological basis, than a second Obama administration.

Democratic politicians and intellectuals tend to see job creation, like all economic activity, as something that must be directed from the top down: we (the national leadership and their advisors) decide to create X hundred thousand jobs in, say, the electric vehicle manufacturing business, and establish regulations and incentives to cause this to happen. (I’m not sure to what degree Millman shares this view; he does, I believe, fail to understand some of the relevant economic dynamics, as noted above.) What the Dem view of the world fails to grasp is the degree to which the most important things in an economy tend to be those that are not centrally planned, or in some cases plan-able. Obama’s energy plan had a big role for solar and windmills; it didn’t have much to say about fracking–which turned out to be perhaps the most important single factor now keeping the economy from total ruin. A national plan for “job creation” in the computer industry, circa 1975, would have had a lot to say about mainframes, not much about personal computers.

I’ve previously cited the words of a Russian peasant leader to Rose Wilder Lane when the latter (circa early 1920s) was still under the spell of Communism and was arguing for the benefits of comprehensive central planning:

It is too big – he said – too big. At the top, it is too small. It will not work. In Moscow there are only men, and man is not God. A man has only a man’s head, and one hundred heads together do not make one great big head. No. Only God can know Russia.

We don’t need a “jobs plan” involving detailed analysis of how many jobs will be “created” in which industries by which government programs. (Where might the automotive industry have appeared on such a plan in 1910?) What we need is to take the brakes off and let hundreds of thousands of creative and courageous individuals move the economy forward.

With a second Obama term, brakes would always be set on most of the cars of the train. Desperate lobbying or favoritism might result in the release of an occasional brake on a particular car, and the train might lurch forward a few feet, with much shock and frequent breaking of couplings, but there would be no real continued movement.

No matter how many detailed analyses of “job creation programs” are produced by the President’s “experts,” a second Obama term would be a time of economic stasis and decline.

Here is the summary of the Romney economic/jobs plan on the campaign website, and here is a detailed exposition and analysis by economists Glenn Hubbard, Greg Mankiw,John Taylor, and Kevin Hassett