Monday, December 7, 2009

Nonsense from the Heritage Foundation.

“What creates jobs? Entrepreneurs with ideas for new or better ways of doing things who successfully put their business plans into action.” At least this is what creates jobs according to James Sherk and Rea Henderman of the Heritage Foundation. You can almost hear the trumpets playing along with the latter answer to the above question, so as to give a general feeling of uplift and gung-ho.

Trouble is, this is all poppycock. To illustrate, we lay bricks nowadays in pretty much the same way as in Roman times 2,000 years ago. But amazingly there are hundreds of thousands of bricklayers employed in the US, and even more throughout the rest of the world: a complete mystery.

In more general terms, it is a moot point as to whether increased efficiency expands or contracts numbers employed in a particular industry. Obviously “better ways of doing things” cuts costs and hence prices. But whether this results in an expansion in numbers employed depends on the elasticity of demand for the product in question.

If demand is relatively inelastic, the decline in numbers employed because of the increased efficiency will outweigh any increase in demand resulting from reduced prices.

These two conservative plonkers also tell us that “As long as entrepreneurs remain reluctant to invest, job creation will lag.” Really? So the fact of investing creates jobs? Fascinating.

Why does the fact of investing in a new car plant increase demand for cars? Darned if I know.

To be fair, a lack of investment COULD be a constraint on economic growth in the US once employment levels get near the 2006-7 levels. This is because the US has slightly REDUCED its total stock of physical investments since that date. But just at the moment, there is any amount of idle plant, machinery, factory and office block ready and waiting to be used.

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