Free market provisions required for economic growth

I wonder how many people were as perplexed as I was leading up to last month’s presidential election. I could not support the Republican Party’s position on abortion, contraception, immigration and religion. But having spent a part of my work experience in economic research, I also could not support the Obama administration’s reliance on wealth redistribution as the solution to the country’s economic problems.

Economic solutions in this country have always ranged between free market and wealth redistribution initiatives. Free market practices promote competition and stimulate growth, but they also produce inequality. Wealth redistribution mitigates inequality but it also increases debt and slows growth. Complicating the ability to balance these two counteracting sources, the current economic environment is experiencing slow growth and inequality at the same time.

The Obama administration has chosen to place its emphasis on reducing inequality, with the claim that it also will boost growth. But many economic theorists believe that such emphasis without a heavy dose of free market initiatives will only make matters worse. Poor economic performance over the last four years has given support to that contention. During his administration and leading up to the election, the president has continually chastised corporations and denounced free market solutions. When Paul Ryan tried to interject them into the dialog the president mercilessly ridiculed him (pushing grandma off a cliff in a wheelchair).

A column by Robert Samuelson, headlined “Time for a realistic look at America’s welfare state” (Herald, Nov. 12) provided a much needed discussion about the inability to reverse the mounting debt crisis and stimulate economic growth without major revisions to entitlements. Samuelson says, “The welfare state’s great contradiction is that what seems to be good for the individual is not, when multiplied by thousands or millions of cases, always good for society. Politicians appeal to individuals who vote, but in doing so may shortchange the nation.” If there are doubts about such a conclusion, watch the nightly news concerning Greece and Spain.

Like Samuelson’s contention about the welfare state, a realistic discussion of free market initiatives did not take place in the pre-election debates. Job creation is a critical example. For individuals, having a job is one of the most important aspects of their lives. But like welfare transfers, what is good for individuals may not always be good for society. It depends on how the jobs are created.

The free market way is to grow the Gross National Product so that there will be more useful work to be done. But allowing each worker to be less productive also can create jobs because more labor will be required to produce the same goods and services. The president’s job creation solutions were mostly of the second type. He scolded companies, now that they are making a lot of money, to hire more people. He also proposed giving tax credits to any company that would hire back people they let go at the start of the recession. Those are wealth redistribution proposals, not jobs that are useful, because the companies no longer need more people to meet demand.

In order to survive during the recession, companies increased their productivity through automation, sending jobs overseas (a good thing) and other means to reduce labor costs. If companies can reduce the amount of input necessary to make their goods (and labor is a big part of that input) they can sell those goods at a lower price and capture more market share, which then allows them to create more useful jobs to meet the increased demand. Retraining people who have lost jobs that are no longer needed rather than repeatedly extending unemployment compensation is another essential part of a free market initiative.

The idea that labor is a cost and needs to be reduced if the economy is to grow and create “useful” jobs is not how the process is usually described in the popular press. But it is an essential economic principle that people should understand in order to evaluate the way politicians promise to create jobs. For example, the administration brags about saving the U.S. auto industry, carefully avoiding any mention of Ford. Ford Motor Co. is competing very effectively without government support by being the industry leader in productivity increases. The jobs Ford is creating now are to meet increased demand not government subsidized labor agreements.

Facing up to the role productivity plays in the creation of useful jobs is only one example of how free market practices have been ignored by the Obama administration. Hopefully more progress will be made on the way to the “fiscal cliff.” Unless politicians are willing to make the case to a changing demographic population for less welfare and more free market practices, the country is destined to experience years like the last four of a raising debt and wobbly economic growth.

Garth Buchanan holds a doctorate in applied science and has 35 years of experience in operations research. Reach him at gbuch@frontier.net.