Who creates jobs? How economists see the Obama-Romney debate.
The debate about job creation is becoming one of the central themes of the presidential campaign. The answers aren't simple, many economists say – especially in the current climate of employment malaise.
Pablo Martinez Monsivais/AP
It takes a village to raise a child, the saying goes. And, you might add, it takes a whole economy to create jobs.
And yes, Barack Obama, you’re right: Job creation doesn't happen just because of a few wealthy risk-takers with bright ideas. It also requires a surrounding climate that includes laws, infrastructure like roads and schools, and consumers who are able to buy products.
The debate about job creation is becoming one of the central themes of this year's election campaign. President Obama says the Bush years proved that tax cuts for the rich don't generate a vibrant economy and that a healthy middle class is the key to job growth.
Romney and his conservative allies also argue that Obama has shown little understanding of how to create a good business climate. They have even pounced on one recent Obama statement – "you didn't build that" – as a sign the president doesn't appreciate what business people do.
So, who's right? How do jobs get created, and by whom?
The answer isn't a simple one, many economists say – especially in the current climate of employment malaise.
"One way of answering the question is that the economy is the job creator," says Ken Mayland, president of ClearView Economics, a consulting firm based near Cleveland. If an economy has more "inputs" of labor and capital, the result will be a rise in output and the creation of jobs.
When you look for actual people to call job creators, he adds, "it's a lot of entrepreneurs taking risks." But the bigger picture is important: They don't do it in a vacuum. Like garden crops, jobs grow in an organic environment that's conducive.
"This is why Warren Buffett ... says the only reason why I'm going to hire is if there's more demand," Mr. Mayland says. "He doesn't run a social agency."
Brian Bethune, an economist at Gordon College in Wenham, Mass., offers a similar explanation of job creation. An entrepreneur is the linchpin person he mentions first as a "job creator." But Mr. Bethune quickly explains employment growth as fueled by the surrounding conditions.
"For the most part, it's driven by the general economy," he says.
Essentially, a growing economy creates more demand, begetting more production. Jobs are the result.
Consider a restaurant chain that opens a new outlet: It buys equipment and hires workers. "If the economy is expanding, then you have a lot of that activity taking place," Bethune says.
The problem now is a weak economy, with low consumer and business confidence. In this climate, entrepreneurs can still start successful companies – and some of them will become so-called gazelles, which sprint forward with rapid growth in jobs and product demand.
Square, a company selling tiny credit-card swipers that attach to smart phones, is a case in point. But if the overall economy isn't growing very fast, extra jobs at Square might be offset by fewer jobs somewhere else.
Another important bit of context: Companies of all shapes and sizes contribute to the US economy in important ways. Economists like to talk about the importance of those upstart gazelles, but the overall availability of jobs also depends on old firms, large and small, that are surviving and evolving.
Even firms that fail play an important role, teaching lessons to would-be entrepreneurs.
"There's a lot of churn," says Mayland, describing the process by which firms are constantly starting and closing, adding jobs and axing them.
So what does this job-creation reality imply for voters as they listen to Romney and Obama?
It may mean, for one thing, that voters shouldn't be too influenced by any one sound bite. The question, rather, may be which candidate offers the best vision for creating a policy climate for sustainable, long-term job creation.
Republicans have blasted Obama for a recent campaign speech in which he appeared to play down the importance of entrepreneurs. The president's defenders say he was taken out of context.
If you'd like to judge for yourself, here's the key excerpt, from Obama's remarks on July 13 in Roanoke, Va.:
"If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet."
He then summarized his message:
"The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together."
Economists agree that economic growth is aided by things like school systems and reliable infrastructure. Although they often say "less is more" when it comes to regulation (a view championed by Republicans), they generally say a certain amount of regulation is necessary – such as efforts to prevent another financial crisis (echoing Democrats on this point).
Economists also agree that tax policy will have an impact on the job climate. Here they see a delicate line to walk. America's need now, according to Federal Reserve Chairman Ben Bernanke, among others, is to set a less profligate course for the long run, while not allowing the nation to go over a "fiscal cliff" when Bush-era tax cuts expire at the end of this year.
Many forecasters worry that a rise in tax rates would slow economic growth and perhaps even tip a weak economy back into a recession. But at the same time, failing to address chronic budget deficits won't do much to inspire the long-term confidence of businesses and investors.
Obama's idea of raising taxes on the rich gets mixed reviews. Some say it would raise needed revenue while not doing much damage, while others say the harm would outweigh any revenue gains.
Such a tax hike, Mayland says, would decrease the after-tax return of many investors, and the result would probably be less job-creating investment.