Tuesday, July 13, 2010

Cities Should Focus on Creating Wealth, not Jobs

There's a lot of debate going on these days about Macroeconomics. One the one hand, there are people like Paul Krugman, who basically thinks it's still 1933, and that we should deficit spend our way back to prosperity. On the other side are people like Larry Kudlow, who thinks we need to tax cut our way to prosperity. But I think they're both wrong, especially in the context of urban economic development, because creating jobs has a lot more to do with microeconomic reality than macroeconomic policy.

Problem with macroeconomists is that they fall in love with theories the way teenage girls fall in love with quarterbacks. But at least the teeny boppers are fickle, macroeconomists can hold onto their crushes for decades. Krugman likely fell in love with Keynes in college, and has had hearts in his eyes ever since.

Back in the 30s when Keynes was coming up with the ideas Krugman and other disciples now cling to religiously, it was much easier for government to create jobs. This wasn't because FDR was some clever guy, but because capital labor costs were much lower. Hoover Dam, for example, cost $9,400 per construction worker to build. Adjusted for inflation, this works out to about $132,000 of capital expenditures per construction job. Yet today, a modern power plant costs about $2-$4 million per construction job. Cap labor costs have gone up about 7-8% a year since the 30s, while inflation's only gone up about 2-3%. As a result, it's gotten much harder for any government to create jobs, regardless of whether policymakers listen to Krugman, Ron Paul, Larry Kudlow, or Larry the Cable Guy.

In recent articles, I've pointed out the $1 million capital-invested-per-job steam turbine plant in Chattanooga, the $4 million capital-invested-per-job data center in Iowa, and the $25 million capital-invested-per-job wind farm in Oregon. It simply requires too much capital now to create a job, and this figure is not going to stop rising faster than inflation, especially when all the workers need health benefits. If it only cost $132,000 in capital investment to create a new job like it would if cap labor costs had stayed at the same level as broader inflation, then there'd be no issue, we could just have a 1930s economic policy, and Krugman would be a hero. But we don't, so the answer is to shift regional economic development away from just creating jobs, and focusing more on recirculating wealth.

Perhaps one of the best examples of recirculating wealth is the Lowell, Mass Venture Development Fund, which doesn't try to recruit massive factories that only need 300 workers, but rather locally owned shops and restaurants, which don't need tremendous amounts of capital to justify hiring someone. Additionally, the owners live locally, so the profits don't get sent to Toronto, Toledo, or Tokyo. Increasingly, regional economic development will have to focus more on building local businesses like this, because workers are simply too productive to be hired by the thousands anymore.


  1. While I agree with 99% of everything you're saying, this does not bode well for the future. At some point we need to have jobs that produce things. We can't all run restaurants for each other. It's not about China or forcing in manufacturing jobs. We need to build new power generation for example. Whether its nuclear or wind farms it doesn't matter, but how will be do that if it becomes too expensive per worker? It sounds like we are getting to a point of being economically stuck.

  2. Like other forms of employment, face-to-face jobs include high paying and low paying, everything from doctors to teachers to manicurists, and if you look at which jobs are outpacing the broader economy, it's these personal contact professions, not the "cool" or "creative" ones.

    Re: power plants, they still need to be built, but they aren't the job creators they once were, so new ones shouldn't bring high expectations of employment

    I don't think we're economically stuck, I think macroeconomic thinking is stuck. The economy is evolving as it always has, but people who ponder the broader economy are stuck in the 1930s, 60s, or 80s, depending on which theory they're trying to over-apply to today.

  3. Creating the capital used in these projects takes a lot of people;ignoring this severely underestimates the jobs created by stimulus spending. Buy-American provisions can and do steer those jobs to Americans.
    Anyone who thinks that a locality can opt out of the global economic crisis with a few new restaurants is not in a strong position to call anyone else "faith-based."
    Krugman posts his data, even doing charts to make it easy to read, so that anyone can see the backup for his positions. Whether you like it or not, he is right. Unfortunately for all of us, too many of the people in power don't care about jobs for the "small people."