Why Obama Cannot Match Germany's Jobs Miracle

In 2002, Chancellor Gerhard Schroder appointed a jobs council headed by Volkswagen’s Peter Hartz to solve Germany’s high unemployment. In 2011, President Barack Obama similarly appointed a jobs commission headed by General Electric's Jeffrey Immelt to achieve the same goal.  (At the time, Schroeder headed the SPD, the equivalent of America’s Democratic Party.)

Germany’s labor market turned around in a dramatic fashion after Schroeder implemented the Hartz Commission’s sweeping reforms between 2002 and 2005. In contrast, Obama’s Immelt Council quietly disbanded without making substantive proposals, and America’s worst jobs recovery of the postwar period continued.

Obama cannot duplicate the German reforms. They reject his Keynesian belief that jobs are created by government stimulus.  Instead, the Hartz reforms rest on the common sense notion that people take jobs when work, rather than welfare, pays. Such an approach violates Obama’s core belief that government must make the lives of the unemployed as comfortable as possible. No, the Germans say. If the state gives too much, the unemployed will have no incentive to take jobs, even when they are available.

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Why Obama Can't Support A Real Jobs Program

President Obama’s much-anticipated jobs speech will undoubtedly cover more of the same things that already haven’t worked. He will propose an infrastructure bank, extension of unemployment and food stamps, promotion of green jobs, more government-corporate partnerships, and a one-year extension of the payroll tax reduction. He’ll advocate a second stimulus. He may be flanked by his jobs commission, headed by the CEO ofGeneral Electric, which earlier issued a lame interim jobs report.

His speech will not be about jobs. Instead, it will be a campaign speech in disguise.

Obama cannot propose a real jobs program. His constituents would rebel. A real jobs program attacks too many of the core beliefs of his party, such as minimum wages and higher taxes on the better off. Even if his presidency rested on it, Obama couldn’t emulate Bill Clinton’s 1996 Welfare Reform Act that triangulated him from his own party. There is no way for Obama to enunciate the equivalent of Clinton’s “We must end welfare as we know it.” His core beliefs rule out such a dramatic move to the center.

However, if Obama really wished to create jobs, he must:

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The President’s Waste-of-Time Jobs Council

It took GE’s Jeff Immelt and Amex’s Ken Chenault and their “26 private sector leaders and people standing up for the rights of workers” 90 days to issue five “fast-action” recommendations to create “more than one million jobs.” (WSJ, June 13 “How We're Meeting the Job Creation Challenge”).

The Presidents Jobs Council’s recommendations are either:

1) Obvious (better education and training), or

2) Require more government spending (more SBA loans, more infrastructure spending), or

3) Make money for GE (install energy saving devices in buildings) or for Amex (issue more tourist visas), or

4) Call upon federal, state, and local licensers to do their jobs expeditiously as they are supposed to do anyway.

The Jobs Council will issue longer-term recommendations later. I lose all optimism, when I read that “government, business and labor (read: crony capitalists and big labor) need to work together to get this done.”

I do not need 90 days and millions of government money to give you my “Jobs Council” recommendations:

1) Reduce energy costs by halting the EPA’s attack on coal and drop regulations that require renewable energy to produce electricity. These measures lower the costs of doing business and encourage hiring.

2) Limit the duration of unemployment insurance. Unemployment insurance cannot be a permanent entitlement. Empirical studies show unemployed persons exit unemployment near the end of their benefits.

3) Withdraw the NLRB’s ruling against Boeing’s new plant in South Carolina. The federal government and its regulators cannot be seen as blatantly anti-business. We cannot have an economy in which the government interferes in key investment decisions.

4) Allow for increased mobility of occupational licenses across state borders by attacking special-interest protection of licensed occupations. Increased mobility lowers unemployment.

5) Drop all attempts to prop up underwater mortgages and let the housing market clear as quickly as possible. Phase out Fannie Mae and Freddie Mac. Housing will not expand until the industry reaches an equilibrium.

6) Have a bi-partisan agreement that reduces government spending and debt now, not in the distant future. The lack of agreement creates too much uncertainty about future taxes.

7) Provide businesses certainty as to their current and future tax liabilities. No business will hire without knowing its bottom line after taxes. Keep marginal tax rates low.

8) Adopt a bi-partisan solution of the unfunded liabilities of Social Security and Medicare starting now, not in the distant future.

9) Reform the education system to teach everyone basic skills of reading, writing, and math. With these skills, people can acquire the specific skills business needs.

10) Put teeth in the requirement that all regulations must produce benefits in excess of costs with realistic estimates of both.

11) Repeal Obama Care to give employers certainty as to their true employee costs. Let employers compete for workers by offering better health insurance and employees choose among employers for health insurance benefits.

12) Follow the dictum of Franklyn Delano Roosevelt and prohibit collective bargaining for public employees. The public is the "boss" of public sector workers not greedy capitalists.

13) Ratify outstanding free trade agreements. Expansions of trade lead to job expansion.

I guarantee that my jobs program will actually create jobs and economic growth. I imagine most honest economists would agree with me.

Neither political party, however, has the will or gumption to enact it.

Mafia in Pinstripe: The Real GE Scandal

The transition from street thug to state mafia took a decade in Russia. I was an eyewitness to the Russian process: In 1992, I saw businesses being shaken down by bullies in jogging suits and shaved heads. Six years later, I talked with business owners harassed by crooked tax, sanitation, police, and fire inspectors. Under Putin, these petty thugs were replaced by officials in pinstripes, politely shaking down businesses in meetings in government offices and swank hotels. It has become civilized, but the outcome is still the same.

What does the Russian story have to do with GE?

GE is unique among American corporations. Since its founding, it has been consistently in Fortune’s Top 10 – the only long-term survivor of Schumpeter’s creative destruction. GE adapted better than others to changing tastes and technology under executives like Gerard Swope, Charles Wilson, and John Welch Jr., who wrote the book on the art of corporate management.

GE is still in the top ten under CEO Jeffrey Immelt, but it is a different GE. Instead of adapting to the marketplace, GE structures its businesses to harvest government subsidies, tax preferences, and bailout money. GE fits Schumpeter’s pessimistic forecast of bureaucratized, influence-peddling capitalism, which he had the temerity to call socialism.

A casual glance at GE’s annual report shows that most of GE’s businesses depend on favor with the government. Energy generating windmill turbines make money because of government subsidies and state orders. Nuclear power requires government licenses. Energy-saving turbines receive subsidies. GE’s lending arm may again need a quiet $140 billion bailout. Its huge medical services division must receive favorable treatment under a new health care law. Even its competitive jet engines could use a diplomatic boost when foreign airlines buy new aircraft. Its NBC division needs broadcast licenses and other forms of protection.

The GE scandal is not that it paid no U.S. taxes. It was simply following the social-engineering instructions of our tax code, which its tax department is able to nudge at times. The true scandal is that the once mighty GE has become a crony capitalist in its “partnership” with Washington. The hundred million or so in campaign contributions is chump change compared to the cost of its lobbying behemoth and its vaunted tax department.

The new winners in creative destruction at first naively think they have no need of government. Silicon Valley's Microsofts, Apples, Googles, and Facebooks create products no one had ever dreamed of. They can outstrip the competition on their own. They are then baptized by fire. Government agencies politely worry that they have grown too big; an anti-trust suit may be in the works. Revenue-hungry politicians may decide that taxing the internet is a good idea. Facing this reality, the creative-destructors open expensive offices on K-Street and join the crowd. An ounce of protection is worth a pound of cure, they reluctantly conclude.

There is an invisible cost to all this that few of us notice or understand. The mighty GE has been diverted from innovating and developing products that stand on their own to producing those things that its Washington partners want for the “good of society.”

NYT’s Expose: But GE Is Doing Exactly What is Expected of Them (Subtitle: Jeffrey Immelt is James Taggart in Ayn Rand’s Atlas Shrugged opening on April 15)

President Obama’s appointment of GE CEO Jeffrey Immelt as his job czar signaled his “move to the center.” The pro-business President declared a “government-business partnership” to create jobs, green technology, and other good things. Now a NYT investigation reports that GE paid no U.S. taxes, aggressively lobbied Congress for subsidies and sweetheart deals, and spends millions (billions?) to minimize its tax bill. The NYT was shocked, as was Claude Rains in Casablanca, to find such skullduggery, from GE, no less. The NYT concludes that one of the most striking advantages of GE is not its jet engines and washing machines but “its ability to lobby for, win and take advantage of tax breaks.”

Written to buttress the case against reductions in the corporate tax rate, the NYT investigation unwittingly strikes a deeper vein --- that GE is faithfully pursuing Obama’s vision of, what is called in other countries, crony capitalism. Under this philosophy, “crony corporations” should follow where government incentives lead them. If Obama wants green jobs, they will build windmills, with healthy subsidies of course. If the government wants more lending, crony corporations will lend with a bailout if the loans go bad. A “green car” should be no problem. The government will pick up most of the price tag for leery consumers. Insofar as crony corporations, like GE, can “negotiate” their tax bill with Congress, they are a ready source of campaign contributions or other perquisites.

Such crony capitalism changes the normal rules of economics. Those who play the “business-government partnership game” better than others win. Those who do not play well lose, even if they are superior entrepreneurs or innovators.

From an economic perspective, it is not even clear that GE is a real “winner.” In pursuing subsidies and tax advantages, GE engages in activities that yield lower returns than other alternatives. The government payoff compensates them for making otherwise unwise economic decisions. The GEs of the world also have to waste enormous resources on the lobbying game.

If we factor in all these economic costs and losses, GE may have been better off not playing the crony capitalism game after all. The public, surely, is made worse off by the misallocation of resources and other economic losses.

The NYT’s disclosures, coupled with Obama’s appointment of Immelt, are an embarrassment, but they offer a rare backroom glimpse of crony capitalism in action. Our crony capitalism takes place, respectably and legally, in board rooms, in congressional and executive offices, or “on bended knee” before Charles Rangel. In other less civilized countries, it takes the form of shakedowns, threats of violence, and arbitrary prosecutions, but the game is played with the same results. In Russia, it is called State-Mafia capitalism. In the U.S., it is corporate welfare.

Obama Does Not Understand Business

As a teacher of comparative economics and textbook author on the subject, I cannot refrain from commenting on President Obama’s unfortunate lack of understanding of business.

Obama’s last weekly address to the nation shows his profound misunderstanding, despite an international consensus as to what determines a good business climate. The various indexes that purport to measure it have one thing in common: A good business climate is one where the government gets out of the way of business. Overregulation, inconsistent application of the rule of law, a heavy tax burden, and insecure property rights reduce business formation, investment, and economic growth. The strong positive correlations between such measures of business climate and economic performance prove this basic fact.

Obama’s pronouncements suggest a quite different understanding: In his mind, a good business climate emanates from public and private alliances, subsidies of progressive business activity, industrial policy, state-directed investment, the “saintly” non-profit sector, and massive infrastructure campaigns. It should be noted that none of President Obama’s “good business climate” measures are included in the existing business climate indexes.

Obama’s stated goal is as American as apple pie: to “make America the best place to do business” In return, businesses should “set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That's their obligation." Contrary to Obama’s assertion, the real obligation of businesses is to make profits for their owners. In pursuing this goal, far sighted businesses will hire, invest and pay decent wages.

Three examples, among many, illustrate the President’s thinking:
The most recent is his vaunted “move to the center” in appointing the “pro business” Jeffrey Immult, the CEO of General Electric, as his chief economic advisor. Immelt and GE exemplify a business whose fortunes hinge on a cozy relationship with government -- aan American version of Crony Capitalism. Notably, he did not appoint a true self-made entrepreneur, who made it on his own without the government.

The second example was the notorious bullying of secured Chrysler creditors – an outright attack on contracts and property rights. The shoving of Chrysler’s creditors to the back of the line helps explain much of the current reluctance to lend.

The third example has been the Obama administration’s conclusion that it was the government’s responsibility to deal with “excessive” executive pay rather than leaving the matter up to shareholder owners, as has always been the case.

It will not be possible to make America the best place to do business in the world with such thinking, but there are few signs, other than some PR forays, that this message has been heard. If such misconceptions continue to shape government policy, the result will be a continued deterioration in the U.S. business climate.