Who is Responsible?

Not only are we failing to get any traction to employment due to the stagnant economy, companies that have screwed up are continuing to shed payroll to get costs in line with their revenues, companies like Bank of America (NYSE:BAC) and Cisco (Nasdaq:CSCO).

Investors have been focused on Europe almost exclusively. But the employment picture is every bit as important, perhaps more so. With that in mind, and with Obama’s jobs proposal recently revealed, I want to address a question I received from a Daily Profit reader…

Alec D. wrote:

I’ve been following you for several months now and first I want to thank you for your candid and helpful perspectives and advice on both investing and our troubled economy. I would very much appreciate your opinions regarding a few questions I have:

Once again, thank you-you’ve already helped me save and earn just in the 6 months I’ve been reading your free newsletter.

To me, these questions get right to the heart of American economic problems, as well as help define the current political debate.


We can start by saying that no Fed policy can create jobs. Monetary policy from the Fed can create an environment where demand is released via lower interest rates. As in, people and businesses can be encouraged to borrow and invest when borrowing costs (interest rates) come down.

The problem here is that there needs to be pent up demand in the economy. There has to be capacity for investments in production to generate a return. Right now, the U.S. economy has neither of these things. Consumers and banks, the two entities that are currently the most affected by past borrowing decisions, are still working off bad decisions.

When you borrow money, you’re borrowing against future income or production. When you make a poor borrowing (or lending) decision, you are losing a portion of your future income or production. It’s easy to see that a consumer who is underwater on a mortgage loan is essentially losing earnings to a bad borrowing decision. It’s also easy to see that banks that made bad lending decisions lose earnings to make up for its investment losses.

My point here is to offer a simple explanation for why demand is so slack. The only way to change it right now, without going through what’s called the de-leverage process, is for there to be loan forgiveness, which is a nice term for default. If consumers or banks owe less, than the point at which they have extra cash moves closer to the present.

I would say that government stimulus money would have been better spent on loan forgiveness or mortgage principal reduction than Cash for Clunkers, even though we all know that’s not a popular position.

In any event, low interest rates do not help in an environment of weak demand. So there’s really nothing the Fed can do for jobs.

I also don’t think there’s any way we can say that its Corporate America’s job to hire people. Companies have a responsibility to their community, their employees, their investors, etc. But capitalism does not, and can not, demand that companies increase their costs for the greater good. That’s the very definition of inefficient investing, and it leads to failure.

Companies will be happy to hire new employees when demand improves and revenues grow.

Yes, that leaves the federal government. And I’ll start by saying I’m sure I’ll get plenty of hate mail for saying that government bears the responsibility for creating a pro-growth, pro-business environment.

I firmly believe that the U.S. government is "of the people and for the people." And who are we? We are business owners. We are workers and innovators. And while I am adamant that business owners and investors know best how to grow their businesses and invest, it is government’s responsibility to create the most conducive environment for that to happen.

I would also argue that begins with protecting our borders, having a military and upholding the rule of law. Business, and economies, for that matter, depend on clarity and optimism about the future. The most basic way you create that is by declaring that what’s yours is yours, and no one can take it from you.

Taxes. I’m sure plenty of people will say that I’m wrong, because taxes are legal theft. Baloney. Taxes are payment for services. That’s not to say our tax code is fine. It isn’t. In fact, it’s hopelessly broken and needs a complete overhaul.

And for that matter, the federal government itself needs an overhaul. But I’m trying to keep this discussion focused on what should be, not on what is.

I also will argue that part of government’s responsibility includes a healthy regulatory environment. De-regulation is not always the answer. We have plenty of examples of what happens when companies get free reign. But increased regulation isn’t the answer, either.

At the end of the day, our federal government is suffering an identity crisis. For that to change, we need political leaders with vision, clarity and strength. Right now, we have little of that on either side of the aisle.

One more thing, then I’m done. I wouldn’t rule out the potential for a rebound for US manufacturing in the future. Globalization is a leveling process for the global economy. In time, the cost advantage of Chinese labor, for instance, will be minimized.

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