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Business Investment Destroys Jobs, So Why Do We Subsidize It?

The notion is widely held that all we need to bring the unemployment rate down is some good old-fashioned business investment. Congress and the Obama Administration, doing what the government has often done in times of recession, provided businesses with more generous depreciation schedules and other breaks designed to encourage investment in plant and equipment.

These policies are great if you’re General Electric (GE), United Technologies (UTX), Illinois Tool Works (ITW) or just about any other sophisticated manufacturer that is constantly updating its equipment. Uncle Sam helps out.

Super-low interest rates are supposed to goose investment, too, making it easy for companies for borrow money to modernize, and the Federal Reserve has certainly been accommodating on that score.

So where are the jobs? William Baldwin, the former editor and now a columnist at Forbes, has a different point of view and it is very persuasive: business investment destroys jobs by modernizing industrial and other processes, making them more efficient and less labor-intensive. That’s as it should be. More productive companies and workers increase wealth and boost the economy.

But why don’t our policy makers get that? They’re stuck in an old mindset, where capital investment begets employment, which stokes the economic fires.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

This chart certainly makes it seem like there’s a relationship between capital investments and jobs, but we can’t assume a cause-and-effect relationship here. In good times, there are more jobs to go around and companies invest to expand output. But that doesn’t mean it’s those investments that are expanding the employment picture. Especially in recent years, as jobs shift from manufacturing to service industries, it has been consumer spending that helped drive job gains.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

Cause-and-effect seems more likely there.

The manufacturing jobs lost in recessions often don’t come back. Companies become more productive and efficient during a downturn and learn how to increase output with fewer workers. They’ve also been sending production abroad for many years.

US Manufacturing Employees Chart

US Manufacturing Employees data by YCharts

Slowly, the service sector will employ more Americans, but so many of those jobs are lower-skilled and lower-paying. To get unemployed and under-employed people back into higher-skilled and higher-paying jobs, perhaps we as a country should be spending money not on tax breaks for factory equipment, but on education targeted at high-demand and high-value occupations. This doesn’t mean simply giving all takers low-rate student loans and watching the for-profit education industry grow fat yet fail to develop students’ skills much. The idea that worker-students understand the economy well enough to choose a career is a nice laissez-faire notion, but too many get talked into vocational training that’s not in high demand.

Beyond a more disciplined and targeted vocational education system, what’s needed is realistic talk from policy makers. Let’s stop repeating the false truism that business investment creates jobs and start admitting that our national economy has structural flaws that leave too many people in low-skilled, lower-paying jobs.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

Read more articles about: Economic Watch  

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