Thursday, August 18, 2011

Rebuilding the US Economy: Part 2, Real Job Creation

Creating Value
In Chapter One of my book, Organizational Economics: The Formation of Wealth, and in a post entitled Concept of Value, I discuss three types of value, knowledge, capacity, and political.  I will trust that the readers of this post have read one or the other [or both? :-)]. 

In my book I argue that, in general, governments (and governance) cannot create value, in terms of ROI.  Instead, governments have two interlocking roles; Creating the policies and standards (see my post The Purpose of Laws, Regulations, Policies, and Standards and Standards: A Mission of Government) and Governance that reduce Intra- and Inter-organizational friction and Creating the environment or context in which value can be created.  This involves that construction and maintenance of defense (see my Post: Security: A Mission of Government), and formal and fair markets, transportation, utilities, and communications systems(See my Post: Infrastructure: A Mission of Government and Organizational Control).

Creating Jobs
Currently, leaders of many nations are claiming they know how to create job others are struggling to determine how to do this.  Unfortunately, governments cannot create value, and since they cannot create value they cannot create jobs, as such; they can only create the context in which job creation is possible (this creates Value On Investment and the private sector can turn into ROI).

In the US, the Leadership in the period from 1933 to 1963 understood this.  This is the period in which the United States spent the most on creating the infrastructure necessary for job creation.   Examples include in the 1940s the TVA, the Hoover Dam, rural electrification, the national road systems (built by the WPA) and so on, enabled the industries of WWII to support, and some would argue to win the war.  In the 1950s, the Interstate Highway System.  All of this enabled the growing economy from the 1950s to the late 1960s.  In the early 1960s NASA's Man to the Moon program built the Internet and other technologies of the 1990s, which again, helped the economic growth of the 1980s to 1990s.

However, starting with Johnson and the entitlement programs, the US lost its way, living for 45 years on what was built up prior.  Instead of concentrating on infrastructure spending, the Johnson and succeeding administrations have concentrated on spending on a "social safety net".  Politicians have found this to be a much better way to get reelected.  And, in effect, this is creating exploitive political value from the knowledgeable by the ignorant (see Concept of Value or my book, Organizational Economics: The Formation of Wealth for the definition of exploitive political value).  I suspect that most everyone would agree, now, that having a job is the best "social safety net".  And that spending resources on the infrastructure is the only Mission that a government has to help to create jobs.

The second arrow that a government has in its quiver is its laws, regulations, policies, and standards.  The executive and legislative branches of government at the federal and state level all operate on the secondary road maintenance process. This is the process whereby county road departments fix or repair the roads.  After a road has been paved it always require maintenance due to use and the weather.  Initially, as road deteriorate,  the first cracks and potholes appear, crews are sent out to patch them. Then, as potholes appear in the potholes and the cracks open up again, the crews come back.  At some point the patches on the roughness caused by cracks and potholes make it impossible for the normal use.  When the citizens finally scream loudly enough, the road commission will send crews to "top coat" or pave over the entire surface.  Generally, this is enough to quiet the outcry, but within a year the potholes and cracks with start to reappear.  This restarts the maintenance (patching) cycle.

The US Congress and the various state legislatures attempt to use this process, also known as the "duct tape" process, to adjust or repair the laws, regulations, policies, and standards to support their Mission.  Since, at least in the US, there are two very distinct political camps with respect to the Federal Governments Mission.  One is the Keynesian "demand-siders" who say that putting government money (our money) into the hands of the "have-nots" will stimulate the system into growing jobs.  What has been found is that most people were burned by having too much credit and are taking the money to pay off debts and to save for the future.  One the other side are the "supply-siders" who say that governments ought to get out of the way (deregulate) and let business do its job of creating jobs.  This was tried in the 1990s and led to the bubbles of the 2000s and the bust of 2008.

Neither side realizes (or wants to realize) that supply and demand are all functions of a (mostly) closed loop system (as is the chicken or egg problem and many others).  Further, neither side wants to realize that there are only two ways to create jobs within any organization.  The first is through some stimulus external to the organization and the second is through the growth of knowledge.

In the 1930s, President Roosevelt enacted a series of "New Deal" programs.  These "demand-sider" programs, like the CCC, the WPA, and the TVA were designed to create jobs, pure and simple.  Fortunately for the country, these programs were also creating an entire country-wide economic infrastructure, that is they were creating Value On Investment (VOI).  Additionally, they started to lift the country out of the Great Depression.  But this was an artificial lift.  When the various programs were challenged and court and found to be unconstitutional in the mid-1930s, by 1937 the country went into recession.

In 1938, Brig. Gen. George C. Marshall was named Deputy Chief of Staff for the Army.  He was appalled at the state of the forces.  The United States had the 17th largest military in the world and was using WWI weapons that were leftover from the buildup in 1918.  With his low key approach, honesty, and a doctrine of preparedness (and the onset of WWI in Europe), by 1939, when he became Chief of Staff, Congress that had been wrangling about million dollar items started to provide first hundreds of millions and then billions of dollars for the Army (which include the Air Force) and the Navy.  Initially, this was for new weapons.  But the manufacturing of these new weapons required new factories and new tooling. 

Very quickly the US economy bounced back and then moved out smartly.  Companies, who had never paid attention to military contracts (and many of whose leaders were isolationists) were now drawn to these contracts like yellow jackets to a picnic.  "Suddenly", new construction and manufacturing jobs opened up and unemployment fell, hard (in fact so hard, that during WWII, women were first employed in large numbers).  Where Dr. "New Deal" (demand-sider) could not cure the jobs issue, Dr. WWII did.

In the process of up-dating the weapons, a great deal of research and development were done on both sides of the conflict.  The results included much more reliable radios, rockets (the V-2 led to the Moon rocket Apollo, (see my post The Cost of Rockets Built by NASA: Waterfall Process vs Short-cycle and Agile Processes), the computer, and the Atomic Bomb.  And all of these supported new businesses with new jobs after the war.

However, somewhat inadvertently, the United States government continued to support job creation in the 1950 and early 1960s through their support of basic research in nuclear physics, space, and military aircraft.  However, with the Johnson administration and succeeding administrations, all of this work was killed off in favor of "buy the votes" entitlement programs.  Now with a crumbling infrastructure and little real research and development, and little support for education or educational reforms (built on a good Enterprise Architecture Framework), all of the politicians are falling back on either demand-side or supply-side economic processes to create jobs; and neither will.

The common ground is the need for jobs.  And the only way is to straighten out the law, regulation, policies and standards "cluster-blub", cut entitlements, re-start programs like the super collider (and others of this type), and to create an education enterprise architecture that recognizes difference in the ways teachers teach and students learn, and which teaching methods are best for which students (plus making the central supervisor's office much more cost efficient).

[Sidebar: That is not to say that there are not people that deserve some help, though I suspect that between charitable organizations and good governmental regulation most of these people could be taken care of.]

Notice that it takes about 25 to 30 years (a generation) from the government investment until the investment truly bare full fruit.  It is very silly of the politicians and people of countries to expect it in less than a full generation.  However, in a recent interview, one retired US Department of Transportation head indicated that politicians cannot stand that when they appropriate a trillion dollars to upgrade highways, it takes at least 2 years to spend the funds--to me that seems way too short a time.  But the politicians (and their constituents) are of the instant gratification type and expect that 9 women can make a baby in a month.

My contention is that if we don't follow the plan outlined here, the US will continue on its merry way, until, like the economy in Ayn Rand's novel "Atlas Shrugged", it hits a discontinuity and falls into complete chaos.

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