Do Politicians Really Have Much to Do with Job Creation?

September 9th, 2012 at 4:53 pm

Reading Matt Bai’s piece in the NYT Magazine today about the Ohio economy, and reflecting on many recent discussions and debates, I found myself pondering the question posed above.

It’s a big, portentous question, especially in an election year where the economy’s center stage.

It’s central to the Bai piece as he talks to the current and former governors, the mayor of Columbus, and the White House.  It’s not like Ohio’s soaring ahead of the rest of the nation, but there’s been a notable recovery there, particularly in autos.  Unemployment, which peaked at 10.6%, above the national rate, is now below it, at 7.2% (the nation is at 8.1%).

Predictably, everybody wants a piece of the action.  Ohio’s an interesting case study, because it’s a swing state and an autos state so there’s a lot for the pols to squabble about.   Bai points out that Gov John Kasich (R)  talks about his great jobs record, giving Obama little credit, while the President is all over the state reminding folks of his actions, while at the same time Romney surrogate Sen Rob Portman (R) reminds Ohioans of the very un-Kasich-like message that they’re really not doing so well at all.

Is there any way of sorting out who’s right here?

In normal economic times, meaning business cycle expansions as opposed to recessions, there’s a virtuous cycle of income growth, demand growth, consumption and investment growth, job growth, back to income growth, etc.  Politicians at all levels–especially governors and mayors–don’t have to do much at these times other than take credit for job growth on their watch that they didn’t have a lot to do with (though, as I’ll stress in a moment, there are important nuances here).

The President and Congress can, of course, make a difference in expansions, mostly by not screwing things up and watching out for market failures.  It helps if fiscal policy is structured such that budget deficits that grew in the recessions shrink in the expansion.  And there’s always work to be done ensuring export markets are open to our businesses, workers are adequately trained, financial bubbles aren’t inflating, fiscal cliffs are avoided (…ahem).

But when the economic chips are down, that changes, and the federal government matters a lot more than the state and locals.  For one, only the federal sector can run budget deficits, which means states are highly unlikely to engaged in any job-creating Keynesian stimulus.  To the contrary, as recession-impacted state revenues take a hit, states often find themselves in pro-cyclical versus counter-cyclical mode (doing things that reinforce the negative trend in the economic cycle rather than things that might reverse it).   States are more likely to raise taxes or cut services in recession than not, which is one reason they’ve shed so many jobs in recent years even as private sector employment has consistently expanded.

So there’s no question that the top-level answer to the question of politicians and job creation is, “in recessions, yes, and it’s President (and Congress) that matter most.”   In this regard, note that both Presidents Obama and GW Bush implemented stimulus, the auto rescue, and the TARP.   It’s obviously a whole different discussion as to how effective they were under whose watch, etc., but governors and mayors were recipients of any jobs benefits from these initiatives, not originators.

But what about in expansions?  Do governors and mayors have more to do with job creation when the economy is growing?   Not so much here either, but that doesn’t mean these electeds are irrelevant to job growth.  While the aggregate quantity of job growth in a nation is largely driven by macro and global trends, there’s a lot sub-national officials can do to try to encourage the jobs that are created to locate in their states and cities.  They affect less the number of jobs than where those jobs end up.

There’s a large literature on this, much of it evaluating the costs and benefits of “stadium/factory chasing,” i.e., offering businesses tax and other breaks to come your way versus somebody else’s backyard (see the work of my old friend Greg LeRoy and his group, Good Jobs First).   Summarizing, what I think we now know is that just giving tax breaks isn’t enough to make this work for either communities or the larger nation.  Instead, we’ve learned two important lessons.

First, what matters more to thriving businesses is the quality of public goods, including physical infrastructure and the quality of the workforce.  Yes, the tax base matters, but the success stories are not the places that offered the most sugar in terms of tax cuts.  It’s the ones that offered solid communities with world class infrastructure—the roads, airports, schools, and skilled workforce that businesses need to succeed.

In fact, Bai talks about the role played by the very forward looking Mayor Coleman of Columbus, Ohio, who actually managed to pull off a small tax increase to help improve the local services that he believed made an important difference to business location decisions.

…when it came to the recovery in Columbus, Coleman credited the way local businesses had come together around the idea that raising revenue could stave off cuts and preserve investments. “They understand that part of selling a local economy is selling the quality of life in that local economy,” he said. “So if you don’t have good streets and good parks, if you don’t have a strong safety force and a strong fire department, if you don’t have the ability to grow the economy locally, businesses will not locate there. They’ll shrink and go somewhere else, because the quality of life is so bad. There are a lot of Ohio cities where that has happened, and it hasn’t happened in Columbus.”

Bai emphasizes this point further, stressing the connections between investments in public goods and the economies major growth industries:

…banking and insurance and management consulting, state-of-the-art medical facilities, high-tech manufacturing and research. These industries thrive on the kinds of major investments in infrastructure and quality of life that only government can make, in schools and transportation and fiber optics and parkland. How politicians think about these kinds of investments, and how they intend to pay for them, would probably make for a more relevant debate this year than arguing over who created 1,000 new jobs in Canton last May.

The second thing I think we know about the role of sub-national politicians in job creation has to do with regional aggregation or clustering effects that are often very important to local job growth.   Cities can develop as research hubs with a quality university at the core; a port city can develop transportation infrastructure that creates lots of new opportunities, and so on.  These clusters can develop organically, like the old railroad and river-confluence cities, but these days such developments tend to be more strategic.

In sum, pols will always take credit for jobs on their watch—and try to point elsewhere re job losses.  But outside of recession, I wouldn’t take it too seriously.  In recession, the President is very important, and President Obama comes across as effectively stepping up to this plate in the Bai story re Ohio.  In expansions, govs and mayors don’t have much at all to do with the number of jobs the economy generates, but if they’re smart in terms of investments in public goods, they can draw more of those jobs to their states and cities.

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14 comments in reply to "Do Politicians Really Have Much to Do with Job Creation?"

  1. Rima Regas says:

    I have a question for you, Jared. In a better educated America, one in which people know, at least to some degree, what government does and how an economy like ours works, would the question you ask even be a question?

    The fact that Kasich can even get away with trying to take credit for the jobs in his state points to a serious problem with the voters, if they place any credence with his claims.

    It really doesn’t take a bachelor of science in political science to have sufficient knowledge with which to differentiate between a whopper (Kasich) and where the truth lies.

  2. save_the_rustbelt says:

    Actually Jared, it is a whole lot more complicated, and the issues are much more long term.

    Ohio started downhill at about the time NAFTA was passed, and job offshoring became a serious factor. The rotting hulks of former factories are monuments to globalization.

    Ohio is still a depressed (repressed) economy, there are now $10 an hour warehouse and construction jobs where there used to be $20 an hour manufacturing and construction jobs with good benefits. So the unemployment rate is better, the underemployment rate is worse.

    I earned $11 an hour in Ohio doing construction work to get through college, circa 1969 – 1975. I’m certain you can do the inflation math.

    I get through Columbus a couple of times a month (business and grandchildren) and Columbus is nowhere near what it once was, especially outside of the downtown (Columbus was once as close to recession proof as a city could be).

    So who gets credit and who gets blame? Tough to answer, but there is 20 years of blame and only a small recovery for credit.

  3. JimZ says:

    I remember Rick Perry boasting about Texas’ job creation statistics, but we shortly found out that the predominant source of most of those Texas jobs were the government, at all levels.

  4. Nhon Tran says:

    Thank you.
    States can increase the quantity of jobs nation-wide by harmonising their regulations, where appropriate, thus reducing the costs of doing business in America, especially when businesses cross state borders, and therefore attracting investment from o/seas.

  5. EdH says:

    It’s not just that OH unemployment peaked high but we’ve also come off a roughly 10 year period where unemployment trended higher than the national average ( I believe we’ve also been losing population but don’t have a good grasp of the interaction there. Regardless, a *relatively* good unemployment rate is kind of a big deal here.

    I do believe that Kasich has been advocating to bring jobs to OH. What I’m not clear on is how strategic they’ve been, which is the key take-away I’m getting from this post. My sense is they’ve been more opportunistic, either poaching an incongruous set of jobs from other states or like the Times piece mentions possibly caving to business interests that were bluffing about leaving. When thinking about a growth industry like renewables where our manufacturing capabilities at least have the potential to build a clustering effect, his heart isn’t in it. I think he’d rather frack our way to some easy short term money.

    And one more local comment, CLE was hardly mentioned in the piece. *Sigh*

  6. Michael F says:

    I remember back when I started taking grad-level seminar courses where we would have working discussions on similar topics and at least 1/2 of the students would be missing the salient points… they would be sitting there with head cocked to the side like the old RCA Victor dog.

    This is exactly what is going on here with Jared’s blog entry. I referred to a Washington Post article about the State of Maryland building a budget surplus and how the Post completely missed the point

    … for exactly Jared’s reasoning. I believe that, nationally, we have dumped over a half a million jobs of our Fed/State/Local payrolls. The Feds really haven’t contributed, but the locals sure have.

    What Maryland found, thanks to Governor O’Malley and the State Legislature, was that by raising taxes and protecting the state infrastructure and services, the State insulated (partially) against the onslaught of the Republican austerity which crushes the lower middle class and poor because people stop spending money and “save their acorns for winter.” This causes additional loss in the local economy, which repeatedly rolls through the local commerce. (layoffs and drag on the local safety net.)

    If you apply the Republican/Koch Bros devised meme for the wealthy to the rest of the population–we have to be confident in the economy–it has a much larger impact on our lives, as we are the job creators and not the rich.

    The ultimate kicker on the Maryland “situation” is that state taxes are deductible on your Federal return, so Maryland just managed to “keep” a bit of what would have been a Federal layout that would then be used to pay the shortfalls in the Republican controlled states, which I would call a Guinness moment. If the Maryland plan worked, only then would the Federal Gov’t benefit.

  7. Rick McGahey says:

    The Bai piece was pretty bad, actually. At one point, Bai gets lost in BLS estimates of additional direct auto jobs in Ohio, and leaves the clear impression that it was only around 700 post-bailout, or perhaps even negative. But the issue isn’t marginal gains over the direct auto job base–it is what would happen if the auto sector closed down entirely, and the ripple effects of that on suppliers and communities. Bai fumbles the ball several times on this issue–there is no question that the auto bailout is crucial for the Ohio economy. All of the stuff about state tax incentives to lure firms is well known (that is, they are deadweight that detracts from the national economy, a conclusion reached both by progressives and mainstream economists).

    Bai is just another of the false equivalence stories–“well, who can tell what’s real? Both sides overstate” that we are seeing more of. That approach by naive journalists works for Romney-Ryan, who lie and won’t give any details on their policies, and reporters are reduced to these “on the one hand, on the other hand” stories. The auto bailout was a big success, and needs to be treated that way.

    • Jared Bernstein says:

      Great points.

      • Michael F says:

        Rick, Jared was implying, if I remember correctly, the same points on an MSNBC weekend show. The failure of supposed educated writers to question the vastly important stimulus affect. measuring the impact against the employment situation at the start of the Obama Presidency is “weak” at best. The stimulus was very important int stopping the job losses, and allowing the economy to establish a bottom.

        What’s more, the couple months after the election in which Obama became the de facto acting President for economic affairs and stabilizing the financial sector was beyond critical. Clearly, it was fast moving and messy. I remember some smart guy saying, “I was in the room.”

        I very much like your point that measuring the importance of the quick and directionally smart package did some very heavy lifting.

        To this, Rick, I have to agree with your point on the press. There are too few journalists willing to take this sort of issue on. What’s more, the Bush collapse came after years of economic stagnation … ugly growth numbers when there was growth at all. Large segments of the employed population was suffering lowered standards of living (earnings based–and their spending was funded off of credit). At the collapse, the population was at its worse situation ever to handle the implosion. Most people were extended and, with job losses, were turned into financial salt pillars.

        My point is that beyond leaving the country with collapsing economic numbers and jobs dropping at over 700K per month, This followed a crazy borrowing cycle. To this fact, I see very few journalists spend any time on this. What’s more, most economists who have gotten their hands dirty working in for the White House for either party agree on the cure for the common recession. It really isn’t being partisan to question what we know about the Ryan/Romney economic plan. OR to try to pin them down to what they would do on their watch if they, in the new year ended up in the WH.

        My thought is that the first thing that Romney would do after taking the oath of office would be to have an immediate “Come to Jesus” moment and order up another stimulus. Why can’t “the press” do some work and nail him down.

        What we know now is that all we get now is what Pundit Joy Reid has referred to as “word salad.”

        I’m waiting for the debates.

  8. 4G Bill says:

    Economic growth that creates jobs depends mainly on the innovation capability of organizations, mainly businesses. But governments should have policies and programs that support innovation such as the Department of Energy’s Innovation Hub on Energy Efficient Buildings that is a public private partnership to cut the energy consumption in about one million commercial buildings by 50%. However, the most important factor in creating economic growth is the competitiveness of methodology used to create radical innovation in sectors such as energy, education, healthcare, transportation, information technology, and construction. The competitiveness of methodology to create radical innovation has entered a fourth generation (4G) similar to what happened in manufacturing decades ago with lean methodology. 4G financial accounting measures capabilities based on both tangible and intangible capital. If you can’t measure the competitiveness of an organization’s capability which people with knowledge,tools, technology and processes, then you can’t measure the capability to innovate and create economic growth based on innovation.

  9. Greg LeRoy says:

    I haven’t read the Bai piece yet, but here are a few things we do know that Kasich has done in the name of jobs. He offered Sears Holding Corp, a deeply troubled company controlled by a hedge fund manager, $400 million to relocate its headquarters from a Chicago suburb to Columbus. He gave Omnicare $41 million to relocate its HQ one mile from Covington, KY to Cincinnati. He gave American Greetings about $100 million to move from one Cleveland suburb to another. He gave Diebold a state-local package of $96+ million after it also did the “job blackmail” dance. Similarly, Bob Evans got an eight-figure package to move within the Columbus area. Despite a damning report from the state’s AG that found almost half of subsidized companies are falling short on jobs, Kasich has allowed the quality of job-subsidy disclosure to continue to deteriorate (that began under Strickland). Finally, Kasich was one of the first new governors taking office in early 2011 to pull down his state’s Recovery Act (job-reporting) website.

  10. Sarah says:

    The lesser spoken-of issue is how government policies can be used to develop talent as well as stimulate growth. Having top talent is a crucial determinant of America’s future competitiveness, and one that can be influenced by many seemingly uncorrelated policy decisions. According to a recent Deloitte report titled Brawn from Brains, ( policy reforms from immigration to FDI regulations can have a substantive impact on talent development. When policies are considered through the lens of talent, politicians really can impact the creation of jobs, and more critically, the development of the US talent pool.

  11. Andrew West says:

    Demand is the only thing that can create jobs. No President has ever created ANY jobs. Stimulus funds, incentives and bailouts may prevent the loss of jobs – at taxpayer expense, but they don’t “create” anything. At the same time, tax cuts or scaling back regulations do not create any jobs. Both of these ideas sum up the “magic” of Liberal or Conservative thinking. Presidents do not create jobs.

    To solve our current economic challenges by creating jobs we need to focus on demand – aggregate demand and unmet demand. Aggregate demand is simply the sum of purchasing power (income) of those employed. With some 20 million people unemployed or underemployed, aggregate demand is at an all time low. Political magic won’t change that. The only thing that will is “unmet demand.” Unmet demand can create jobs if businesses can meet that demand.

    One example: for decades we’ve known we need to replace half of our schools in the US because they’re substandard. That is very real demand, but it cannot be met because schools are too expensive. Delivering state of the art schools for 30% less would make them affordable and meet that demand. In 10 years that would create nearly 2 million jobs/year. There are several major instances of unmet demand in the US including clean AFFORDABLE energy, affordable urban living, reliable agriculture production and affordable healthcare. These areas have unmet demand that can create more than 10 million jobs in the short term.

    Our only way out of the current situation is to define the unmet demand and create ways to meet that demand – not with subsidies or tax cuts, but with innovation. There is no political fix on the horizon (from either party) but perhaps there is a return to American invention. I suggest solving some of our greatest challenges can create plenty of jobs.

    My work is here:

    A short Intro is here:

    If Obama or Romney could create jobs…. why not just create 20 million and get it over with?

  12. Angela says:

    After watching the first debate last night, my son asked “How can government create all these jobs?” I’ll share this article with him. You’re right: It doesn’t make sense to cutback government spending during a recession, which cuts public sector jobs. Higher unemployment leads to lower consumer confidence, which leads to less spending. Instead, we should be investing in our infrastructure and public agencies. How many private businesses flourish as the result of public contracts?