Romney Must Focus on Value Creation, not Jobs

Governor Romney can best respond to criticisms of his record at Bain Capital by focusing on value creation as the key to both jobs and shared prosperity.  He is a veteran at creating value, and that is why he is capable of bringing jobs, jobs, jobs to America if elected. He can explain, and the American people can understand, why when government creates jobs without creating new value beyond their cost, we become poorer as a nation.

In late November, 2008, then president-elect Obama said that job creation was a priority.  He promised 2.5 million more jobs.  He also promised, while campaigning in 2008, on seven different occasions, that he would create 7 million jobs in green energy and construction.

The loan program that gave us the Solyndra fiasco was forecast by the Department of Energy (DOE) to "create or save" about 2,500 permanent jobs, or about $6.4 million per job.

Obama's original $800 billion stimulus (the American Recovery and Reinvestment Act) in 2009 created "as many as" 3.3 million full-time jobs says the Congressional Budget Office (CBO).  It also estimated as few as 500,000 jobs were created.  So, using the CBO jobs figures, we get from $242,242 to $1.6 million per job.  Using CBO's most generous jobs creation number, CBS estimates each job created or saved to have cost at least $228,055.

Two years after it began, a $34.7 billion green energy loan guarantee program has created just 3,545 new, permanent jobs, or about $9.8 million per permanent job.  The loan program touted 64,000 jobs.  So that program had a 5.5% jobs creation success rate.  If the $447 billion American Jobs Act had similar success, (White House prediction was 1.9 million jobs) it would have created about 105,000 jobs that would have cost $4.25 million per job.

While the official U-3 unemployment rate for April, 2012, was 8.1%, Shadow Government Statistics puts the unemployment rate at 22.3%, almost triple the official rate.  Experts believe our economic situation could get much worse.

Further, at least ten members of the Council on Jobs and Competitiveness (that Obama appointed) gave the legal maximum contribution to help get Obama elected in 2008.  Several also serve as Obama campaign bundlers, and have raised as much as $2.7 million for Obama in 2008 and 2012 combined.

We have Obama focusing on jobs, jobs, and jobs in order to get the US economy moving.  And we can see that his plans called for some rather expensive job saving and/or creation costs per job.  We see how Obama "selects" members of his Jobs Council. All of Obama's actions are damning enough, so ...

Now let's look at jobs from a different perspective, from a value perspective.

We start with Dr. Walter E. Williams' famous telling of Frédéric Bastait's "Broken Window Fallacy" fable.

"... a vandal smashes a shopkeeper's window. A crowd forms, sympathizing with the shopkeeper. Soon, someone in the crowd suggests that instead of a tragedy, there might be a silver lining. Instead of the boy being a vandal, he was a public benefactor, creating economic benefits for everyone in town. Fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler and so forth. Bastiat says that's what's seen. What is not seen is what the shopkeeper would have done with the money had his window not been smashed. He might have purchased a suit from the tailor. Therefore, an act that created a job for the glazier destroyed a job for the tailor. On top of that, had the property destruction not occurred, the shopkeeper would have had a suit and a window. Now he has just a window and as a result, he is poorer."

Williams is reinforcing Bastait's point about "what is seen and not seen," that job creation has unseen consequence, that tax money spent to create jobs has first to be removed from the economy and cannot be used for any other purpose.  Jobs directly created by the government are visible, are seen.   But what is not seen are workers displaced by the effects of increased taxes, tariffs, and government regulation, the direct result of government creating jobs.

Let's examine the concept of "value."  Dr. Steven Horwitz wrote, "The next time anyone starts talking about job creation, stop listening.  Jobs come into existence when entrepreneurs are free to create value. Aiming directly at job creation is a recipe for waste and poverty.  Set people free to use their talents to create value for others and the jobs will follow."   [emphasis added]

Horwitz continues, "... politicians from both parties are much too concerned about job creation when they should be concerned about value creation.  Creating jobs is easy; it's creating value that's hard....   We want labor-saving, job-destroying technology because it creates value by enabling us to produce things at lower cost and thereby free up labor for more urgent uses."   [emphasis original]

How, then, is value created?  To answer that question, we turn to Porter's Value Chain.  Companies create value by acquiring raw materials and using them to produce something useful.  It creates profit by selling the "something useful" for more than it paid for the raw materials (including labor).  The most profitable companies produce the most value for its customers.  Providing value for customers means increasing customers' profits.

Which leads us to profit and its relationship to value.  Paul Hsieh states, "'Making a profit' has an unsavory, morally suspect taint.  Yet simultaneously, Americans have a far more positive view of the concept of 'creating value'."  Hsieh continues, "...'creating value' and 'making a profit' are just two sides of the same coin."

While at Bain Capital, Mitt Romney created value for Bain investors through private equity services and venture capital.  Bain bought underperforming or undervalued companies and tried to make them profitable.  Still some companies were closed and employees laid off, but Bain's goal was to create value, not destroy it.  The result was profit for Bain's investors.  Yet Romney has been excoriated by the Obama campaign and the MSM for cutting jobs and closing unsuccessful or dying companies.

In contrast, look at what Obama has done.  "Profits" (or more often losses and bankruptcy) made by cronyism and political favoritism, including government bailouts of failing businesses or subsidies to unprofitable companies (such as Solyndra), are the result of government compulsion.  Taxpayers must pay for goods or services they would not otherwise purchase.  These subsidized companies do not offer value.  They survive (or take taxpayer money) only through bailouts and political "pull."

We have seen how the emphasis on jobs has failed.  Even Nobel laureate Dr. Paul Krugman didn't get it, choosing instead to emphasize jobs

Romney knows better.  Hiadviser Eric Fehrnstrom said on MSNBC's "Andrea Mitchell Reports," "When you create value, when you add value as they did in trying to improve companies, you also add employment."  That's promising.   Another part of his campaign web site states:

Multiple factors contribute to America's faltering performance.  But a major part of the problem over successive presidencies, and one that the Obama administration has sharply exacerbated, is the regulatory burden on the economy.  Regulations function as a hidden tax on Americans, with the federal government's own Small Business Administration placing the price tag at $1.75 trillion annually - much higher than the entire burden of individual and corporate income taxes combined.

It sounds as if Romney is going to ease the regulatory burden on US businesses, allowing them to produce value.  Then, as Bastait, Williams, Horwitz, and Fehrnstrom have said, new value can be created and jobs and employment will follow.   But I guess that solution is just too simple for Krugman.

Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University.  He was a (very conservative) professor of quantitative management specializing in using statistics to assist/support decision-making.  He has been a consultant to many small businesses and is now retired.  Dr. Beatty is a veteran who served in the U.S. Army for 22 years.  He blogs at rwno.limewebs.com.

Governor Romney can best respond to criticisms of his record at Bain Capital by focusing on value creation as the key to both jobs and shared prosperity.  He is a veteran at creating value, and that is why he is capable of bringing jobs, jobs, jobs to America if elected. He can explain, and the American people can understand, why when government creates jobs without creating new value beyond their cost, we become poorer as a nation.

In late November, 2008, then president-elect Obama said that job creation was a priority.  He promised 2.5 million more jobs.  He also promised, while campaigning in 2008, on seven different occasions, that he would create 7 million jobs in green energy and construction.

The loan program that gave us the Solyndra fiasco was forecast by the Department of Energy (DOE) to "create or save" about 2,500 permanent jobs, or about $6.4 million per job.

Obama's original $800 billion stimulus (the American Recovery and Reinvestment Act) in 2009 created "as many as" 3.3 million full-time jobs says the Congressional Budget Office (CBO).  It also estimated as few as 500,000 jobs were created.  So, using the CBO jobs figures, we get from $242,242 to $1.6 million per job.  Using CBO's most generous jobs creation number, CBS estimates each job created or saved to have cost at least $228,055.

Two years after it began, a $34.7 billion green energy loan guarantee program has created just 3,545 new, permanent jobs, or about $9.8 million per permanent job.  The loan program touted 64,000 jobs.  So that program had a 5.5% jobs creation success rate.  If the $447 billion American Jobs Act had similar success, (White House prediction was 1.9 million jobs) it would have created about 105,000 jobs that would have cost $4.25 million per job.

While the official U-3 unemployment rate for April, 2012, was 8.1%, Shadow Government Statistics puts the unemployment rate at 22.3%, almost triple the official rate.  Experts believe our economic situation could get much worse.

Further, at least ten members of the Council on Jobs and Competitiveness (that Obama appointed) gave the legal maximum contribution to help get Obama elected in 2008.  Several also serve as Obama campaign bundlers, and have raised as much as $2.7 million for Obama in 2008 and 2012 combined.

We have Obama focusing on jobs, jobs, and jobs in order to get the US economy moving.  And we can see that his plans called for some rather expensive job saving and/or creation costs per job.  We see how Obama "selects" members of his Jobs Council. All of Obama's actions are damning enough, so ...

Now let's look at jobs from a different perspective, from a value perspective.

We start with Dr. Walter E. Williams' famous telling of Frédéric Bastait's "Broken Window Fallacy" fable.

"... a vandal smashes a shopkeeper's window. A crowd forms, sympathizing with the shopkeeper. Soon, someone in the crowd suggests that instead of a tragedy, there might be a silver lining. Instead of the boy being a vandal, he was a public benefactor, creating economic benefits for everyone in town. Fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler and so forth. Bastiat says that's what's seen. What is not seen is what the shopkeeper would have done with the money had his window not been smashed. He might have purchased a suit from the tailor. Therefore, an act that created a job for the glazier destroyed a job for the tailor. On top of that, had the property destruction not occurred, the shopkeeper would have had a suit and a window. Now he has just a window and as a result, he is poorer."

Williams is reinforcing Bastait's point about "what is seen and not seen," that job creation has unseen consequence, that tax money spent to create jobs has first to be removed from the economy and cannot be used for any other purpose.  Jobs directly created by the government are visible, are seen.   But what is not seen are workers displaced by the effects of increased taxes, tariffs, and government regulation, the direct result of government creating jobs.

Let's examine the concept of "value."  Dr. Steven Horwitz wrote, "The next time anyone starts talking about job creation, stop listening.  Jobs come into existence when entrepreneurs are free to create value. Aiming directly at job creation is a recipe for waste and poverty.  Set people free to use their talents to create value for others and the jobs will follow."   [emphasis added]

Horwitz continues, "... politicians from both parties are much too concerned about job creation when they should be concerned about value creation.  Creating jobs is easy; it's creating value that's hard....   We want labor-saving, job-destroying technology because it creates value by enabling us to produce things at lower cost and thereby free up labor for more urgent uses."   [emphasis original]

How, then, is value created?  To answer that question, we turn to Porter's Value Chain.  Companies create value by acquiring raw materials and using them to produce something useful.  It creates profit by selling the "something useful" for more than it paid for the raw materials (including labor).  The most profitable companies produce the most value for its customers.  Providing value for customers means increasing customers' profits.

Which leads us to profit and its relationship to value.  Paul Hsieh states, "'Making a profit' has an unsavory, morally suspect taint.  Yet simultaneously, Americans have a far more positive view of the concept of 'creating value'."  Hsieh continues, "...'creating value' and 'making a profit' are just two sides of the same coin."

While at Bain Capital, Mitt Romney created value for Bain investors through private equity services and venture capital.  Bain bought underperforming or undervalued companies and tried to make them profitable.  Still some companies were closed and employees laid off, but Bain's goal was to create value, not destroy it.  The result was profit for Bain's investors.  Yet Romney has been excoriated by the Obama campaign and the MSM for cutting jobs and closing unsuccessful or dying companies.

In contrast, look at what Obama has done.  "Profits" (or more often losses and bankruptcy) made by cronyism and political favoritism, including government bailouts of failing businesses or subsidies to unprofitable companies (such as Solyndra), are the result of government compulsion.  Taxpayers must pay for goods or services they would not otherwise purchase.  These subsidized companies do not offer value.  They survive (or take taxpayer money) only through bailouts and political "pull."

We have seen how the emphasis on jobs has failed.  Even Nobel laureate Dr. Paul Krugman didn't get it, choosing instead to emphasize jobs

Romney knows better.  Hiadviser Eric Fehrnstrom said on MSNBC's "Andrea Mitchell Reports," "When you create value, when you add value as they did in trying to improve companies, you also add employment."  That's promising.   Another part of his campaign web site states:

Multiple factors contribute to America's faltering performance.  But a major part of the problem over successive presidencies, and one that the Obama administration has sharply exacerbated, is the regulatory burden on the economy.  Regulations function as a hidden tax on Americans, with the federal government's own Small Business Administration placing the price tag at $1.75 trillion annually - much higher than the entire burden of individual and corporate income taxes combined.

It sounds as if Romney is going to ease the regulatory burden on US businesses, allowing them to produce value.  Then, as Bastait, Williams, Horwitz, and Fehrnstrom have said, new value can be created and jobs and employment will follow.   But I guess that solution is just too simple for Krugman.

Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University.  He was a (very conservative) professor of quantitative management specializing in using statistics to assist/support decision-making.  He has been a consultant to many small businesses and is now retired.  Dr. Beatty is a veteran who served in the U.S. Army for 22 years.  He blogs at rwno.limewebs.com.