Is Job Loss Economically Damaging?

Keynesian cheerleader Paul Krugman recently used his New York Times column and economics credentials to make yet another politically partisan attack.

Can you say one-trick pony?

This time, the Princeton prof. has his target set on Republican presidential nominee Mitt Romney and his previous business experience running Bain Capital for roughly fifteen years.  Krugman alleges Bain Capital, a private equity firm, engaged in more job destruction than job creation:

But how were profits to be increased? The popular image - shaped in part by Oliver Stone - is that buyouts were followed by ruthless cost-cutting, largely at the expense of workers who either lost their jobs or found their wages and benefits cut. And while reality is more complex than this image - some companies have expanded and added workers after a leveraged buyout - it contains more than a grain of truth. One recent analysis of "private equity transactions" - the kind of buyouts and takeovers Bain specialized in - noted that business in general is always both creating and destroying jobs, and that this is also true of companies that were buyout or takeover targets. However, job creation at the target firms is no greater than in similar firms that aren't targets, while "gross job destruction is substantially higher."

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation.

Despite his admission that job creation and destruction go hand in hand, Krugman paints the whole of the leverage buyout industry as one of evil capitalists benefiting at the expense of shackled workers.

Nothing can be further from the truth however when it comes to this often-demonized enterprise.

Krugman, like many ideological followers of Keynes, sees job creation as the ultimate goal for raising the standard of living.  As long as we are all employed, then somehow goods and services will continue to be produced and sold.  It doesn't matter how unproductive some jobs are (think digging ditches); resources have to be fully utilized and wages must be paid to get those animal spirits spending again.

But simple reasoning assumes jobs are ends in themselves when, in reality, they are means used to acquire wealth.  The same concept applies to money which is just a medium to enable commercial exchange.  At best, jobs are a mere impediment we must endure to pursue those activities which we find pleasurable.

Since jobs in themselves aren't the pathway to prosperity, Krugman's assertion about the leverage buyout industry rests on faulty, elementary logic.  While it's true that firms such as Bain Capital assist others in downsizing, it's only a function of increasing long term sustainability and profitability.

Arguably the most profound lesson in economics was highlighted by French political philosopher Frédéric Bastiat.  In his classic essay, "That Which Is Seen, and That Which Is Not Seen," Bastiat stresses the importance of analyzing opportunity costs beyond easily recognizable effects.  Using the example of a shopkeeper's window being smashed in an act of delinquency, the classical liberal theorist explains that while the window-pane producer sees an increase in demand, such shallow observations don't consider what the shopkeeper's money had the potential to be spent on.  Perhaps the baker or tailor would have been patronized in lieu of the window not being broken.

When Krugman claims that leverage buyout firms are job destroyers, he too misses the unseen.  If a company reliant on profitability is experiencing inefficiencies, it's better to vet them out sooner than later.  Companies like Bain Capital provide this service in order to lay the groundwork for increasing productivity.  Cost cutting, though it appears damaging initially, is merely a reaction to changing market conditions and previously unsustainable labor costs.  Businesses striving to out-compete their competition do so by attracting better workers through bidding up wages and producing more efficiently to offer lower prices.  While downsizing is detrimental to workers in the short term, there is reason to conclude that those jobs would have been lost anyway in the long run.  Freeing up once used capital ultimately leaves it available for more profitable endeavors.

Krugman misses this important distinction; he narrows in on the "seen" only.

True capitalism can only function when both losses and gains are allowed to be realized.    "Creative destruction," the consequence of which was wrongly identified by Karl Marx, is necessary for inefficiencies to be vetted and eliminated.  Using Krugman's logic on job perseverance, the death of the horse and buggy industry posed an extreme threat to economic health.  As long as human desire remains infinite, there will be infinite opportunities to produce no matter one's ability or intelligence.

The Keynesian ideology has clouded the thinking of economists for decades with its focus on jobs and money as ends only.  For a Nobel prize winning economist to miss Bastiat's lesson is a testament to its importance in an era of endless government deficits and money printing.