Over the past few months President Trump has been waving the victory flag of job creation and low unemployment rates, but with a background in finance I feel like it’s only right to set the facts straight, and explain why, through his process, America will actually be worse off in the long-run. So purely from the fundamentals of business and economics, and removing all political opinions about President Trump, I will set the record straight about what’s really going on in the job market, and why America should actually be worried.
One of the leading goals for President Trump’s campaign was job creation, which is actually no different from the agendas of past presidents. But nevertheless, Trump was adamant that we knew that he was going to “bring jobs back” to America. Job creation is an extremely important factor for an economy. Jobs are the driving force behind household income, and when individuals have money, they spend money, a.k.a., they purchase goods and services which helps expand the economy, also known as driving consumption in the GDP equation. Last week in Trump’s Weekly Address he stated that the unemployment rate was the lowest it had been in 16 years. So why are finance and economic gurus fretting over this “achievement?” Because the practices he put in place to achieve these low levels of unemployment are purely short term, and in the long run will be severely damaging to the U.S. economy.
Let’s take the recent case of the Ford plant that was scheduled to close in the U.S. and re-open in Mexico. Clearly this is a cost based decision- labor is cheaper in Mexico. But when the focus turned to saving U.S. jobs and Ford was in the spotlight, it retracted its plans and instead reinvested money into keeping the U.S. location open; hundreds of domestic jobs were saved. So why is this a bad thing? Because it’s a temporary fix. Ford now becomes less competitive on the global scale. The costs that it would have saved on labor could have translated into more competitive selling prices, or invested into advertising and marketing to help drives sales, or invested into R&D so it can compete in the electric car market. In addition, car manufacturers from other countries are doing everything that they can to make their cars more competitive, which would include sourcing labor and materials as cheaply as possible. So what does this mean for Ford? Competitors can offer lower prices- Ford sales decline; competitors can offer more advanced technology in the electric car market- Ford sales decline, etc.,. Eventually the downward spiral in sales leads to plant closures and layoffs, on a massive level, and Ford and its employees are worse off.
Why don’t we just put a tax on foreign cars (imports) to protect domestic car sales?
This practice is already in place, known as tariffs. This is an important measure to give domestic businesses a chance in both their home country and around the world. But as shown by the fundamentals of business and economics, a market will always move to where supply and demand intersect, and if it doesn’t (i.e., we tamper with the free market too much) someone, usually the domestic market, becomes worse off. If a German manufacturer made a line of cars comparable to Ford’s but cheaper, am I better or worse off if the U.S. government applies a tariff that makes the German cars way more expensive so I choose Ford? I am worse off. I am spending more on a product than it is worth, and could have used the extra money in many other ways (i.e., savings, consumption of other U.S. products). Ford may be temporarily better off because its sales are protected by government policies, but this disincentives Ford to find innovative ways to make their production more efficient and more competitive. In the end, both domestic parties lose. And this is also how black markets form.
So what is a long-term sustainable solution to reduce unemployment?
Invest in forward-looking industries that are in line with your countries competitive advantages or skill sets. Instead of fighting to keep manufacturing jobs in the auto industry in the short-term, invest in equipping these workers with skill sets that will allow them to move into industries where a new demand exists. Asking the questions:
• Which industries does America see itself leading in the future?
• How can we align the skill sets of these workers to be of value going forward?
As we approach our future with A.I. a forward looking approach to job creation is fundamental. We need to anticipate the industries that are about to be disrupted and prepare each associated workforce. This current reactive approach just won’t cut it.