Truth, Justice, and the American way. TRUTH: Helping to correct people's misconceptions about history, science, and the state of the world. JUSTICE: Meant in the biblical sense. Fair treatment of other people, rational laws, and assisting the disadvantaged. THE AMERICAN WAY: A classless society where everybody has an opportunity to meet their potential and for economic advancement, regardless of race, ancestry, religion, gender, or sexual orientation.

Thursday, October 18, 2012

Investment and Jobs


Most people incorrectly believe that by investing in stocks they are creating jobs.
  • Buying stock does not create jobs.
  • Companies holding on to cash costs jobs
  • Mergers and acquisitions cost jobs and lead to inflation.
  • Vulture capitalism costs many jobs.
  • Outsourcing to other countries costs workers 3 times what one would expect
  • Federal bailouts and infrastructure investment help the economy more than tax cuts 
Look for ideas about tax reform soon

Buying Stock Does Not Create Jobs

Most people think that by investing in the Stock Market, they are investing in companies. Actually, if you buy a share of stock, you are usually buying a piece of a company and gambling that the share price will go up. The company does not directly benefit from changes in the share price, so you are not actually investing in the company, but buying part of the company from somebody else.

When a stock offers dividends (a periodic bonus) the share price is usually steadier and the shareholder tends to make more money. This is how a company gives shareholders a portion of the profits (because the shareholder owns part of the company).

While the share price tends to vary with the company's success, a lot of price changes are based on  guesses about the future and lead to wild stock price swings. There are ways to improve these guesses using computer models, but they are still just guesses and should usually be left to professionals (usually mutual fund managers).

The advantage of buying shares on a stock market is that you become a limited liability partner in the company (corporation). This means that if the company loses money, the creditors cannot ask you to pay the company's bills (you can lose your investment, but not more).

Actual Investment in a Company Creates Jobs

The easiest way actually invest in the expansion of a company is to lend the company money (buy bonds sold by the company). Lending the company money allows the company to expand or buy new equipment. Expansion means that the company has to hire more people. Upgrading old equipment sometimes allows more efficiency with fewer employees (the company lays people off), but new equipment usually means an expansion in business and a net gain in jobs. When a bond expires, the value is fixed (assuming the company is not bankrupt). Before that date, the value depends on how well the company is doing and general interest rates.

A second way to invest in a company is to buy shares directly from the company. The opportunities for this are limited. An initial stock offering or an offering of additional shares in the company provides stock that the company sells through specialized investment houses (arbitragers). Purchase of  these shares is investment in the company.

The best way to create jobs is to invest in new companies. This involves either creating a new company, investing in a new company, or buying stock in a venture capital fund.

Companies Holding Cash Costs Jobs

When a company sells stock or gets a loan, not all of the money is spent immediately. The money that is saved for the future should be put to work by investing in other companies. Some can be used to buy stock in other companies (or put in the bank), but most of the money should be in actual investments.

Mergers and Acquisitions Cost Jobs and Lead to Inflation

Sometimes a company will buy another company in order to gain valuable resources (such as skilled workers, patents, or contracts. Most company presidents want to streamline the combined company:
  • Use the same forms and software throughout the company (requires retraining or layoffs)
  • Merge duplicate offices or divisions (requires layoffs and/or relocation of employees)
  • Eliminate parts of the combined company that are not part of the central role of the company (spin-offs or layoffs).
Mergers and acquisitions usually cause inflation, because there is a loss of competition.

Vulture Capitalism Costs Many Jobs

Vulture Capitalism is the opposite of Venture Capitalism. Venture capitalism is investment in new businesses (high risk, but very high potential reward). Vulture capitalism is squeezing all of the money out of a company and then closing the company.

A vulture capitalist buys a company that is either distressed or has a low stock price. Then, resources (divisions, equipment, contracts, trademarks, patents, and so on) are sold off until all that is left is the name. In the mean time, most of the employees are laid off and pension funds are raided. Finally, the name is sold.

Often spinning off resources results in requiring workers to relocate and reducing worker pay.

An example is the purchase of AT&T by Southwestern Bell, which followed the above plan (except) that the combined company was renamed AT&T (fraudulently taking advantage of the public trust built under the AT&T name in earlier years).

Outsourcing a Job to Another State or a Foreign Country Costs Many Jobs

As a rule of thumb, every dollar of new employment brought into a local economy adds $3 to the local economy (through purchases and services used by the new person, and purchases and services paid for by existing people serving the new person, and so on). Assuming round numbers, this means that every new person hired adds between $100,000 and $150,000 to the annual local economy (depending on the base income assumed). Laying off a person costs between $75,000 and $100,000 from the annual local economy (unemployment insurance reduces the cost of a layoff). However, the lost taxes bring the overall loss up to the $100,000 to $150,000 range.

Outsourcing to another state causes 3 local layoffs for each person relocated or laid off by the company. Because of bad tax and quality laws, outsourcing to a foreign country costs 4 to 5 layoffs to the local, state, and US economies.

For example, outsourcing telephone customer service to India results in:
  • Loss to the local economy of at least 3 times the salary of the person laid off
  • A reduction of service quality
  • Employees being paid around half of what US employes would be paid
  • No import duties charged on the services and no taxes paid in the US (increasing import duty collections on services would greatly reduce outsourcing services to foreign countries)
Outsourcing of manufacturing to a foreign country
  • Creates a very complex import duty situation,
  • Loss to the local economy of at least 3 times the salary of the person laid off
  • A reduction of product quality (poor inspection, rampant bribery, poor environmental controls, and so on)
  • Employees being paid around half of what US employes would be paid

Federal Bailouts and Infrastructure Investment Help the Economy More Than Tax Cuts

Tax cuts for the rich are like buying stock in companies, most of the money is saved, not spent. Tax cuts for the poor make very little difference to the national or local economy, because the amount of money is small.

Tax cuts for the middle class help the economy, but the multiplier is smaller than creating new jobs. For the past 15 years, the middle class has been shrinking as people are paid lower salaries and are laid off.

Federal bailout of a US financial institution helps the US economy if it avoids layoffs. Federal bailout of a foreign financial institution hurts the US economy and increases inflation.

Federal bailout of US manufacturing firms helps the US and local economies by maintaining 3 times the jobs as the layoffs averted.

Maintenance of schools, roadways, bridges, public parks, waterways, levies, and other public "commons" has fallen behind by 15-20 years. Road widening in metropolitan areas and pavement upgrades in rural areas are 5-10 years behind. The Katrina rebuilding and the BP cleanup are still not complete.

Investment in infrastructure would help alleviate these problems, provide jobs, and would speed growth of existing and new companies.

About Me

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Canoga Park, California, United States
Software Engineer with Ph.D. in Computer Science. I have a deep background in the sciences and in computer-human interaction. I was a college professor for 11 years, followed by over a decade of work in industry.