Job Creation Requires Perpetual Job Destruction
The progress of civilization has meant the reduction of employment, not its increase.
—Henry Hazlitt, Economics in One Lesson
Economic growth in Las Vegas has been one of the few constants over the past several decades. A housing correction after 2008 slowed its ascent somewhat, but population growth has held steady for the city. In the 1950s alone, the city’s population tripled.1 By the new millennium, 1,500 people were migrating to the resort and gambling town every week.2 Clark County, the home of Las Vegas, has seen its population grow more than twenty times since the mid-twentieth century. No other U.S. county comes close to that growth rate.3
Some arrivals have been retirees eager to enjoy the city’s plenteous entertainment and no state income tax. But the main driver of this decades-long influx of human capital into Vegas has been the high paying jobs offered by casino resorts such as the Desert Inn, Sahara Hotel, and the Sands. In keeping with Alexis de Tocqueville’s observation in the nineteenth century that Americans are “restless amid abundance,”4 they headed for Las Vegas and its plentiful jobs in the twentieth century.
And yet the three legendary hotels I just mentioned—symbols of the city’s glory days—no longer exist. The site of the Desert Inn is now occupied by the Wynn and its sister hotel Encore. The SLS Las Vegas stands where the Sahara once shimmered. And the Sands has been replaced by the Venetian and Palazzo. The destruction of these once-great casino resorts contains a lesson about job creation.
There are no sacred cows in Las Vegas. When a casino loses its luster, and its profitability along with it, Nevadans don’t run to Washington seeking a bailout. They bulldoze the joint. The destruction of a hotel ends a lot of jobs—that’s the “seen.” The “unseen” is what comes next: the replacement of a failure with a new and better idea. It’s that constant renewal that has made Las Vegas a job-creating machine. New, more profitable casinos attract more investment, creating more jobs. It’s Sin City’s virtuous circle.
The opposite of Las Vegas is Detroit, whose population shrank 25 percent from 2000 to 2010.5 Remember those two thousand carmakers from the early twentieth century? Imagine the burden on taxpayers if we had done bailouts in those days. And what would propping up failures have done to survivors like General Motors, Ford, and Chrysler? The successful companies that became the Big Three would have been forced to compete with companies kept alive with capital extracted from the citizenry.
But here we are today, with both General Motors and Chrysler owing their existence to the taxpayers. In their anxiety to save jobs in Detroit, politicians are propping up the Motown equivalent of the Desert Inn. The “seen” is the thousands of jobs preserved by the bailouts of GM and Chrysler in 2008 and 2009. The “unseen” is how much more vibrant Detroit would be today without government’s false compassion. Successful carmakers like Toyota, Honda, and Volkswagen could have purchased the valuable assets of GM and Chrysler and managed them better. Some of the eager migrants to Las Vegas, Silicon Valley, and Austin might have opted instead for Detroit. The Motor City’s stratospheric unemployment rate is tragic testimony that the surest way to suffocate new jobs is to prop up the losers of the past.
Workers follow economic growth, and economic growth takes place in cities and towns unshackled from the past. Las Vegas has had its struggles in the last few years, but its history suggests that it will weather these difficulties because its entrepreneurs are constantly replacing the dead or moribund with new businesses. Tourists return to the Entertainment Capital because there’s always something new to see. About the only thing that draws tourists to the remains of Detroit, on the other hand, is the same voyeuristic instinct that makes people stop to gawk at a car wreck.6
A well-run business never runs out of money. If short on cash, a properly managed business can always find private investors willing to back its management. The management of GM and Chrysler lost the trust of investors. Bankruptcy would have brought in new owners who could raise the funds necessary to keep the companies in operation and possibly expand their payrolls.
A classic example of such restructuring comes out of Silicon Valley. Steve Jobs recalled that when he returned to Apple in September 1997, “We were less than ninety days from being insolvent.”7 But with Jobs in control, the threat of insolvency vanished with a $150 million investment from Microsoft.8
The turnaround entailed a painful first step: Jobs laid off over three thousand Apple employees.9 That was a lot of livelihoods lost and families uprooted. But shedding labor that was not contributing to profits was unquestionably necessary. A year after the company had reckoned with insolvency, Apple was on the rise. Speaking at San Francisco MacWorld in 1998, Jobs urged his audience to “Think Profit.” They did, and Apple’s profit of $309 million that year allowed it to attract the investment necessary to start hiring again.10
John Doerr, the head of the venture capital firm Kleiner Perkins Caufield Byers, responded to the change at Apple by establishing an iFund backed by two hundred million dollars to finance new “apps” for Apple products. By June 2011 Apple had paid out two and half billion dollars to the developers of the products that stock its App Store.11
Jobs’s willingness to destroy unproductive jobs led to far more new jobs down the road. Recall Enrico Moretti’s finding that Apple is responsible for sixty thousand jobs in the Cupertino area, many of them outside the technology field.
The town of Ann Arbor, Michigan, was the headquarters of the now defunct bookseller Borders, which closed 399 stores and laid off 10,700 workers in 2011.12 That’s a lot of lost jobs, but as Henry Hazlitt recognized, economic progress is often a function of destroying work. If job-creation were our sole economic aim, we could achieve it in a perversely simple way. Millions of jobs would appear tomorrow if we banned computers, ATMs, and tractors. Businesses would have to hire legions of typists and clerks, banks would have to add tellers, and scores of men with shovels would be needed for every idled tractor. Of course, most of us would be condemned to a life of drudgery. Everyone would have a job, but it would be backbreaking. Even worse, abolishing “job killers” like the computer would abolish profits. Investment capital would flee to other countries, and we’d all be working for pennies.
There were many reasons for the fall of Borders, including management errors, but it is safe to say the rise of the internet is high on the list. Amazon.com might have killed Borders, but it now employs more than thirty-three thousand people.13 Of course, Amazon’s effect on Borders is only a small part of the internet story. For the longest time American Airlines operated a walk-up ticket office in the Drake Hotel in Chicago as well as similar offices around the country. The ability to buy tickets online has rendered those offices and the jobs of the people who staffed them obsolete. More broadly, the ability of travelers to book flights, hotels, and rental cars on Expedia.com and other internet travel sites has nearly wiped out travel agents.
It is hard to quantify, but the internet has probably destroyed more jobs than any innovation in history. But the jobs the internet takes it gives back in abundance. Moretti estimates that “the number of jobs in the Internet sector has grown by 634 percent over the past decade [2002–2012], or more than two hundred times the growth rates of the overall number of jobs in the rest of the economy during the same period.”14
An obvious response to assurances that the internet makes more jobs than it kills is that not everyone has the tech savvy to work in Silicon Valley. Fair enough, but returning to Moretti’s earlier point, technology multiplies jobs in abundance for all skill levels. Well-paid tech workers in Silicon Valley, Seattle, Boston, and Austin need the services of lawyers, doctors, roofers, and yoga instructors.
Okay, but what about all those high-wage manufacturing jobs, the foundation of the American middle class, that technology has killed off? Even here, the long-term story is undeniably good.
It is hard to imagine today, but in the 1970s the Economist referred to Seattle as the “city of despair.” In the “Boeing Bust” of 1967–1971, the city’s largest employer shed more than sixty thousand jobs. A billboard near the entrance to the airport read, “Will the last person leaving SEATTLE—Turn out the lights.”15
As luck would have it, Bill Gates and Paul Allen grew up in Seattle. Though they originally incorporated Microsoft in Albuquerque, New Mexico, the desire to return home ultimately won out. All those job-killing computers animated by Microsoft’s products made a lot of clerical workers obsolete. But while Boeing has more manufacturing workers in Seattle than Microsoft has employees, the aviation giant creates fewer local jobs than Microsoft does.16 In short, technological advances surely destroyed quite a few manufacturing jobs, but there has been a net gain in the end.
Not everyone can get one of the lucrative jobs at Microsoft (average annual compensation: $170,000),17 but a city filled with high-earning techies is a magnet for lots of other workers—high-skilled and low—in other fields. And a prosperous Microsoft made Seattle an attractive location for other tech firms, like Amazon, to put down roots.
Seattle was once a Detroit-like crumbling monument to manufacturing’s once glamorous past. Seattle booms today and employs workers of all stripes because backbreaking assembly-line jobs left the city. They went overseas, and Americans increased the value of their toil in jobs created by what is now called the “new economy.”
The irony is that the rise of Detroit itself a century ago led to plenty of job destruction, in the United States and around the world. Horse-drawn carriages and buggy whips quickly became obsolete. That was the “seen”—the kind of “seen” that today’s politicians and commentators focus on, the loss of jobs caused by innovation. The “unseen” was the jobs created by the automobile industry. More broadly, businesses could expand the size of their markets because trucks (like trains before them) enabled them to ship goods to more distant locales.
It is hard to quantify, but the mass production of the automobile destroyed numerous jobs in the early twentieth century. But far from forcing Americans into breadlines, that destruction cleared the way for better jobs, much as the internet today is replacing jobs it has eliminated with enhanced employment possibilities.
Naysayers point to dying cities like Detroit as evidence of the harm of job destruction. But the real lesson of such cities is the danger of worshipping particular kinds of jobs for their own sake rather than maximizing profits, even at the short-term expense of employment. Steve Jobs’s principle, “Think Profit,” is what attracts vital investment. Detroit did not implode because of bad luck or heartless “robber barons” (a robber baron by the name of Henry Ford largely created Detroit, after all). Job creators abandoned a once-prosperous city because it chose to remain in the past. Detroit is jobless today because supposedly compassionate politicians tried to maintain the status quo—a sure path to destitution.
Henry Hazlitt pointed out a simple truth that is easily forgotten: It is only in poor countries that everyone must work. Rich countries are constantly obliterating work. In his 1946 classic Economics in One Lesson, Hazlitt wrote that wealth-enhancing technological advances allowed the United States to eliminate child labor and work for the aged.18 Thanks to the wealth and higher-paying jobs created by job destruction, children don’t have to work in factories or fields and the elderly aren’t forced to work until death. Conversely, work is the constant for everyone in impoverished countries such as Haiti or Bangladesh. Technology and free trade mean more and more Americans get to do the work they love, while work for survival is the norm in poor countries. It is job destruction that has allowed kids to be kids and the old to retire and play with their grandchildren.
The progress of job creation through job destruction does not make losing your job less agonizing. I write from experience—it is a terrible feeling to be laid off. Yet getting laid off is not cause for despair. Good often comes from losing your job. Buddy Ryan and the Philadelphia Eagles drafted Cris Carter out of Ohio State in 1987. Carter had talent, but in 1990 Ryan released him with the memorable quip, “All he does is catch touchdowns.”19
Twenty-three years later, at his NFL Hall of Fame induction ceremony, Carter tearfully thanked Ryan for cutting him. He described his release as “the best thing that ever happened to me.”20 Carter had a substance abuse problem, and the loss of his job with the Eagles was the wake-up call that he needed. Thanks to Ryan’s fatherly tough love, the immature wide out got straight and finished his sixteen-year NFL career with over thirteen thousand receiving yards and 130 touchdowns.
Steve Jobs was famously fired by Apple in 1984. The loss of the company he had founded forced him to look inward. He returned to Apple in 1997 with far more knowledge about how to run a business. In chapter seven, I shared the story of Pete Carroll, who converted his two NFL firings into lessons that propelled him to the heights of football glory. You can lose a job for all sorts of reasons, but the experience will leave you permanently scarred only if you ignore the causes. No one likes to be fired, but failure need not be permanent. Unemployment is harsh but it is not forever.
We are conditioned to think of unemployment as kind of like the weather: the unavoidable result of vast, impersonal forces. Like a drought or a persistent heat wave, you just have to endure it. It’s part of the natural order. And yet unemployment is wholly unnatural for anyone who wants to work. It is the result of specific government policies. To understand what I mean, open your local newspaper and look at the advertisements. The February 14, 2014, issue of the Washington Post, for example, carries an ad from Cyprus Air offering “Safe, Clean, Gas Fireplaces” for 80 percent off. A sale at Bloomingdales offers 50 percent off of your second item. A four-day sale at Annapolis Lighting features a 40 percent discount on everything in the store.
The obvious lesson is that when retailers have inventory that they’re struggling to sell, they lower prices to levels that bring in buyers. Every market good has a price, and “clearance sales” are the way that businesses clear unsold inventory. It’s the same with labor. Unemployment reflects a failure of the price workers are charging for their labor to match the demands of their market.
Let’s go back to the NFL for a moment. In August 2012 the Washington Redskins cut a star tight end, Chris Cooley, even though he had set a franchise record for tight ends of 423 receptions in his eight years with the team.21 Cooley’s contract gave him a star’s salary, but Fred Davis had replaced him as a starter. Though he rejoined the Redskins after Davis suffered an injury, Cooley retired for good in 2013. If Cooley had wanted to continue playing in the NFL, he could have done so at the prevailing salary for backup tight ends. He chose not to. Employment in the “real world” is no different. The problem arises when government steps in to soften the blow of unemployment.
In his brilliant 1949 book, Economics and the Public Welfare, Benjamin Anderson wittily observed that “any country can have heavy unemployment if it is willing and able to pay for it.”22 His point was that labor, much like gas fireplaces and lamps, has a price. Just as Bloomingdale’s will be stuck with its inventory until it brings its prices down to a level that will attract buyers, workers will remain unemployed if “generous” government transfer payments prevent them from adjusting their wage demands to market realities.
We see this today in unemployment benefits that have been extended to ninety-nine weeks. Employees are a cost that businesses must bear: they hire workers if they feel the addition of new employees will boost profits. But every dollar the unemployed receive from the government is an extra dollar that employers must offer to lure workers back into the workplace.
Politicians justify the payment of jobless benefits by pointing to slow economic growth. But those benefits exacerbate the very economic illness they say they are trying to cure. Jobless benefits make it more expensive for businesses to hire workers, because workers must compare the benefit of a new job with the “earnings” they will lose if they stop receiving an unemployment check. Some will choose the relative leisure of unemployment over work that might not pay much more. For others the unemployment check will allow them to hold out for a more desirable job. When government bids up the price of able-bodied labor, it’s harder for business to make a profit, the economy suffers from reduced production, and workers are consigned to the indignity of living at the expense of others. Rich countries are their own worst enemies when it comes to healing a weak economy.
In recent years, government has increased hiring costs in ways beyond simple unemployment benefits. In 2010, President Barack Obama signed the Affordable Care Act, mandating that businesses with fifty or more employees offer healthcare insurance. Ostensibly, Obamacare is a work of governmental compassion, but it imposes a substantial cost on struggling businesses. By making it even more expensive to hire a worker, Obamacare has increased the country’s unsold labor inventory.
Too many politicians, commentators, and voters don’t understand how work, while the norm, can become scarce when government policy raises the price of hiring. Of course, the biggest barriers to hiring are efforts to “save” jobs through subsidies to dying or failed businesses. Emotion writes too much economy-sapping legislation.
In a free economy, capital migrates to talented entrepreneurs eager to pursue profitable opportunities. Innovations like the automobile, computer, and online retail services destroy jobs, but the process leads to better, higher-paying jobs. The lesson, as always, is to let market forces work. Yes, to create jobs in abundance, we must allow the free marketplace to regularly annihilate them.