The new proposed Job Bill finances more teachers, firemen, police officers (being the son and grandson of one we do not call them cops, it was considered a bit derogatory), and union construction workers, and more of that ilk. Not a single job to be created in which it will sustain new real economic growth.
What does an entrepreneur/investor look at regarding the
creation of jobs? The long term return. Simply the net present value, NPV, of
the investment. We formalize this below. The NPV is the value today of a stream
of revenues, hopefully, in the future.
If we look at this equation we see several factors:
(1) First the NPV must be greater than the investment made.
If we invest a $1M then we need well more than a $1M NPV.
(2) The revenue today is highly un-predictable. Why, demand,
no matter how low we price it people are just out of money for many things.
Thus the entrepreneur cuts this estimate down.
(3) Costs or Expenses, they are driven up by health costs
and the ACA mandates. Taxes are also high, state and local, and the costs of
meeting all other state and federal mandates just add to the per employee
burden. So one tries to build a business with as few employees possible. That
is great for productivity and bad for employment.
(4) Capital is a problem because it may be available but
raising investment or loan dollars for some equity leverage may be near
impossible.
(5) Risk, r, which is the sum of cost of risk free plus risk
makes it a highly discounted number. We may have used 18-25% before, when risk
free was say 5-7%, but now we raise it to 30-35% when risk free is almost zero.
Why? Recession, unpredictable Government taxes and costs etc. Just the risk of
seeing capital gains go back up to high end income tax rates drives this number
sky high.
(6) Terminal values: just as capital gains affected the r it
kills the terminal value for the same reason. Also with markets going sideways
at best the ability to monetize the company in say K=5 years if unrealistic.
Thus the terminal values drop.
The result is that from the investor/entrepreneur view we do
not see why we should put capital at risk as was done before. Washington does
not understand this. Macroeconomists are lacking any fluency here, it is not
part of their thought process.
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