Monday, December 31, 2012

The Cost To Create ONE US Job - Public Sector Versus Private Sector

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Jobs creation is the driver of virtually any industrialized economy. Unemployment and new jobs creation statistics in the United States tell us that we're doing something fundamentally wrong.  

As the author of The Global Futurist Blog, The Internationalist Page Blog, The Mad Marketing Tactics Blog, The Business And Project Planning And Management Blog, and a host of blogs and a website or two regarding non-bank financing alternatives and crowdfunding, I always like to look at the way things happen in the private sector and the way in which things are done in the public sector, having had experience with both.

Aside from the illogical and somewhat haphazard way in which the data is compiled by hard-working civil servants (i.e., when an individual comes off of the unemployment roster, that person is assumed to be [magically] employed; when a person who was fired is re-hired elsewhere, the assumption is that a new job has been created or added, even though the job was merely replaced; when a person no longer seeks conventional employment, that individual is considered employed; and when an individual who used to be making $150,000US is now working as a cashier at the statutory minimum wage and is no longer receiving any more healthcare or other benefits, that grossly underemployed individual is considered employed; and a new government worker -- a worker in a "new job" in the public sector likely producing very little, not adding value, and merely costing taxpayers some of their hard earned money -- is counted as an added job), the statistics generally:

1) Overestimate the number of jobs created tremendously;

2) Underestimate the percentage of persons unemployed tremendously.

I recently received my memo from U.S. EX-IM bank, this time boasting of a wonderful project which they were proudly financing which would, ostensibly, create 350 US jobs across 3 states. Are these permanent or temporary jobs -- only for as long as the project is being built? And what type of labor (and at what level of compensation) are they going to be performing?

An excerpt from the EX-IM release as well as some of my notes (5 specific bits of information) regarding EX-IM's 2012 financial statements follow for your information:

Export-Import Bank of the United States
Tuesday, November 20, 2012
Media Contact: Steve Horning, (202) 565-3200

Ex-Im Bank Approves $37.6 Million Loan For Gas Compression Export To Trinidad and Tobago; Supports 350 Jobs In Three States

WASHINGTON, D.C., November 20, 2012 – The Export-Import Bank of the United States (Ex-Im Bank) announced today its approval of a $37.5 million direct loan to support exports by McDermott International Inc. and five American suppliers of natural gas compression equipment and technology for a United Kingdom energy project off the coast of Trinidad and Tobago.

The Bank’s financing will support approximately 350 jobs in Texas, California, and Louisiana, according to bank estimates derived from Departments of Commerce and Labor data and methodology. [snipped]

NOTES: Additional facts or estimates extracted from EXIM’s 2012 Annual Report

1) According to EXIM’s 2012 Annual Report (their fiscal year-end is October 31), it issued a total of  $11,764,537,236 in Loan Guaranties and $14,879,621,415 in Direct Loans, or a total volume of $26,644,158,651, all of which it analyzes, issues and manages on an administration  budget of approximately $98,700,000.00.

2) Based upon the information above, it costs EXIM approximately $1.00 to administer every $271.00 in issued loans and guaranties.

3) In the case of of $37,500,000 loan, the allocated administrative cost would then be
$37,500,000 divided by 271, or an administrative component (in only the first year of the loan’s life!) of $138,376.00. [one year]

4) The credit insurance (reinsurance, actually) on the loan would be approximately 1.25% of the loan amount (on the average, in each year of the loan’s life, and based upon industry standards as estimated), or $468,750.00 [one year].

5) Let’s assume that the loan has a 5-year term, and is self liquidating, and that the jobs created in the US last as long as the loan does. These are not verified facts based upon audited data -- these are estimates for the purposes of illustration only.

I thought it would be interesting to calculate what it might cost EX-IM (public sector) to create one US job, versus what a simple, entrepreneurial crowdfunding (private sector) project which is successful would cost to create one US job.

By my calculations, the above EXIM loan represents an expenditure (without adding in the cost of interest, guaranties, and other credit facility-related costs for keeping a credit facility in force and for using the proceeds, and without taking a look at both the fixed and variable cost components of what it cost EXIM to process the loan, and to stay in business as an entity on its own), this represents a direct cost to the borrower to create one US job of $107,429.

Let’s create a simple table of what the creation of 350 jobs would actually cost EXIM if the above numbers were applicable, assuming of course that the loan were being paid off timely without incidence of default, and without giving effect to the offsetting interest that EXIM would receive on the loan. Let’s also assume that even if the loan principal is repaid, it is capital put at risk, and that it is a part of the cost of jobs creation. 

DescriptionLoan Principal
Amount At Risk, Assuming Maximum Exposure
Administrative Cost: Average Per YearLoan Reinsurance Cost: Average Per YearTotals
Year 1$37,500,000$138,376$468,750N/A
Year 2$37,500,000$138,376$468,750N/A
Year 3$37,500,000$138,376$468,750N/A
Year 4$37,500,000$138,376$468,750N/A
Year 5$37,500,000$138,376$468,750N/A
*Where applicable.
* Not actually a total, this number is a constant amount.

The magic number appears to be $40,535,510 to create 350 US jobs, or a cost exposure of approximately $115,815.73 per job created through EXIM Bank.

Despite these numbers and our simplifying assumptions, we don’t know how much the workers will be paid, nor do we know just how “permanent” their jobs will be.

Contrast the foregoing with a crowdfunded startup venture [allow we to insert a reference here to CFI - CrowdFunding Incubator LLC , whose website will be going live on January 11th, 2013] which raises a mere $150,000.00 in contributions (we’re assuming that no securities are being sold, and that the contributors receive some other substantial bonus in consideration for their faith and fiscal friendliness).

Going further, what if the promoters of this crowdfunded project have a solid plan, good incubation (access to resources, advice, support and the necessary tools) and get substantial preorders  or advance orders for their newly-developed intellectual property and have to begin paying a nucleus of five employees to handle the business immediately?

And going even further, what if that gem of an early-stage enterprise creates another 15 jobs within the next year, which are paid for by the company’s rapidly rising net revenues. We’re now up to a total of  20 employees.

Using a very rudimentary analysis, $150,000, contributed by an aggregate of many smaller-ticket “Main Street” participants might be able to create a total of 20 jobs (including sales and marketing positions as well as internal operational and administrative positions) -- jobs which are much more likely to turn into fast-track careers than on funding a large industrial project similar to the one EXIM is sponsoring. It gives one pause for thought.

Without using Calculus, Complexity Theory, Disruption Theory, or the arcane algorithms underlying securities industry derivatives that no one seems to understand (especially when called before a congressional subcommittee to testify), it seems that this CrowdFunding approach puts only $7,500 at risk per job (career) created.

At this rate, comparing apples to apples (although bananas have more appeal), using the crowdfunding model to create 350 jobs would cost $2,625,000, as contrasted with the EXIM model where the cost at risk for 350 jobs would be, as we said earlier, $40,535,510.

The difference between the two approaches to jobs creation is $40,535,510 [EXIM] less $2,625,000 [CrowdFunding], or $37,910,510 or

In 2013, look for an increase in the volume of crowdfunding and the growth of jobs generated principally by members of the entrepreneurial sector who are promoting their projects, start up companies and ventures on the better crowdfunding platforms run by the better crowdfunding companies.

Douglas E. Castle

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