Can The Government Create Jobs ???

The debate over whether gov’t can or should be attempting to create jobs is an interesting one. Those from all walks of economic theory have attempted to examine this from many different perspectives. Let’s first look at whether or not gov’t can actually create jobs.

Does the gov’t actually create jobs ??? Clearly we have gov’t employees. I myself am married to a public school teacher. Is she not working at a job the gov’t created ??? Well, the answer is no. Where did the funding for the teacher’s salary come from ??? It must be paid for by revenues collected from the private sector. Such revenues only exist if there is sufficient economic activity in the private sector. Essentially the gov’t employee is a liability in economic terms. This is not necessarily meant in a derogatory sense. There are clearly certain basic essential functions that only gov’t can provide. Perhaps a public school teacher is one of them. Certainly courts of law that enforce legal contracts are also among such basic functions. As well as national defense and many emergency services. Yet what’s important to note is that there is no new capital created as a result of these functions. They do not generate revenue streams, but rather siphon them off. These are simply necessary services that the public has determined are best provided by an agency of gov’t to maintain a civil society. However, creation of capital is quite important. The economic “Pie” is infinitely expanding as a result of new innovations. The role of any gov’t employee is in effect a necessary evil in terms of economics. While they may not create capital, they can contribute to these basic functions of a civil society, which enable the innovator to work in a hospitable environment. That in itself describes the purpose of what the gov’t should be doing in a free society…creating a hospitable environment. The real question is has the gov’t gone beyond providing those functions which are a necessity ??? That is open to interpretation. What one individual deems to be a necessity, the other may not. However, any activity beyond a necessary function is a net negative in economic terms. In 1946 Henry Hazlitt touched on the theory of “The Fallacy of the Broken Window”

The Fallacy holds that when a vandal breaks a window he will actually create an economic benefit because he creates work for the glazier who will make the repair of the window. While it is true that the glazier, those that supply the glazier, and their employees will benefit, the shop owner must pay to repair the broken window. He now subsequently has less money to spend on other items. The visible benefit the glazier will see is then offset by the less visible harm done to the shop owner, his corresponding suppliers, and his employees. The shop owner might have planned to buy a new suit. Yet he must now spend that money to merely return his window to its previous state. The money that would have gone to the tailor to buy the new suit has now been given to the glazier. Economic benefits do not result from destruction but from production. Economic benefits result from creating value, not destroying value.

How does this theory apply to the current state of gov’t ??? Often we hear politicians speak of creating jobs. In fact nothing could be further from the truth. As we demonstrated earlier, job creation is not something the gov’t can do. The gov’t can create economic liabilities (both necessary and unnecessary liabilities). But the gov’t cannot expand the economic pie. It can merely create the environment for business to flourish. Innovation and new products come from the profit motive of the entrepreneur. Job creation is rather a bi-product of the business owner’s success. He retains new employees because they presumably bring some value to him that he can utilize to meet the demands of the consumer and ultimately expand his business. The more rare and in demand the skill set of the employee is, the more they are subsequently compensated. The key is the success of the business entity. Without the opportunity for upward economic mobility, innovation is stifled and job creation will slow.

What about things like public works projects ??? Even in such examples, like the building of roads, bridges, tunnels or any other gov’t spending program there is an offset. Much like Sir Issac Newton’s 3^rd law of motion…For every action there is an equal and opposite reaction. You can argue that such projects on infrastructure create jobs. Yet where does the revenue to pay for these projects originate from ??? The answer is the tax revenue that is generated from the private sector, which can no longer be used for productive distribution by those who paid the tax. The single biggest difference is that the private sector is exchanging a value in trade for another value. This is what happens when you opt to purchase a new television. On the contrary the gov’t rather takes through coercion and leaves behind less for the production of any new value.

The argument in favor of building new roads or bridges is that there are unseen benefits from such projects as well. It is quite rational to assume that without an interstate highway system, the ability to conduct national commerce would be impaired. This is certainly the case to even the casual observer. However this takes us back to the discussion of those functions of gov’t which are a necessity. When the gov’t provides a service as a necessity that could not be practically provided by the private sector, there is a clear benefit in terms of the contribution to the hospitable business environment. Yet when the gov’t determines it will take on new public works projects for the sole purpose of putting people to work, this is extremely unproductive. The purpose of such projects should NEVER be to simply employ those who work on the project. If that were the case, why do we supply those working to build a new highway with heavy machinery. Would we not generate more employment by simply arming them with hand held rock hammers ??? This could create employment at infinitum !!!

The other argument that is often utilized is that of the Quasi-Keynesian suggestion that such projects can create short term increases to aggregate demand which in turn will stimulate a sort of electric shock to the heart of a stalling economy like a cardiac defibrillator. Unfortunately there is little evidence that suggests this can work. Dr. Milton Friedman dismissed this argument on the basis that any increase in aggregate demand as a result of gov’t intervention will only produce transient demand/income to the business community. The business community will certainly recognize this and not commit to any new significant capital expenditures as a result. We are now in late 2012, and we see that the 2009 US stimulus bill has done nothing to motivate the nearly 2 trillion dollars sitting on corporate balance sheets. Most corporations are unwilling to commit capital because they recognize the support the gov’t is providing to the economy and do not view this as organic growth. Additionally they recognize such expansionary measures by the gov’t must be paid for by additional taxation. At which point it is more productive to sit in cash than risk large amounts of capital. Hence the money supply is quite large, yet still continues to show nominal velocity.

The answer in a free society is that there is a role for gov’t. Yet that role should be limited in economic terms to those functions that can only be performed by the state. Not to satisfy a desire for services that the public would like, yet can be provided privately. Any attempt to do otherwise will produce at a minimum and equal detractor for each positive it creates. Unfortunately the negative impact often goes initially unseen to the casual observer. And in time these detractors can create massive market dislocations and prices distortions that eventually harm us all.