October 7, 2010

No Matter How Hard It Tries, Government Won't Create Jobs

Ostensibly related, scary jobs graph.
No matter how hard it tries, government won't create jobs.  This is really quite simple.  

(1) In order for wealth to be created, value has to be added to something. Trees become wood, they become more economically valuable.  Bulk wood becomes pencils it becomes more economically valuable (thank you Milton Friedman).  Wealth has been added to the system.  In this example it is goods being created, but it could also be a service.

(2) In order to create a good or service some combination of three things is required.  Those three things are land, labor and capital ($).

(3) Government is typically not in the business of making goods, but it does, ostensibly provide services.  

(4) Normally these goods or services are created by people or businesses in response to a perceived need.   Jobs are a necessary by-product of wealth creation.  In order to create wealth, people need to do work. It is one of the 3 key ingredients of production.

(5) In the case of government, it has land, and labor, but it gets it's capital by taking it from businesses and people in the form of taxes. It requires that capital to employ it's labor and maintain it's land (and buildings) in addition to providing whatever services it can.  There is a significant use of capital required for this.

(6) By taking this money out of the hands of business and people it is reducing their ability to have the three resources needed to create wealth - specifically capital.  Essentially what government has done is move one of the factors of production from one player (the private sector) to another (itself).

(7) Assuming everyone can create wealth equally (and that's a flattering assumption for the government) by employing land, labor and capital, the government has not added any jobs that would not have been created elsewhere.  In fact, judging by the failure of the Keynesian ARRA stimulus pushed through by the Democrats, they likely provided less jobs than if they'd left that money with business to do it's thing.  All government can do is shift what those dollars help create.  Instead of iPods*, you might get more workers at the DMV.  Government has never been better than the free market at assessing what the public wants.  If it were, the government would be producing iPods. Since it is not, the government is producing less wealth, and less jobs than would have been created if they'd left that money where it originally was.

The government cannot create jobs, it simply can move around the existing job mix to suit itself.  I don't think I've ever heard any Keynesian economist argue that the government money goes further than private sector money (has a higher multiplier effect).  That erstwhile taxed capital, could have been put to more effective use by the private sector.  It would have created more jobs than ARRA did. That's a separate discussion that requires more time.

Keynesian adherents would argue that business has been sitting on the sidelines and that money would not have been spent anyway.  They might also argue that the money wasn't taxed, it was mostly borrowed, from China. That's an interesting argument but it is flawed.

Let's address China first.  Setting aside whether it's a good idea to borrow enormous sums of money from a global competitor, the money the government uses from China it WILL have to be paid back eventually.  With interest.  So it will still come out of the private sector in the form of a tax, except it will happen in the future, and it will be more than advertised. Oops.

Regarding private money sitting on the sidelines, there are a number of problems with that argument.  A lot of the money that the private sector is sitting on, it is doing so out of uncertainty.  That uncertainty has been brought on by a stalled recovery, which has been caused by the Keynesian tax and spend approach to government and the private sector is simply waiting for the dust to settle before it starts spending again.  Now instead of $3 trillion that the private sector is sitting on and waiting to spend, it's only $2 trillion.  The other trillion, plus interest, will be forfeited to China.  The money is gone - in exchange for what?  A 9.6% jobless rate (probably 9.7% by tomorrow) instead of the promised 8% cap.  Congratulations guys, you blew it.

Another problem with the money on the sidelines issue is that it will not stay there forever.  The Great Recession will not last forever either.  But without the unintended consequences of government intervention, perhaps that private investment would have already started to flow back into the economy.  Just like the Obama White House's fictitious jobs saved, one could argue that the number of jobs destroyed has been in the millions.

Keynesianism, is a flawed view of economics.  At least as it's being practiced today.  I would argue (and others have said that Keynes himself would to some extent agree with this) that the only time a government stimulus is a good idea is if the government has been prudent and was not sitting on a mountain of debt but rather a healthy surplus.  Keynes I believe might argue the surplus point, but I believe he would agree that systemic deficits are counter-productive and not how he meant the government stimulus in a recessionary period idea to be applied.

It's something to consider when you start thinking about who you are voting for in any election.  President Obama wasn't lying when he said as a candidate that he thought spreading the wealth was a good thing.  He's talking about it through a prism of how government will spend your money, and whom it would like to see benefit.  The one part he did forget to mention was that while the government can't create wealth, and while it's busy spreading it around, they're also hard at work spreading around the debt.  There's a lot more of that going around these days than wealth.

*Steve Jobs, unlike government, has created iPods, jobs (and more Jobs).

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