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The Fallacy That Government Creates Jobs

President-elect Obama has announced that he wants a big "stimulus" package to create 2.5 million jobs by 2011. Many of the details are unclear, including how much new government spending he will propose and how he is measuring job creation. Press reports suggest the incoming administration is looking at $400 billion-$500 billion over the next two years, but the Washington Post reports that Democrats are talking about as much as $700 billion during that time period.

Not surprisingly, the prospect of all this new spending (above and beyond the record spending increases during the past eight years) has triggered a feeding frenzy among special interests. Home builders, auto companies, road builders, state and local governments, the education establishment, the food stamp lobby, the green lobby, and alternative energy companies are among the groups fighting for a place at the public trough.

It would be easy to dismiss this orgy of new spending as the spoils of war. The Democrats won the election, after all, and now they intend to reward the various special interests that supported them. But that's not a complete explanation. Some supporters of this new spending seem genuinely convinced that the federal government can create jobs.

In part, this is a debate about Keynesian economics, which is the theory that the economy can be boosted if the government borrows money and then gives it to people so they will spend it. This supposedly "primes the pump" as the money circulates through the economy. Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can't inject money into the economy without first taking money out of the economy. More specifically, the theory only looks at one-half of the equation -- the part where government puts money in the economy's right pocket. But where does the government get that money? It borrows it, which means it comes out of the economy's left pocket. There is no increase in what Keynesians refer to as aggregate demand. Keynesianism doesn't boost national income, it merely redistributes it. The pie is sliced differently, but it's not any bigger.

The real world evidence also shows that Keynesianism does not work. Both Hoover and Roosevelt dramatically increased spending, and neither showed any aversion to running up big deficits, yet the economy was terrible all through the 1930s. Keynesian stimulus schemes also were tried by Gerald Ford and George W. Bush and had no impact on the economy. Keynesianism also failed in Japan during the 1990s.

To be fair, the inability of Keynesianism to boost growth may not necessarily mean that government spending does not create jobs. Moreover, the argument that government can create jobs is not dependent on Keynesian economics. Politicians from both parties, for instance, argued in favor of pork-filled transportation bills earlier this decade when the economy was enjoying strong growth -- and job creation generally was their primary talking point.

Unfortunately, no matter how the issue is analyzed, there is virtually no support for the notion that government spending creates jobs. Indeed, the more relevant consideration is the degree to which bigger government destroys jobs. Both the theoretical and empirical evidence argues against the notion that big government boosts job creation. Theory and evidence lead to three unavoidable conclusions:

  • The theory of government-instigated job creation overlooks the loss of resources available to the productive sector of the economy. Frederic Bastiat, the great French economist (yes, there were admirable French economists, albeit all of them lived in the 1800s), is well known for many reasons, including his explanation of the "seen" and the "unseen." If the government decides to build a "Bridge to Nowhere," it is very easy to see the workers who are employed on that project. This is the "seen." But what is less obvious is that the resources to build that bridge are taken from the private sector and thus are no longer available for other uses. This is the "unseen."

  • So-called stimulus packages have little bang for the buck. Even if one assumes that money floats down from Heaven and we don't have to worry about the "unseen," government is never an efficient way to achieve an objective. Based on the amount of money that is being discussed and the claims of how many jobs will be created, Harvard Professor Greg Mankiw filled in the blanks and calculated that each new job (assuming they actually materialize) will cost $280,000. But since money doesn't come from Heaven, this calculation is only a partial measure of cost. In reality, the cost of each government job should reflect how that $280,000 would have been spent more productively in the private sector.

  • Government workers are grossly overpaid. There are several reasons why it costs so much for the government to "create" a job, including the inherent inefficiency of the public sector. But the dominant factor is probably the excessive compensation packages for bureaucrats. According to Bureau of Economic Analysis data, the average employee for the federal government now earns gets paid nearly twice as much as workers in the productive sector of the economy.

Notwithstanding these points, it is quite likely that politicians in Washington will pass a boondoggle-filled "stimulus" bill. While there may be a few naïve folks who think a big increase in the burden of government somehow is a recipe for job creation, politicians have a self-interested motive to move in that direction because it increases their power and influence.

They win and taxpayers lose.