Why Government Can’t Create Jobs
Mark Ahlseen is associate professor of economics at King College in Bristol, Tennessee.
Any nation needs a certain number of government employees in order to function. But ever since the Employment Act of 1946 a different view of government employment has emerged: that government can alleviate downturns in economic activity by spending—or “investing”—funds on projects that will stimulate employment. The government may be either a direct employer (as when it increases the numbers in our armed forces) or an indirect employer (as when it increases spending on highways, which increases employment in construction companies). As a nation we may need larger armies or more and better highways, but that is not germane to the discussion at hand.
The insidious notion persists that government job creation actually generates an increase in employment. According to this view, if construction companies increase employment by 100,000 jobs due to a $3 billion government spending program to finance highway construction, then employment is 100,000 jobs ahead of what it might be in the absence of the program.
Rarely does the public debate focus on how employment in other sectors is affected when the government seeks the $3 billion necessary to finance its program. These effects are important but, unfortunately, less visible because they are spread among hundreds, if not thousands, of employers.
Government spending, including spending designed to stimulate employment, may be derived from three sources. The first is taxes. If individual income taxes are raised by $3 billion to fund our highway project, disposable income is reduced by $3 billion. Consequently, individuals will demand less clothing, fewer appliances, and so on. Private sector employers will notice and respond by laying off workers. Since most of us will agree that we can spend our income more efficiently than can the government if only for the fact we do not have to pay a bureaucratic overhead charge—lay-offs in the affected companies will exceed the employment added by companies constructing the new highways.
If corporate taxes are raised instead of individual income taxes, they will eventually result in higher prices for consumers, lower real wages for workers, and lower returns for investors. All of these result in a decreased ability to buy clothing and appliances with the net result that unemployment increases, not decreases.
A second source of funds is government borrowing, but this borrowing increases the price of lendable funds, which reduces the amount of investment in the private sector. Consequently, fewer new factories, machines, and homes will be built. Not only does this decrease in private investment slow economic growth, it results in additional unemployment in these industries.
A final source of funds is the government’s central bank, which can create new money. However, this monetary inflation results in price inflation by eroding the purchasing power of the dollar. This decrease in purchasing power will eventually increase unemployment as well.
Unfortunately, the political appeal of government spending stems from the fact that the jobs created are noticeable to the average voter, while the handful of jobs lost here and there are not attributed to the government spending program. Interestingly, from 1960 to 1988 there has been a positive, and statistically significant, correlation between public aid (as a percentage of GNP) and the unemployment rate. Conventional wisdom would have the public believe that as government “invests” in people the unemployment rate decreases. Yet the opposite is the case. For the same years there has been a positive, though statistically insignificant, correlation between government employment (as a percentage of total employment) and the unemployment rate. This suggests that as government work is created more jobs are lost elsewhere resulting in a rising unemployment rate.
As a nation, we undoubtedly need government employees for such things as national defense, police protection, and administering our court system (though I do question our founders’ wisdom in relegating the delivery of first-class mail to government employees). But it is a fallacy of the Keynesian legacy that government can reduce unemployment by priming the pump with spending programs. Government needs to reduce spending and taxes in order to leave income in the hands of individuals who earned it and who can spend it much more efficiently than the government can.
Pingback by Stimulus Funds Redirected | Foundation for Economic Education on 24 September 2009:
[...] Timely Classic: “Why Government Can’t Create Jobs” by Mark [...]
Pingback by Stimulus Funds Redirected « Daniel Joseph Smith on 24 September 2009:
[...] “Why Government Can’t Create Jobs” by Mark Ahlseen [...]
Pingback by Obama Vows More Jobs | The Freeman | Ideas On Liberty on 24 November 2009:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Pingback by Obama Vows More Jobs « Conservative Thoughts and Profundity on 24 November 2009:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark Ahlseen Leave a [...]
Pingback by Job Growth to Return in Spring, Geitner Says | The Freeman | Ideas On Liberty on 23 December 2009:
[...] Timely Classic: “Why Government Can’t Create Jobs” by Mark [...]
Pingback by Economic “Stimulus” Fading, Administration Concedes | The Freeman | Ideas On Liberty on 13 January 2010:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Comment by John Smith on 13 January 2010:
You write: “For the same years there has been a positive, though statistically insignificant, correlation between government employment (as a percentage of total employment) and the unemployment rate. This suggests that as government work is created more jobs are lost elsewhere resulting in a rising unemployment rate.”
How do you know the causation is in the direction you claim? Couldn’t it be that with rising unemployment, the state acts as ‘employer of last resort’, and reactively creates public sector jobs? This perhaps doesn’t reduce unemployment, but your argument is not rigorous in showing that it causes unemployment.
Pingback by Bipartisan Job-Bill Passes Senate | The Freeman | Ideas On Liberty on 23 February 2010:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Pingback by TIER V, ONE MONTH EXTENSIONS and STUPIDITY!!!!!!! - Unemployment -benefits, rate, legislation, insurance, jobless, extension, jobs, employers, employees, hiring, resumes, occupations, government, laws, unions, contracts, workers - Page 3 - City-Data Forum on 13 April 2010:
[...] [...]
Pingback by IMF Expects Sustained High Unemployment | The Freeman | Ideas On Liberty on 15 April 2010:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Comment by Drik on 15 April 2010:
government CAN creat jobs
for the politicians
Comment by Drik on 9 June 2010:
Like redristributing wealth, which they also do not create, the government redistributes jobs. And like the wealth, they take a cut out for themselves in the process of the redistribution. 95% of the jobs created were temporary government service jobs. And per the government’s own website, they spent $282,000 for each of the jobs that they created or saved. Don’t think for a minute that any of the jobs created or saved actually payed $282,000. The majority of the jobs were jobs like for census samplers and they were doing a little better than minimum wage, the rest of that $282,000 was the government’s handling fee. The problem with the job redistribution is that the same percentage handling fee applies. In Spain, every “green” (aka non-competitive) job that was created cost Spain 2.2 “real” (ie competitive and self-sustaining) jobs.
Would that our goverment were only as inefficient as Spain and that we would only lose 2.2 jobs for each created or saved one. If you look at the cost per job created or saved ($282,000) and the actual take-home pay of the job, you get a better idea of the inefficiencies that are going on. Our government has probably killed betweeen 5 and 10 real jobs for each one created or saved.
Comment by unclewill on 9 June 2010:
Spread The Word! … the quickest way for us to solve our current financial problem is to pass The FairTax [HR 25/S296] … tell your congressmen WHAT’S IN IT FOR HIM/HER, i.e. “The advantage to you of passing The FairTax is that you will have more money to spend than you could ever imagine but without complaints from your constituents because they, too, will have more money to spend than they could ever imagine.” [1st rule of sales ... tell the buyer 'What's in it for them.']
Comment by Rodney Hytonen on 4 August 2010:
“Like redristributing wealth, which they also do not create, the government redistributes jobs. And like the wealth, they take a cut out for themselves in the process of the redistribution. ”
But never as HUGE a cut as Corporate Industry’s infintely runaway GREED will dictate – due to the absolute power our system gives it over government, which was SUPPOSED to be responsive only to the protection of the individual FROM those greed-dominated predatory influences.
In the case of income redistribution, just look at the figures (and the DIRECTION of that redistribution of income and wealth – UPWARD) over the last decade.
Increase for 98% of the country – 1% to negative.
Increase for the top 1.5% – 300% PER DECADE.
Powerfully inversely proportional, BTW, to the TMR over the period.
Comment by Rob Maranville on 7 August 2010:
@ Mr Hyonten – That top earners wages rise out of proportion with the bottom 98.5% may be objectionable – to stockholders, employees, and perhaps customers, and certainly to the envy class. Is such remuneration due to monopoly or fraud or other criminality? That you would impute the negative growth of the rest of the earners in society to the “outrageous” increase in the fortunes of the top 1.5% is not only not substantiated in your comment – the actual net amounts are negligible in federal budget terms. Rescind the entire amount of the 300% increase over the decade and remit to the feds and I doubt it would power the economy for a day or two.
If there is monopoly or fraud involved in such high earnings, or even just strategic advantage – look to government intervention and regulation as a CAUSATIVE agent. Many such top earners work in the lofty areas of that corporatist milieu in which government functionaries disburse favors and contracts and grant monopolies – Law, defense contracting, Agribusiness, and the biggest fraud of all – the fractional reserve system which guarantees a monopoly on the creation of credit out of thin air to the advantange of the ruling class. These “greedy” top earners are not by and large – widget manufacturers who treat their employess as slaves while living the high life. You will find that often, many such earners are in their position because governmental intervention has insulated them from any reasonable relation to genuine free market forces.
Comment by Gwen Harper on 24 January 2011:
I have learned a lot by reading this article and these comments. I think that most of the taxes of property in this country are unfair because I don’t even get much from the government. And nor do I expect much. Why should they give me a job? What do they know about me and my abilities? For instance, I would hate a job that would have me working in a monotonous routine or trying to sell a product that I did not believe in. What if the government gave people jobs selling postage stamps door to door? How many people would quit?
Comment by Philip Lewis on 3 August 2011:
Our government never seems to learn … political elites are “trapped” by ideology and forge ahead … creating more damage to job creation and economic vitality. “Market forces” eventually take precedence over statist interference … it takes time and perhaps conflict. When the government shoves a baseball bat up your butt, it doesn’t take long before someone yells “STOP”.
MORE GOVERNMENT = EVIL
Fire 50% of government employees and life will improve!
Pingback by Why Government Can’t Create Jobs | The Freeman | Ideas On Liberty « salemfarmsupply on 3 August 2011:
[...] Why Government Can’t Create Jobs | The Freeman | Ideas On Liberty. [...]
Comment by Thad Tecza on 20 August 2011:
It seems that the problem in this argument arises when Mr. Ahlseen slips in the innocuous assumption that, “most of us will agree that we can spend our income more efficiently than can the government…”. In fact, in regard to creating jobs that depends upon how a person would spend that income. If, for example, a wealthy individual would spend $1 million of his/her income on a yacht that creates 10 jobs while government taxes and spends that same $1 million on schools that create 20 jobs, than it would appear that government has created 10 jobs. As to the “bureaucratic overhead” that Mr. Ahlseen also decries, the last time I looked bureaucrats were employees who spent their wages overwhelmingly in the private sector. Not to mention that almost every study that has been done demonstrates that government workers are more efficient than comparable workers in the private sector.
Comment by Joe Schmoe on 21 August 2011:
Re: Thad Tecza
“If, for example, a wealthy individual would spend $1 million of his/her income on a yacht that creates 10 jobs while government taxes and spends that same $1 million on schools that create 20 jobs, than it would appear that government has created 10 jobs.”
Keep in mind that an increase in the number of people employed is largely irrelevant to determining whether an investment was valuable, useful, or led to sustainable long-term prosperity.
For example, if I forgo heavy equipment operated by a single person and instead employ one hundred people armed with plastic toy shovels while attempting to dig out the foundations of a house, I have technically ‘created’ ninety nine jobs over the first case… but it is likely that the cost of employing them outweighs the benefits gained from building the house. Very few people will be able to buy such a house, and it would have probably been better for me to employ fifty of those one hundred workers in one twenty separate jobs, making houses and cars and boats, refining metal, wood, plastic, and providing services. Better for me, as an entrepreneur looking to make money, and better for the country, since the country gets much more in goods and services for half the hours worked.
“Full Employment” in it’s economic definition is the goal, not merely employment.
Typically, it is assumed that the private sector is both capable and willing to choose the second option over the first, and even to seek out ever more possible solutions so that society gets the greatest benefit at the least cost, and so in this sense it can be assumed that an increase in employment from 1 worker to fifty is correlated with more productivity and value. This is because the private sector has a direct financial stake in the outcome, and would lose money in the first venture and gain in the second.
But note that a decrease in employment may be good as well, say for example the economy transitions from the first option to the second. Even though employment has been cut in half, the value of that employment is several times as high; typically in developed economies you’ll see the unemployed half supported by the employed half and society better off as a whole, with more leisure time and more productive employment.
For more information and similar arguments see:
http://www.thefreemanonline.org/columns/creating-jobs-vs-creating-wealth/
http://www.thefreemanonline.org/featured/the-absurdity-of-quotsaving-jobsquot/
http://www.thefreemanonline.org/featured/what-is-employment/
“As to the ‘bureaucratic overhead’ that Mr. Ahlseen also decries, the last time I looked bureaucrats were employees who spent their wages overwhelmingly in the private sector.”
The problem is they get paid more than they’re usually worth. I private entrepreneur may seek to employ two for the price of one to do twice as much work and thus produce twice as much value (whether the entrepreneur would succeed is another story, but at least there the goal is to make things more efficient). Another entrepreneur would use some of the proceeds of slashing the bureaucrats wage in half and invest it somewhere else. Either way, the money will end up spent in the private sector; the goal is to employ people in the most efficient and effective way possible in the mean time.
“Not to mention that almost every study that has been done demonstrates that government workers are more efficient than comparable workers in the private sector.”
Now that’s a claim that will have to be backed by a citation. Given the fact that government (at least the US) is perpetually spending more than it can take in, it’s very obvious who is budget-conscious here. But I think I know what kind of ‘efficiency’ you’re talking about, and how it can be refuted… but feel free to cite it anyways.
Comment by Joe Schmoe on 21 August 2011:
“In the case of income redistribution, just look at the figures (and the DIRECTION of that redistribution of income and wealth – UPWARD) over the last decade.”
I seriously doubt it’s as cut and dry as you claim. Where did those figures come from and what do they signify? What do they measure? What statistics do they incorporate to get to the conclusion they claim? What is the meaning of ‘wealth’ and ‘income’ that they use?
Citing a study is reasonable; throwing up numbers out of thin air with no source is not.
There was a video linked to on this site before about common problems with income/wage gap statistics but I just can’t seem to find it…
Comment by Joe Blow on 23 August 2011:
re: Joe Schmoe
Interesting comments, but you seem to beg the question. The article was on “why government can’t create jobs”, not whether the jobs they create, in turn, create the greatest value. That is a separate, empirical question. Are the jobs in the public sector educating the labor force that ultimately allows them to be more productive in their private sector jobs more or less value producing than the end jobs in the private sector? Do public or private sector schools produce better education WITH COMPARABLE STUDENTS?
In examining the value producing ability of jobs in the public sector, though, we also can’t lose sight of the fact that in our society we have to use a different measure of value in regard to government jobs. Thus, in a free-enterprise system the private sector would have to include the cost of sustaining unemployment in the wages it pays in order to make it rational for an individual to accept employment. In our capitalist society, though, the private sector socializes that cost through unemployment compensation and welfare. (Just as it socializes the cost of training and transporting the labor force.) As a result, it can increase productivity at the expense of unemployment knowing that it will reap the benefits of productivity while society will pay the costs. Granted that its customers also receive those benefits, but from the perspective of society as a whole they are externalities.
For government, however, the cost of laying off an employee to increase productivity is simply a transfer from one part of government to another. Therefore, it might be rational to have one hundred people dig a foundation with shovels rather than have ten do it with machinery and pay the other ninety unemployment compensation or welfare. Hence your private entrepreneur can use a different calculus but that doesn’t mean that s/he is producing more value.
Similarly, you have to keep in mind that while in the long run the market might absorb unemployed people into more productive jobs, in the short run they create all sorts of negative societal conditions, e.g. civil unrest, and dealing with the costs associated with these might well outweigh the productivity benefit. Again, it is an empirical question.
It just seems that market strategies work much better in theory than in practice.
Pingback by Public Increasingly Pessimistic about Economy | The Freeman | Ideas On Liberty on 6 September 2011:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Pingback by Pass Bill, Save Jobs, Obama Admonishes Congress | The Freeman | Ideas On Liberty on 6 September 2011:
[...] Timely Classic “Why Government Can’t Create Jobs” by Mark [...]
Comment by G K on 6 September 2011:
I have been to school (K-16 ) and I have also owned a yacht — neither was a good investment.
Comment by Zebulon on 18 December 2011:
This made me giggle:
“Not to mention that almost every study that has been done
demonstrates that government workers are more efficient than
comparable workers in the private sector.”
Now that’s a claim that will have to be backed by a citation.
The only citation in this article of any reality is an offhanded reference to a watered-down policy, then runs away into the land of “rarely”s and “most of us”s. There is so much silliness here it’s hard to know what to even touch on, so I’ll just address this idea of taxes, which stemmed from a statement so wonderfully enigmatic I almost feel this might be a Colbert-esque take on the subject. You wrote:
The insidious notion persists that government job creation
actually generates an increase in employment. According to this
view, if construction companies increase employment by 100,000
jobs due to a $3 billion government spending program to finance
highway construction, then employment is 100,000 jobs ahead of
what it might be in the absence of the program.
Oh, insidious logic unchecked. After you talk about bureaucratic mishandling of funds to provide a profit, and I can only assume you were attempting to set up one of the most classic lines:
Since most of us will agree that we can spend our income more
efficiently than can the government
This is why most of us aren’t in charge of running things. We are generally bad with money. OK, that too is vague, so let’s just look at the cost of your 3 billion dollar tax project which creates 100,000 jobs which would potentially be created with individual small purchases. According to an actual citation: http://www.bls.gov/cps/ there are 154.9 million people in the US workforce. That puts the cost of the 3 billion 19.37 (but, adding in those 100,000 new employees, it drops to 19.35 a person in the civilian labor force). As taxes are spread out for a period of time, let’s just call the arbitrary 3 billion project which needs full new funding a 12 month tax increase. Those 100,000 jobs cost the average worker a whopping $1.61 a month.
I guess a lot of it boils down to the function of government in your mind. If you think it has something to do with providing for the general welfare of its citizens, (http://www.usconstitution.net/const.html –see the Preamble and also Section 8, you know, the first power of congress to lay and collect taxes for said purpose) in this case providing employment to the unemployed, then this cost does not seem an outrageous one, as there isn’t a toll on most highways which would be the capitalist way to handle the repair cost.
If we the people had that $1.61 a month, though, we could spend it on consumer products which help the economy, right? We can’t buy more than a cup of plain coffee, but we can have a slightly larger capital pool to buy a printer or a piece of construction equipment from General Electric, Caterpillar, Microsoft, Wal-Mart, Chevron, Cisco, Intel, Stanley Works, Merck, United Technologies, and Oracle. A Wall Street Journal report indicated that those companies created 2.4 million jobs during the 2000 decade… overseas that is. In the US those companies alone cut their work forces by 2.9 million jobs. (http://online.wsj.com/article/SB10001424052748704821704576270783611823972.html)– and let’s not forget that GE got a tax rebate last year as opposed to paying any taxes on their $5.1B in US operations profits from 2010. (http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=3)
Also, you must consider that the now employed 100,000 people earning an income are not hoarding it under their mattress. They have rent, bills, stomachs, hygiene responsibilities, so, say even if the jobs were at the federal minimum wage $7.25, which they wouldn’t be even legally based on state minimum wages I’d rather not adding in as I don’t know which roads would be fixed, but even allowing that much “overhead” for materials and bureaucratic tomfoolery, that is a brand spanking new $1,160 a month minus taxes (including the insidious $1.61 tax which enabled the job). Since taxes from a government employee is essentially a shuffling of imaginary numbers, those can be overlooked as money never spent. So this new $1,160,000,000 is injected almost directly into the economy every month. I think your numbers are a bit off between jobs and cost, but you get the point. The money does not go into a black hole when it is given to a government employee. It is spent, and when given out in checks of $300-900 every week or two, that encourages much more spending on things aside from spending their $1.61 a month on service goods (are we truly striving to create more jobs as waiters and baristas? Is that how we build the economy as opposed to their growth being a by-product of an economy filled with more employed people?).
Also, there is the actual product of fixed roads. Fewer potholes and cracks and collapsing bridges means less damage/repair to tires and shocks and the lives of 13 people in Minneapolis (http://minnesota.publicradio.org/collections/special/2007/bridge_collapse/victims/). One could argue, from a ideological perspective that even deaths put some money into the economy in the form of funerals, but “most of us would agree” that people making that argument are jerks.
Comment by Zebulon on 18 December 2011:
And from the comments section I really wanted to address this:
For example, if I forgo heavy equipment operated by a single person
and instead employ one hundred people armed with plastic toy shovels
while attempting to dig out the foundations of a house, I have
technically ‘created’ ninety nine jobs over the first case… but it
is likely that the cost of employing them outweighs the benefits
gained from building the house.
This scenario requires that their is only one house to be built. It very much reminds me of the amazing Kurt Vonnegut’s first book Player Piano and its Reeks and Wrecks ( http://ijustreadaboutthat.wordpress.com/2008/08/30/kurt-vonnegut-player-piano-1952/ ).
The argument extended, that eventually if government programs continue, everything will be fixed, is sort of like saying that if fish keep mating they won’t have any room in the ocean to swim. Don’t forget Achebe: Things Fall Apart. Through hubris or the millstone of time.
Comment by Rosemary on 6 February 2012:
Genuinely itís referred to as Search engine marketing that when i search for this article I found this web site at the top of all sites in search engine.
Trackback by stop spam plugin on 8 February 2012:
You should check this wordpress plugin…
[...] Wonderful results against spam links using this plugin [...]……
Comment by Dean on 19 March 2012:
“Why Government Can’t Create Jobs” — a statement of abject ignorance.
Two words: “Lunar Landing”. Launched ENTIRE industries.
Pingback by Mornin’ Milton: the Broken Window Fallacy (with bonus Stossel!) | seriously, y'all… on 10 April 2012:
[...] Ahlseen, Why Government Can’t Create Jobs Matt Welch, Creation Myth This entry was posted in economics, mornin' milton and tagged broken [...]