Filed Under: Columns
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.
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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.
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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.