In his State of the Union address earlier this year, President Obama spoke of the need for the federal government to help boost the economy by making “investments” in a wide variety of areas, including construction jobs, high-speed rail, education, biomedical research, “clean energy” technology, and even high-speed wireless Internet access. But this “investment” is just a code word for more spending on pet programs. This will only lead to more economic stagnation, not economic recovery, because the wealth-consuming nature of public investment is fundamentally different from the wealth-creating nature of private investment. Taxpayers ignore this difference at their peril.

President Obama’s form of investment promises to “create countless new jobs for our people,” but he does not stop to ask from where the money to pay for all these new jobs will come. It must be taken from others “of our people,” either today, through tax increases, or tomorrow, through borrowing (which will harm the economy in the future and delay the ultimate recovery). Of course, taking money from taxpayers to fund these new jobs means there is less money left in the private sector to invest in new jobs and business growth.

The crucial difference between the public sector and the private sector is that the public sector cannot create wealth; it can only shift resources from one group of people to another (after skimming some off the top to placate special-interest campaign donors and support bureaucratic inefficiency, of course). In the private sector, job growth—and economic growth generally—occurs when firms create something that consumers value. In the public sector, government growth occurs whenever government can appropriate more money from the people, and these funds are directed to whatever politicians desire.

The government’s “investment” in green energy startup Solyndra Inc. is a case in point. Last May, President Obama visited the Fremont, California-based solar panel maker in a highly publicized photo-op to hail it as the kind of business in which he thinks the country should invest. And that’s just what the government did. In September 2009 the administration announced that it was awarding Solyndra $535 million in taxpayer-funded loans to finance the construction of a new solar-equipment factory. The following June, just one month after the President’s visit, the company cancelled its initial public offering, and its CEO quit the following month. In November 2010 the company announced it was abandoning its plans to expand its Fremont facility (and the planned hiring of a thousand workers) and would even have to close another factory in the East Bay, eliminating nearly 200 additional workers. That’s some investment.

Throwing Good Money after Bad

This episode did not prevent Obama from visiting another green-energy company two days after delivering his State of the Union address to tout the benefits that surely would come from investing in such technology. During his trip to renewable-energy firm Orion Energy Systems in Manitowoc, Wisconsin, Obama lamented that the United States was falling behind the investment of even more centrally planned economies: “China’s making these investments and they have already captured a big chunk of the solar market, partly because we fell down on the job. We weren’t moving as fast as we should have. Those are jobs that could be created right here that are getting shipped overseas.” While China has made great strides toward a more open economy in the past couple decades, the communist country is hardly a model for economic policy. China’s growth is due to its economic liberalization, not the arbitrary decisions of the ruling elite, yet these command-and-control elements of economic planning that remain in China seem to be Obama’s model of the ideal. This does not bode well for economic liberty and growth here in the United States.

Government has never been particularly good at picking economic winners. Consider, for example, the government “investments” in Amtrak, which has never turned a profit since it began service in 1971 and has lost about $35 billion in its 40 years of operation—or the U.S. Postal Service, which lost a record $8.5 billion last year alone and has projected an additional $6.4 billion loss this year.

The reason for this failure of government investment is not simply poor leadership (although this is certainly endemic and does not help matters) but rather an inability to determine value in the public sector. There is no market price system in government, so there is no measure of profit and loss. As Mises noted in Human Action, “There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were.” In Bureaucracy he added, “Bureaucratic management is management of affairs which cannot be checked by economic calculation.”

Value

In a free market prices are determined by supply and demand, by changing consumer preferences, differing knowledge and evaluations of market information, and the risk-taking of entrepreneurs. A greater desire for a good or service will be reflected in consumers’ willingness to pay more for it and bid up the price.

In the political sphere “value”—such as how much to spend on a particular government program—is determined by the force and influence politicians, bureaucrats, and special interests can exert to extract money from taxpayers and divide it up as these elites please. There is rarely even any semblance of competition for the provision of these services and thus little incentive to maximize productivity and service quality or minimize costs. Since there are no price signals to reveal people’s preferences for one thing or another, there is no good mechanism to determine if programs are useful or satisfying constituent demands.

In the absence of a true market price mechanism, how do you tell if an investment is profitable? And where is the incentive to avoid unprofitable investments? If a government program is deemed successful, there are calls to provide more funding. If it is a failure, we are told we must double down on the spending in order to turn it into a successful program.

Private investment means putting your own money at risk in anticipation of realizing a gain later; public “investment” means taking and spending someone else’s money to support your idea of how you think they should live, or to satisfy the special interests that help get you reelected. Private investment requires putting off spending today so that you may (hopefully) earn more in the future; public “investment” is all about spending today.

Unfortunately, the federal government has not learned the lessons history has tried to teach us about subsidizing business and illusory job growth. This ignorance is especially on display when politicians react to the onset of a recession. The prescription made famous by economist John Maynard Keynes is to “stimulate” the economy through government spending and job creation (otherwise known as “make-work”). Never mind that this means fighting a problem of too much debt by incurring even more debt. As Freeman columnist Robert Higgs, senior fellow in political economy at the Independent Institute and author of Crisis and Leviathan, has said, “Every drunk understands this way of fighting depressions.”

Lost Decade

In the 1990s—and beyond, as it turned out—Japan faced a financial crisis as asset bubbles in the real estate and stock markets, stoked by the central bank’s expansionist monetary policy of the late 1980s, burst and prices came crashing down. The ensuing government response and policy errors paralyzed the economy and ultimately led to a series of economic recessions. Japan followed the Keynesian remedy—with disastrous results—and the country still has not recovered to this day. During the 1990s, Japan passed ten fiscal stimulus packages, focused largely on public works. When one construction plan did not work (meaning it did not return the economy to rapid growth), another was tried. Altogether the Japanese government spent about $6.3 trillion on construction-related projects between 1991 and 2008. Those plans did not revive the economy, but they did saddle the nation with a mountain of debt that postponed any recovery at all for many years, leading the period to be dubbed Japan’s “Lost Decade.”

The construction jobs for the government’s infrastructure projects were not sustainable and did not lead to systemic economic growth. Public debt skyrocketed, unemployment actually doubled, and the economy remained stagnant. (Does any of this sound familiar?) As Gavan McCormack, Pacific and Asian history professor at the Australian National University, noted in his book The Emptiness of Japanese Affluence, “The construction state is in some respects akin to the military-industrial complex in Cold War America (or the Soviet Union), sucking in the country’s wealth, consuming it inefficiently, growing like a cancer and bequeathing both fiscal crisis and environmental devastation.”

The Great Depression

Even during the Great Depression, often held up as a great example of government creating jobs to help get the nation out of an economic recession, President Roosevelt’s massive spending program, which actually had its roots in the Hoover administration, did not stimulate the economy. Despite all that spending and all those jobs programs, unemployment remained extremely high. Prior to the stock market crash in 1929, the unemployment rate stood at a little over 3 percent. By 1933, in the midst of massive spending and public-works projects, it had risen to 25 percent. Even after years of New Deal programs unemployment remained around 15 percent or higher through 1940. It was not until World War II that unemployment dropped back to the low single digits (and then only because millions were drafted into military service).

This led Henry Morgenthau, treasury secretary under Roosevelt, to make a startling admission in 1939:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started. . . . And an enormous debt to boot! (Morgenthau Diary, Roosevelt Presidential Library)

The fact is that economic recessions—and even more serious depressions—need not be so severe or so long-lived. It is government policies that prevent the natural pressures and incentives of the market from purging bad investments and other economic decisions and returning to a path of stable growth. As Murray Rothbard wrote in the introduction to the third edition of his book, America’s Great Depression,

Before the massive government interventions of the 1930s, all recessions were short-lived. The severe depression of 1921 was over so rapidly, for example, that Secretary of Commerce [Herbert] Hoover, despite his interventionist inclinations, was not able to convince President Harding to intervene rapidly enough; by the time Harding was persuaded to intervene, the depression was already over, and prosperity had arrived. When the stock market crash arrived in October, 1929, Herbert Hoover, now the president, intervened so rapidly and so massively that the market-adjustment process was paralyzed, and the Hoover-Roosevelt New Deal policies managed to bring about a permanent and massive depression, from which we were only rescued by the advent of World War II. Laissez-faire—a strict policy of non-intervention by the government—is the only course that can assure a rapid recovery in any depression crisis.

After more than two and a half years and trillions of dollars worth of bank and auto industry bailouts, stimulus packages, and Federal Reserve interventions, the American economy remains sluggish and unemployment is still about 9 percent. According to Federal Reserve Chairman Ben Bernanke, it could take another four or five years for the labor market to “normalize fully.” Unless the government’s interventionist policies are abandoned and reversed, it appears that the United States is headed for its own Lost Decade.

The United States’ $14 trillion federal debt and annual deficits of over $1 trillion are reducing productivity and hindering economic growth. It is time we learned the repeated lessons of the past that government spending, particularly when used to try to stimulate an economy, is simply a bad investment.

First, one may ask: how can Obama and his economic advisers know what kinds of jobs will position our economy to “lead the world” in the long term? Indeed, how can we expect anyone to know what kinds of jobs will be able to offer such a guarantee of wealth and security, considering the enormous complexity of our world? Billions of individuals are constantly making decisions based on their own expectations about the future. Potential ideological shifts and their inevitable changes to policy funding and support complicate matters further. This is without considering technological advancements that can turn the best-laid central plans into white elephants. There is little an individual or group can possibly know or predict for the future, particularly on such a large scale as three to four million jobs.

However, assuming Obama and his advisers are right—that his plan will indeed save or create that many jobs—what proof do we have that it will leave us better off than if it’s not implemented at all?

In his essay “What Is Seen and What Is Not Seen,” the French classical-liberal economist Frédéric Bastiat explained that there is a tendency to recognize only the intended consequences of an action (what is seen). However, there are often other, subsequent effects that are not perceived as connected to the action (what is not seen). Furthermore, the short-term effects of an action can sometimes be quite different from the longer-term, unseen consequences.

In the case of public works, Bastiat explained that government produces nothing independent from the resources and labor it diverts from private uses. When government borrows money to create jobs, what is readily seen are people employed and the fruits of their labor. However, what is generally not considered are the many things that could have been produced if the capital had not been removed from the private sector to fund the government programs in the first place. Such policies necessarily benefit some (the favored workers) at the expense of others (those who would have had the jobs that were not created) and eventually the taxpayers, who have to repay the debt.

What is Seen

New Deal public-works projects provided plenty of evidence for Bastiat’s theory. They not only failed to help lift the economy out of the Great Depression but also served to make it “great.”

First, many jobs created under FDR benefitted few besides those employed—in things like studying the history of the safety pin, collecting campaign contributions for Democratic Party candidates, chasing tumbleweeds, and cataloging 350 different ways to cook spinach. (See Lawrence Reed’s Great Myths of the Great Depression, www.tinyurl.com/7eecje.)

In addition, much of the “job creation” was directed according to political preferences, rather than where jobs were arguably needed most. For instance, a disproportionate amount of public relief went to western “swing states” expected to help Roosevelt win votes in future elections, rather than to the poorest states, such as those in the South, which were already solidly Democratic during this period. Relief and public-works spending also seemed eerily to increase during election years, and it has been shown that votes for FDR correlated closely with jobs and other special government benefits given. (See Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.)

What is Unseen

New Deal job-creation projects also impeded productivity by discouraging private firms from adopting new technologies. A prime example is a government farm in Arizona where a dairy crew discovered that it could turn a profit only by using milking machines, rather than milking by hand, and eliminating some jobs. But that would have violated the terms of a government loan. So the machines were not brought in, and the staff members who made the suggestion were fired. (Amity Shlaes tells the story in “The New Deal Jobs Myth.”)

Roosevelt is still celebrated for his job-creating measures because the people who gained employment were easily seen. However, what wasn’t (and isn’t) so easily recognized is that to pay for his public-works experiments, the government sucked up much of the available capital by selling bonds and collecting taxes, including a 5 percent withholding tax on corporate dividends and ever-rising income taxes. The top income tax rate hit a staggering 90 percent. Thus the New Deal had the unintended consequence of prolonging the Great Depression by diverting resources that could have been used to create wealth.

Barack Obama and his advisers should take a lesson from history. The New Deal and its public-works projects were a disaster, and it would be remiss to think they should be given another try. As Bastiat explained, government doesn’t create wealth; it only diverts it. When government controls wealth it inevitably tends to serve political ends rather than consumers. FDR’s New Deal policies are a testament to that, and if they are repeated in response to our current economic crisis, it will only hinder the recovery.

But wait. Only 3.5 million jobs? Why so few? It’s not like creating jobs is difficult.

Egypt built more than 100 pyramids beginning sometime in the third millennium B.C. to house the corpses of the pharaohs and their significant others. Think of all the jobs that project created. I’ll bet the unemployment rate was something any pharaoh could have proudly campaigned for reelection on—if he faced election, that is. Pyramid-building is one heck of a public-works project.

Pyramids, Earthquakes, Wars

Its economic significance was not lost on that great advocate of full employment through public works, John Maynard Keynes. The British economist, so in vogue today, famously wrote in The General Theory on Employment, Interest, and Money (1936), “Pyramid-building, earthquakes, even wars may serve to increase wealth.”

In fact, pyramids are even better than the usual government project. Keynes said: “Two pyramids . . . are twice as good as one; but not so two railways from London to York.”

Ancient Egypt’s success has many applications today. We could have full employment overnight if the government simply outlawed machines. Today’s 8 percent unemployment rate would vanish.

Again, we find an endorsement in Keynes’s General Theory: “‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.”

Exhibit B is Franklin Delano Roosevelt. I don’t mean his public-works projects, like the Civilian Conservation Corps. I’m talking about his most serious job-creating operation: the draft.

If You Can’t Employ ‘Em, Draft ‘Em

In September 1940 Roosevelt signed the Selective Service Act, which ordered all males 21–35 to register for military service. “Of the 16 million persons who served in the armed forces at some time during the war, 10 million were conscripted, and many of those who volunteered did so only to avoid the draft. . . .” writes Robert Higgs in Depression, War and Cold War.

The draft marked the beginning of the end to the double-digit unemployment that had plagued America for a decade. Two years earlier, Roosevelt’s treasury secretary, Henry Morgenthau, lamented, “[A]fter eight years of this administration we have just as much unemployment as when we started.” The draft was the answer they had sought all that time.

So creating jobs is not difficult for government. What is difficult for government is creating jobs that produce wealth. Pyramids, holes in the ground and war do not produce wealth. They destroy wealth. They take valuable resources and convert them into something less valuable.

Instead of iPods, great art, cures for diseases and machines that replace back-breaking work, we get the equivalent of digging holes and filling them up.

Under President Obama’s “stimulus” plan, jobs will be created to weatherize buildings, construct schools and wind turbines, and repair roads and bridges. But outside the market process, there is no way to know whether those are better uses of scarce capital than whatever would have been produced had it been left in the private economy.

Since government services are paid for through the compulsion of taxes, they have no market price. But without market prices, we have no way of knowing the importance that free people would place on those services versus other things they want.

So although we’ll see the government putting people to work and even some new schools and bridges, we won’t be able to calculate how much wealth we’ve lost because scarce resources were misallocated by the politicians.

Nevertheless, we can be sure we will have lost. If the government’s projects were truly worthwhile, they would be undertaken by private efforts, and in their quest for profits, entrepreneurs would handle them more efficiently.

Remember this when President Obama begins to boast about how successful his stimulus plan is.