Thursday, February 12, 2009

Economics: No Government Job Creation?

TORONTO, ONTARIO - Do a Google news search for "government cannot create jobs" and the results right now are pretty amusing. There are columnists and letters to the editor all over the United States repeating a quote that seems to originally have come from Antony Davies, an associate professor of economics at Duquesne University that has been picked up by the Heritage Foundation, amongst others. Davies stated:
It is time for voters to wake up to the fact that government cannot create jobs. It can only shift jobs from one part of the economy to the other. It is entrepreneurs who create jobs, and it is consumers who judge whether those jobs are the best jobs to be created. The government contributes best by establishing a rule of law and protection of property rights that allows entrepreneurs and consumers to act in their best interests.
One has to give the right wing credit for a very coordinated campaign to spread their message, but the problem is that their message isn't consistent with what I learned in school.

Claiming that government cannot create jobs is absurd on its face. Do we really think the private sector would replace all the government positions that currently exist if we suddenly dissolved the government and eliminated taxes? Hogwash. We've seen from how the Troubled Asset Relief Program (TARP) funds in the United States have been used in the United States how such funds would be used--they would be hoarded by the companies to hedge against a lack of credit in the best case, in the worst case used to pay bonuses for executives.

More directly, their premise assumes that government spending to create jobs will result immediately in higher taxes. Whether it is advisable or not, that is not what is happening right now. Instead, the government is going into debt to spend money now, so it isn't taking money away from the private sector in a direct way. In time, these moves may result in inflation or the devaluation of the currency, and they certainly may result in increased taxes in the future, but those are all delayed effects. The immediate effect of government spending by going into debt is potentially to stimulate the economy and create jobs. It is not necessary to be a hard-core believer in Keynesian economics to understand that. Basic training in macroeconomics should be sufficient.

Voters did speak in the last election. They wanted action on the state of the economy; they wanted the economy to be stimulated by government spending. They may not have really wanted a package like the one that it appears to be on the verge of passing the Congress, but they wanted something. Trying to convince them that they didn't really want anything is futile.

Personally, I wish the Canadian government would get going and start spending some money on public transit, so I might have a fighting chance to get one of the resulting jobs that they can't actually create.

2 comments:

Anonymous said...

You claim that the quote contradicts what you learned in school, but then you go on to claim that the quote is correct.

You say, "In time, these moves may result in inflation or the devaluation of the currency, and they certainly may result in increased taxes in the future, but those are all delayed effects."

Inflation and taxes erode purchasing power thereby slowing the economy and destroying jobs. At the end, you aren't contradicting the quote, but taking issue with the length of time over which the claimed effects occur.

Glitch said...

The original quote states in essence that the government cannot cause growth in the economy. That only follows from what I said if one accepts the ideas that the timing is inconsequential, and that the magnitude of the erosion of purchasing power by inflation and taxes is equivalent to or greater than the increase in purchasing power created by the government spending. I don't assume either assumption is automatically true. The government is arguing that if growth occurs in the interim between the spending now when the consequences kick in later, then a net positive is attained. They may be correct.

That's why quite a few normally-conservative economists favor some sort of stimulus package now that includes government spending, even if they have issues with the one that has passed Congress.

Denying that there are consequences to deficit spending as some on the left have done is defying reality, but arguing that government spending always hurts the economy is similarly ideological and unconstructive.