The Government's Creaky Ol' Job-Creation Machine

I read with interest Daniel Mitchell's opinion piece on why governments can't really create jobs in any economically meaningful or efficient way. (Take that, Barack "2.5 million new jobs" Obama.)

Mitchell offers three reason for his profound skepticism:

1. When government bureaucrats create jobs, they do so with money collected from tax payers — including small and large businesses, rendering those companies much less capable of creating their own jobs. Taking the government approach over the market approach will result in a small gain at best, but we could also be looking at zero or negative gain. See Frederic Bastiat and his economic theory of the seen and unseen.
2. Stimulus packages are notoriously ineffective, and often futile. They are typically nothing but billion-dollar giveaways, Mitchell says. Told ya.
3. If Washington creates jobs, federal and state payrolls are certain to get even more bloated, increasing the government's economic burden.

To expand on the last point: A filing clerk who gets 12 or 13 bucks an hour in the private sector can count on 20 to 24 dollars an hour if the government does the hiring, Mitchell alleges.

That money has to come from somewhere, don't you know? Ask yourself who's paying it. (Go on, I'll wait.) That's right: You are. That's the upshot — you'll have less to spend (which is a drag on the economy) while some stranger is getting close to twice the going rate from the sugar daddies and mommies in Washington.

If we're lucky, of course, said stranger will spend his new windfall, thereby helping to jump-start the sputtering economy. At that point, what's happened? As far as I can see, there's no positive net effect. After all, you could have spent the money yourself.

I think the other side might argue that the money for the job-creation machine could be raised by obtaining foreign loans instead of taxing U.S. citizens — but with a record deficit already on the books, borrowing our way out of the problem will be roughly as effective as digging our way out of a hole. And considering tightening international credit markets, and the fact that the U.S. is adrift in an ocean of red ink even after a decade and a half of relative prosperity, I fear our country is widely regarded as a poor credit risk. If America were a person, would you want to lend her big sums of money right now?

Anyway, it seems to me that Mitchell missed a fourth important point (or maybe this is a corollary to his first argument): The jobs created under a government stimulus program cannot possibly be permanent. Even if it were feasible to create millions of jobs by hiring unemployed roofers, bridge-builders, and ditch-diggers, and charge them with improving our national infrastructure, the majority of these people will again be out of a job once their mission is completed. Or are they all going to be doing maintenance work once the bulk of the projects is done? Unlikely.

It's not quite a ponzi scheme, but almost certainly we're talking the darkest shade of voodoo economics here.

OK: Maybe I fail to see the big picture; macro-economics, admittedly, is not my strong suit. But I kind of doubt that I'm much worse at predicting the outcome of these plans than folks like Paulson, Bernanke, Frank, and Obama. I simply don't know that they know what they're doing, and I have the sinking feeling that they don't, and that Mitchell is right.

Let's see where we end up in a year, and again in two and three years. Given the horrible mess we're in, nothing would please me more than being forced to swallow my words each and every time.

Comments

[Bedlam UK]

I have no knowledge of economics, but my understanding was to give people a job and give work TO these suffering companies to do these jobs during the recession.
Once the money is spent and the bridges built, the companies that have been paid to do all this work, will hopefully look round, see that the economy has recovered and be in a position to keep at least a large portion of the workforce on its books as it starts to get back into its normal workloads.

Giving companies jobs, giving people work during such a time seems like a great idea.
The idea that Obama should scrap his idea because when the bridges are built and your countries infrastructure are hugely improved these people MAY return to the dole queue seems bizarre.

And on a side note, it seems a much better idea to give a big couple of Billion to the companies to build up America than to give it to the idiot bankers that caused the mess in the first place.

Just a thought.

[bob longendyck]

"And on a side note, it seems a much better idea to give a big couple of Billion to the companies to build up America than to give it to the idiot bankers that caused the mess in the first place."
Actually, the gummint caused the mess in the first place, and will cause an ever bigger mess by the time it's done (not that it will ever be done).
Charity is best handled by charities. Besides, who will "build the bridges"? Most workers losing their jobs are incapable of replacing a faucet washer, and you want them building bridges? No thanks.

[McDuff]

If the private sector is so good at creating all these new jobs, where are they?

Wasn't it "the private sector" - specifically the unregulated end of high-end banking, pure capitalism writ large - that recently, if memory serves, fucked the US/global economy in the face?

The entire point of Keynesian economics is precisely to be temporary. A glut of deficit spending that will have to be paid back in the future as an investment in having a future where we can afford to pay it back.

The perfect reason you are wrong, by the way, goes by the name "Herbert Hoover." The advice offered to Hoover was proven wrong then, but that doesn't stop free market fundamentalists from blindly offering the exact same advice this go-round and hoping that this time the magical money fairies will make their irrational beliefs come true.

Government intervention is not the perfect answer to everything, but when the alternative is a private economy that is slowly collapsing on itself like a failed soufflé it's the better path.

[Rogier]

"...hoping that this time the magical money fairies will make their irrational beliefs come true"

You don't think that that's a pretty apt description of the very stimulus packages you seem to approve of?

Chrysler had to be bailed out by Washington or Stuttgart in three out the last four recessions. The company is now near death AGAIN -- hardly proof that the huge corporate welfare handouts worked, now is it?

Oh, and earlier this year, Congress and the White House launched a $160-200 billion economic stimulus package that almost immediately began putting federal checks into most Americans' hands ($600 per adult, $300 per child). And yet here we are today, on the brink of an economic collapse.

Magical money fairies and irrational beliefs, indeed.

[McDuff]

Whoa whoa. I don't have a lot of time, but we need to nail down what we're talking about here. Are we talking about hypothetical future Keynesian stimulus under the Obama administration, or the Auto Bailout, or the Banking Bailout?

All stimulus packages are not equal, and individual corporate bailouts are not the same as massive public works projects, such as the Interstate Highway program, or World War 2. Neither is mailing out checks.

The auto bailout is a timing thing - better for them to fail two years ago or in two years time, but not *now*. The banking one was effectively theft without even an intention to provide stimulus. Federal checks, as I've said, are pretty useless. After all, if you've lost your job and therefore your long-term financial security, a grand or so is nice but it's not exactly going to keep a roof over your head.

They are all different to what I was talking about (I'm on my way out but I can elaborate tonight), which is the government picking up with - if you like - "fake" employment until the private sector can provide it. If your only possible metric for economic wellbeing is how little government interference there is and how close to the theoretical classical efficient margins you can get, then you won't like it. But since the only reason we really measure all these numbers is because they represent real people losing their homes and their jobs and their healthcare, a lack of theoretical marginal efficiency is perfectly acceptable if it leads to a real world increase in public welfare.

The US system is unfortunately very complicated because, really, there's going to be an excessive period of piper-paying to go along with all this other stuff. Nothing - and I mean nothing - is going to make this all go away. You, personally, will get materially poorer as a result of it. So will I, although to a lesser extent I'd think because our economy, although shagged, is not quite as exposed. But there are ways of managing declines to prevent them becoming crashes. That is the job of government.

In the long run, we are all dead.

[McDuff]

OK, a little bit more substance.

The dismal science is not and, delusions of accuracy among the neoliberal intelligentsia aside, never will be an exact science. But what we're talking about here is something which we have a pretty good body of historical evidence to draw upon.

The basic mechanism of a depression is an easy one to grasp:

1) Contiguous group X loses [jobs/homes/income security].
2) X slows down spending, impacting businesses owned by Y and Z.
3) Y's revenues fall, Y can't make payroll for contiguous group P and Q.
4) P and Q lose [j/h/is]
5) lather, rinse, repeat.

Eventually the "natural law" of the system will hit the bottom, it will catch back up with itself and everything will scroll back up to where X, Y, Z and Q are back in business. (P, unfortunately, has mostly died of cholera). This is the observable and inferable "boom-bust" cycle of national economies. We know it happens, we know more of less why it happens - at least mechanically.

The trouble with that kind of mechanistic, determinst view of the economy is that the bottom of the bust can get very bad and kill - literally - a lot of people. The lean depression years probably contributed to nearly as many deaths as the war that helped carry them out of it. This is the fundamental meaning of Keynes' axiom: it may all sort itself out in the long term, but some of us don't have the luxury of waiting that long.

The basic policy proscription in this case is to use the massive purchasing power of government to smooth out the curve. It is a trade off. Yes, it is accepted that some marginal efficiency may be lost at the top of the curve - although the "second best theory" as well as complex interactions between economics and general welfare mean that this might not be as simple as the algebra would lead you to think - but this is a price paid for shallowing out the troughs and gulleys.

Now, the "bailouts" that are being discussed are not the same thing at all. The current auto one is too small to do much, and will still result in a net job loss over the next quarter. The banking one is essentially a bribe, offered because we unfortunately need a financial industry run by twats to continue to exist so that currently existing companies can make payroll. It's shit, and the way it's been handed out is particularly egregious because the chairman of the fed and the treasury secretary have friends who stand to make out like bandits from it. And direct payment stimulus packages are the least efficient way of getting money moving through the economy. Indeed, that probably counts even more in a country as riddled with debt as the USA is because if you pour money into the wallets of people with bad debts, all that happens is that it vanishes.

Which brings me round to something else: the US current account and trade deficits are really high. Like, four-years-into-an-unsustainable-high high. We can argue till the cats come out to play about whether China is behaving badly by picking up the opposite end of the surplus, or just acting in their self interest, but from a USAian point of view it's a significant problem, and one that come rain or shine will get rectified. At this stage, that's going to mean lower wages, fewer jobs, lower standards of living.

Here's the ironical kick in the crotch for libertarians. This is going to hit *harder* because the government didn't do its job on the other side. Not only did it not curb the excesses of speculative trading, and not only did the institutions governing the markets[1] shirk their responsibility to keep up with what the traders on their floors were doing, it also did nothing to translate the influx of wealth, albeit mostly imaginary wealth, to the common welfare. This means that the USA's growth over the last two decades has been increasingly concentrated at the top, with very little trickling down. The concentration of power in Wall St has also managed to distort already straining institutions towards the mantra of ever increasing profitability without paying any attention to outputs. The biggest impact of this trend on the average American has been the increase in health care costs, the scarcity of coverage for the working class and (this is important) a massive rise in income volatility. Reaganism and its decendents Neoliberalism and Bushonomics (which can barely be called an economic philosophy at all, to be fair) has produced a massive amount of financial insecurity among the majority - even as it has increased their wages it has also dramatically increased the chance that those wages, and their healthcare, will be lost automatically, and that (because part of the driver of the growth has been convincing those people to live beyond their means by taking on debt) this has a much greater risk of impoverishing those people and, yes, of creating a negative feedback loop which does the opposite of the growth bubble, sucks all the finance out of the economy and results in more insecure people losing out.

(continued in another comment)

[hermesten]

"Here's the ironical kick in the crotch for libertarians. This is going to hit *harder* because the government didn't do its job on the other side."

The "libertarian" movement has completely discredited itself. Today's libertarians, excepting those still principled few like Rogier, who have been sidelined by the "movement," are just a bunch of right-wing reactionaries who think their vices are superior to everyone else's.

The government didn't just not do it's job, it has actively colluded with the corporate power against the interests of the majority. Corruption is now systemic. The system can't be fixed, but perhaps a new system can be erected from the rubble.