Government Intervention Creates Chaos, Not Jobs; D. Senese

the-job training, institutional train ing, work experience, and job place ment programs. These attempts to replace the operation of the market economy with government interven tionism have gone under a variety of names including the Civilian Conservation Corps, the Works Progress Administration, the Job Corps, and the latest version, the Comprehensive Employment and Training Act jobs program. All ofthese attempts over the years have violated a basic concept of our constitutiopal form of government the moral freedom of the individual to participate in the market. place without exc.essive governmental coercion or regulation. We can bet ter understand the fallacy of this ap proach by examining the interven tionist philosophy which motivates it, why such efforts fail, and the need 335 336 THE FREEMAN June to resist such interventionism if we are to maintain man's essential freedom and the operation of the free enterprise system.

The Interventionist Philosophy The major impetus for govern ment-sponsored employment and training for employment programs has been the economic philosophy of John Maynard Keynes, which has been prevalent in United States eco nomic policy for almost the past half century. Keynes, who put forth his views in The General Theory ofEm ployment~ Interest and Money, advo cated income redistribution and supported efforts by the central gov ernment at jobs creation. The thrust of The General Theory revealed opposition to the assump tion that in a society based on free enterprise there were mechanisms of adjustment which automatically produced the conditions for full em ployment for workers and resources for productive employment. The au thor made it clear that he lacked confidence in the ability of competi tive markets to expand employment and production. Keynes viewed unemployment and economic depressions as the result of a deficiency of aggregate demand for goods and services. One way to stimulate aggregate demand, he reasoned, is through government expenditures which would have a multiplier effect on the economy. An increase in government spending without an increase in taxes was equivalent in effect, Keynes as serted, to an autonomous expansion of private investment.

While preferring that government spending should be on projects which he deemed of usocial utility" (e.g., schools, parks, public housing), the important element in Keynes' eco nomic philosophy focused on the ne cessity of government spending to aid the whole economy. And even if the unemployed were put to work on jobs which appeared useless for the growth of the economy (e.g., ditch digging, leaf-raking), the incomes of these workers would be used to buy products (e.g., clothing, food) which would help stimulate the economy. Keynes thus accepted the myth that government, by spending the re sources of its citizens, could spend itself to prosperity. According· to Keynes, a central government, through public works and other expenditures, could help stimulate the economy despite in creased inflation and budget defi cits. Rejecting the traditional eco nomic wisdom of the dangers of excessive governmental spending and the need to accumulate savings in the economy, Keynes had devel oped a new theory of employment and income which had as its conse quence a whole series of public poli cies focusing on the need for govern mental intervention to deal with 1981 GOVERNMENT INTERVENTION CREATES CHAOS, NOT JOBS 337 unemployment in a free enterpris.~ economy.

During the depression ofthe 19308, federal spending had been used ex tensively to combat unemployment by creating jobs in the public sector and providing training to the un employed. Despite little evidence of success, the programs were contin. ued and even grew larger and larger. Yet, it was in the post-World War II period that the Keynesian influencle had its greatest impact on United States economic policy. KeynesianPoliciesFail Successive U.S. presidential ad ministrations have turned to gov ernment spending for employmen.t training and jobs creation despite budget deficits and, indirectly, the inflation it creates. And as the econ omists James D. Gwartney and Richard L. Stroup have reminded us, the Keynesian macroeconomic thinking established the foundation for the policies· which provided the United States with the inflation, un employment, and stagnation of the 1970s. 1 The experience with Keynesian economics has been a disappointing failure for the U.S. economy. These expansionist policies (including in flation, high taxes, budget deficits, and rapid growth in the money sup ply) have not promoted full employ ment or even economic growth. That great economist Hans F. Sennholz has reminded us that a tax burden which is heavy during a period of expansion becomes destructive dur ing stagnation and decline. Rather than helping the working man, these misguided policies have hurt him, failed to provide significant employ ment for the unemployed, and placed a drain on the economy which has resulted in a decline in the Ameri can standard of living. 2 Advocates of the Keynesian poli cies reveal an ignorance of econom ics which confuses the .short-term and the long-term results for a na tion which follows Keynesian eco nomic policies. While policies which seek to accelerate demand beyond the expectations of buyers and sell ers may reduce the short-term rate of unemployment, the result of such inflationary policies in the long run is to increase the economic problems of a society, leading to high rates of both inflation and unemployment.

Why EmploymentProgramsFail Despite the rhetoric of govern ment officials that government-cre ated jobs have added ttX" number of jobs to the economy, a closer exami nation reveals the fallacy of this claim and the inevitable failure of such programs to improve the econ omy. Work is the process of forming capital such as goods and services for future consumption. There are two economies in which people may 338 THE FREEMAN June work: (1) a barter economy in which services are exchanged free from government regulation, and (2) the money economy in which govern ment money is being used as a me dium of exchange. The major dis tinction between the barter economy versus the public economy is the vis ibility of the transactions to the gov ernment in the latter. Once a trans action becomes visible to the government, it becomes subject to government regulations so that those individuals participating in the public economy must be willing to give a share of their work to govern ment (e.g., taxes). Individuals will shift to this public economy when it is· easier to trade their work for someone else's in the public econ omy. One individual trades his labor (e.g., a carpenter) with those who are willing to trade for other item& groceries, housing, insurance, and the like.

The Incentiveto Work Government can assist production in a free enterprise economy by making work more attractive than non-work. If an individual can keep a significant part of the results of his labor he is more willing to work. However, if government .acts through coercion (e.g., taxes) in taking away the fruits of his labor, the worker is less interested in working in the public economy. In addition, if non work is more attractive either through welfare benefits or unem ployment benefits, the individual will choose non-work or leisure. Jude Wanniski has explained how this lesson applies to CETA-type government jobs programs: Government programs to ((create jobs" usually fail because the designers of the programs ignore the incentives of the barter economy. .. Such offers are fre quently spurned by those government has targeted, for they would not only have to give up their transfer (welfare, etc.) payments, but also their tax free work or leisure in the barter economy.

The new governmental jobs will instead attract individuals who are already em ployed in the public economy, but at lower rates of pay than the new positions being devised by government. 3 Besides the inefficiency inherent in government created jobs, the gov ernment acting as the agent for cre ating jobs violates the personal free dom of the indi vid ual in a free enterprise economy. These pro grams violate certain fundamental moral principles which view man as a free individual with the right of choice in the economic system. The government in effect robs the work ing man of the fruits of his labor through· taxes in order to subsidize another individual, possibly at a higher rate of compensation, for doing non-productive work. The government programs also can be faulted for disrupting the opera tion of the market economy. Perma1981 GOVERNMENT INTERVENTION CREATES CHAOS, NOT JOBS 339 nent jobs are created when there is a climate of freedom-the investor is willing to put his money in an en·· terprise where he will receive a de·· sirable rate of return, a business·· man will open a plant or factory or business with the expectation that he receive a profit, and the worker will attempt to sell his labor to the highest bidder with the most desir·· able return for his work. This free·· dom of choice benefits all parties concerned in a free market economy ..

Government-created jobs programs deny the operation of this successfu1 system. Resources Wasted When the government intervenes in the economy, government bu reaucrats take money from the tax·· payers and direct money to projects without any concern for the best use of resources. Because of their mis·· trust and misunderstanding of thE~ :market principles, these resources are allocated to a variety of uses-- additional governmental jobs, con·· troversial experimental programs, public works. The government through high taxation, expansion of the money supply, and intervention in the credit markets to finance these projects helps to drive out individu als who seek financing in the pri vate sector. No government action can substi tute for the effective operation of the free market economy. When govern·ment seeks to employ people, it must take these resources from the re sources of the private sector which is the productive sector and the op eration of the government jobs pro grams becomes merely another way to redistribute income. Whether the central government is paying out high welfare payments or salaries for non-productive jobs, the result is to reward cCnon-work"at the expense of the productive sector. These so called government jobs only place a greater burden on the taxpayer, and the resulting government· spending only delays the time for full recov ery during an economic slowdown.

Training for What? The same dismal results have come from government job training pro grams as from the jobs creation pro grams. A 1977 study by the Con gressional Budget Office concluded that even intensive government training programs failed to raise the lifetime income· potential of partici pants. The study found that the av erage manpower training enrollee, either a young person or a member of a minority group, achieved an an nual post-training income differen tial of only $400. This differential resulted not so much from the train ing but as a result of the individual working more hours per week or in working more weeks per year. 4 Many of these government train ing programs train workers for jobs 340 THE FREEMAN June which do not exist, and thus funds from the taxpayers are used to keep a person unemployable. The most effective training programs are those originating from companies who train employees with potential for jobs in which they are then placed.

If workers are already trained or have a marketable skill, immediate work is provided for the unem ployed. The opportunity for real jobs creation can only come when gov ernment creates a climate for pri vate enterprise and does not at tempt to compete with it for employment of workers. Some critics see the jobs creation programs put in operation during an ((emergency" as a step toward the destruction of the free enterprise system, with the government as suming the role of central planner and chief employer for the economic system. The distinguished journal ist John Chamberlain has noted that ever since the beginning of social life men have swung between ex tremes of freedom and coercion, vol untary association and community' compulsion, family ((mutualism" and State-imposed order. While man can exist under either system, he notes that it is only when cooperation is a matter of free election and the vol untary approach predominates that man can live creatively. 5 One needs only to look to Great Britain whose government leaders have been devoted followers of Keynes to discover the crisis in 'its economy-a low growth rate, a poor rate of productivity, a deteriorating physical plant, high inflation, high unemployment, and a high degree of social unrest. Despite warnings, the British continued to plunge into dis aster. The consequence has been to make Britain the latest version of the ((Sick Man of Europe". 6 Will the United States learn this lesson be fore it is too late?

The Need to Return to Free Market Principles Critics of government interven tion in the U. S. economy have stressed that the difference between a Keynesian approach and the clas sical free market approach goes be yond mere economic theory and re flects a significant difference in social policy. This factor is illustrated in the difference between a $14 billion reduction in federal taxes and a $14 billion expansion of public pro grams, the latter strongly supported by the Keynesians. The reduction in taxes (and gov ernment interventionism) acts as an incentive to strengthen the private sector and, enlarges the sphere of private control over spending. The expansion of public or government spending, favored by the Keyne sians, limits the private sector and expands the public sector where al location decisions are made by gov ernment officials, not the factors of 1981 GOVERNMENT INTERVENTION CREATES CHAOS, NOT JOBS 341 demand and supply. The stakes are not only economic efficiency and de·· cision-making control, but personall freedom as well.

Critics of the CETA program haVE! often cited the many abuses in these programs as funds have been used to provide additional political jobs:, pay salaries for old jobs previously funded by local taxes, pay for bar·· tenders and lounge managers, sup·· port muscle-building programs for women, and funding activist anti·· business groups. However, even without these many scandals, these programs would be defective be·· cause of the attempt by government to perform a function which econom·· ically and morally belongs to indi· viduals operating in the private sec·· tor. BureaucraticInefficiencies The great economist Ludwig von Mises pointed out many years ago the difference between profit man· agement and bureaucratic manage·· ment in his notable work Bureau· cracy (1944). The grave inefficiencies of bureaucracy were inherent and inescapable, von Mises reminded his readers, and these led to the failures of government-promoted and gOY ernment-controlled programs in a nation's economy.7 A more recent study has added more ammunition to the critics of these job programs promoted by the central government. Two research scholars, .Kim B. Clark and Law rence H. Summers, noted that there was no evidence that billions of dol lars spent on special jobs programs had any real results. These profes sors found there is evidence that as aggregate demand increases, and the general level of economic activity grows, employment increases for all groups in the economy, including young adults and even older work ers. Rejecting the argument that special programs are needed to help minorities in the economy, they noted that in the case of black teenagers, who have an unemployment rate of 36 per cent, benefits occur since em ployment in that group rises by 6 per cent for every 1 per cent increase in economic activity.s The 1980s should be a time to re duce the failing economic policies of the 1970s that have brought infla tion, stagflation, and economic hardship-policies which have re duced the standard of living of the American people and seriously weakened the role of the United States in the international commu nity.

Policiesfor Growth The importance of incentives in the political and economic sphere must be recognized, replacing gov ernmental interventionism. Eco nomic policies to encourage savings and capital formation in order to maintain a healthy growing econ342 THE FREEMAN June omy must be pursued and the result will be productivity, stable demand and prices, and reduced inflation. Only through a growing economy based on the principles of the free market do all the citizens-espe cially the disadvantaged-gain by an increase in their standard of liv ing. Policy leaders in the U.S. govern ment must shift the economic em phasis to the supply side of the mar ket, realizing the negative impact of high tax rates on total output and the income transfer payments that have ultimately penalized the ef forts of low-income families to help themselves. When productive citizens are al lowed to keep their income, the in centive is present for economic growth and increased productivity without government-sponsored work programs.

The incentive to save will provide the funds necessary for the tools, high technology, and modern ma chinery which will aid the increase of production per manhour. A frugal central government, bal ancing the budget and restricting the growth of the money supply, will enhance economic growth, reduce inflation, and get people back to work in the private sector in permanent jobs which will help the economy to grow. The time is now to· roll back the Keynesian influence over public policy in the United States. The theory that government spending causes people to produce must be rejected. Government spending does not cause economic growth but it does cause economic disruption through infla tion and interference in the market place. Restorationof Incentives Incentives must be restored for production, employment, invest ment, and new enterprises. A sound economic policy can make rapid progress toward the completely achievable goal of restoring growth to the economy and increased pro ductivity and employment.

We can only preserve the moral freedom of the individual and eco nomic prosperity by the market so lution, not.by a government imposed solution. In warning against the road to serfdom from oppressive govern ment, the Nobel prize economist Friedrich A. Hayek noted that al though history does not repeat it self, we can learn from the past in order to avoid a repeat of the same process. His admonition should be a clear message to those who love freedom and oppose government jobs programs: ttThe guiding principle that a policy of freedom for the in dividual is the only truly progres sive policy remains as true today as it was in the nineteenth century". 9 Real prosperity and strength for the economy will only come when 1981 GOVERNMENT INTERVENTION CREATES CHAOS, NOT JOBS 343 such illfated schemes of govern ment intervention as the CETA pro gram are abandoned in favor of us ing the strengths of the free market unhampered by the heavy hand of government regulation. Heeding the prophetic words of George Santay ana, free men will recall the failure of government to create jobs or r€~ store employment and will seek the answer for a strong economy in the time tested principles of the free market. , -FOOTNOTESIJames Gwartney and Richard Stroup, uThe Creation of Economic Chaos: Inflation, Unem ployment, and the Keynesian Revolution," The Intercollegiate Review (FalllWinter, 1980), p.

3. 2Hans F. Sennholz, UStandards of Living Are Falling," The Freeman (February, 1981), p. 8.. An Appropriate Policy 3Jude Wanniski, The Way The World Works (New York: Simon and Schuster, 1978), p. 84. 4public Employment and· Training Assis tance: Alternative Federal Approaches (Wash ington, D.C.: Congressional Budget Office, 1977). 5John Chamberlain, The Roots ofCapitalism (Princeton, New Jersey: D. Van Nostrand Company, Inc., 1965), Revised Edition, p. viii. 6R. Emmett Tyrrell, Jr. (editor), The Future That Doesn't Work: Social Democracy's Fail ures in Britain (Garden City, New York: Dou bleday and Company, Inc., 1977), Introduc tion, pp. 1-2. 7Ludwig von Mises, Bureaucracy (New Ro chelle, New York: Arlington House, 1969 (Re print of 1944 edition), pp. 122-123. 8Kim B. Clark and Lawrence H. Summers, Demographic Differences in Cyclical Employ ment Variations, Working Paper No. 514, Cambridge, Massachusetts: National Bureau of Economic Research, 1980; Also see UDe_ bunking the Efficacy of Special Job Programs,"

Business Week (September 1, 1980), p. 8. 9Friedrich A. Hayek, The Road to.Serfdom (Chicago: The University of Chicago Press, 1965), p. 240. /--' IDEAS ON LIBERTY ONE further observation must still be made about this matter of saving and capital formation. The improvement of well-being brought about by capitalism made it possible for the common man to save and thus to become a capitalist himself in a modest way. A considerable part of the capital working in American business is the counterpart of the savings of the masses. Millions of wage earners own saving deposits, bonds, and insurance policies. All these claims are payable in dollars and their worth depends on the soundness of the nation's money. To preserve the dollar's purchasing power is also from this point of view of vital interest to the masses. In order to attain this end, it is not enough to print upon the banknotes the noble nlaxim, In God we trust. One must adopt an appropriate policy.

LUDWIG VON MISES, "Wages, Unemployment, and Inflation"