Make-Work Won't Work; J. Semmens

John Semmens Make-Work Won't Work MORE AND MORE the fate of public policy has been determined by the stampeding sacred cows. The mere mention of sacrosanct beneficiaries like the "poor," or "elderly," or "un employed," is deemed sufficient to justify any policy, no matter how ill conceived. Objective analysis goes out the window whenever the an nounced intent of a government pro gram is to feed a sacred cow. The big spenders of Congress are rushing to bloat the federal deficit with ''job creation" programs. Per sons questioning this precipitous profligacy are characterized as heartless haters of the unemployed. With unemployment in double dig its, how dare anyone delay the ex penditure of funds to make work? Tragic as an individual case of un employment may be, sound policy cannot be made by this kind of demMr. Semmens is an economist for the Arizona De partment of li'ansportation. The views expressed here are those of the author and do not necessarily reflect Departmental policy.

agogic manipulation of our emo tions. We need facts about the na ture of the phenomenon, its magnitude, and its causes. Without these facts no real solutions to social problems can be devised. Instead, the creation of a "crisis" atmosphere will serve as another opportunity for those holding the power to exploit productive, taxpaying businesses and individuals. To begin with, the concept of the "unemployed" is not well defined. Implicit in the decision of an in dividual whether to accept a given job is the issue of compensation. If a person turns down a job because the pay is too low he is expressing a preference for leisure at that price. Is the economy failing because it does not provide a job at the desired wage? Or is the individual to be castigated for withholding his labor? Defining unemployment is not merely an esoteric exercise. For ex ample, high rates of unemployment among auto workers may have a lot 561 562 THE FREEMAN September to do with the comparative wage costs in auto production between Japan and America. If unemployed U.S.

auto workers did not insist on wages 50 per cent higher than their Japa nese counterparts, there would be more jobs available in American auto factories. Rising Expectations Whose fault is it that some work ers cannot gain the amount of com pensation they desire? It is quite a common circumstance for people to be paid less than they think they are worth. If taxpayers are to be re quired to make up the difference be tween desired wage and offered wage, the destruction of productive output will be the end result. A partial explanation for the in creasing incidence of withheld labor (or unemployment) is the rising level of expectations. Legislation at tempting to dictate unreasonably high wage levels has had both a di rect and an indirect effect on unem ployment. Decreed minimum wage laws directly prevent individuals from accepting employment at wages that would be satisfactory. The in direct effect of these decreed wages is to create unreasonable prejudices and expectations among some indi viduals' causing them to disdain certain kinds of employment.

The availability of alternative sources of income also supports the willingness and ability to withhold labor. The payment of unemploy ment compensation abets the pref erence for leisure among those eli gible for benefits. Despite all the rhetoric about the impoverishment of the unemployed, Department of Labor statistics reveal that the av erage income of a family that in cludes at least one person drawing unemployment benefits is over $19,000. This is not pre-unemploy ment income. It is post-unemploy ment income. That is, even with one family member unemployed, the family is still bringing in income in "livable" amounts. While averages do not tell the complete story, it is clear that the so-called unemployed are not universally suffering the ex traordinary deprivation that some would have us believe. Even with the family income fig ure of $19,000, unemployment ben efits are routinely denigrated as in sufficient. First, the benefits are portrayed as inadequate to sustain life. Second, the idea that the provi sion of such inadequate benefits could actually deter someone from accept ing a job is ridiculed. Despite claims of the inadequacy of unemployment benefits, research on the subject in dicates that the availability of ben efits does seem to affect the willing ness and ability of individuals to withhold their labor from the mar ket. In a paper presented to a "Con ference on the Incentive Effects of Government Spending," Princeton 1983 MAKE-WORK WON'T WORK 563 Professor Gary Solon disclosed that the taxation of benefits had the ap parent effect of reducing the dura tion of unemployment by over 20 per cent.

The reference point one uses to observe the national unemployment situation can influence the interpre tation of the phenomenon. On the one hand, reported unemployment hovers in the double digit range. This is the worst it has been since World War II. On the other hand, 57 per cent of the adults in America have jobs. This is virtually unchanged from 15 years ago when the reported rate of unemployment was less than 4 per cent (the reputed "full" em ployment rate). The long term prob lem has not been a decline in the number ofjob opportunities. Rather, the problem has been that the growth ofjob opportunities has not kept pace with the increase in the number of persons desiring employment. To some extent the divergence of the supply and demand for labor has been created by government inter vention in the economy to fix the prices of labor above the market clearing prices. The establishment of minimum wage laws was discussed earlier. In addition to this meddling on the lower end of the wage scale, government has raised the price of labor at the upper ends of the wage scale as well.

For blue collar occupations, gov ernmental intervention has sanctioned the use of coercion and threats of violence as a means of extorting higher wages for union members. Intimidation of wouldbe labor com petition is a "normal" part of the government-sanctioned collective bargaining process. In the Professional Field, Entry Denied For those in the professional field, the government at local, state and national levels has authorized var ious anticompetitive practices aimed at denying certain persons the op portunity to enter licensed or regu lated professions. This has both a di rect and an indirect impact on unemployment. Some individuals are directly excluded from pursuing a profession. Others, using the artifi cially high pay in the protected professions as a standard or refer ence are encouraged to withhold their labor because of unreasonably high wage expectations in general.

It should be obvious that the touted cures for unemployment being con sidered by Congress are totally in appropriate. Congress does not pro pose to deal with the issue of withheld labor. Congress does not propose to eliminate government programs that contribute to unem ployment. Congress does not offer any encouragement for the eco nomic growth that could supply many more job opportunities. Instead, Congress pledges itself to 564 THE FREEMAN September actions· based on coercion that are sure to aggravate the problem. To keep foreign firms from "stealing" U.S. jobs, Congress is considering legislation to prevent consumers from exercising free choice in their pur chases. Import restrictions and do mestic content laws would deny con sumers the right to freely select the products most suitable to their needs. Not only will consumer satisfaction be reduced, but both the purchasing power of the dollar and eventual output per unit of input will be low ered.

To assist U.S. firms in gaining markets abroad, Congress is warm to the idea of bribing foreigners to buy American made goods. The bribes come in the form of subsidies either to lower the price of the goods or to lower the cost of borrowing to purchase the goods. Though Secre tary of State George Schultz con cedes that such a policy is insane, we are, nevertheless, headed toward its widespread adoption. The funda mental outcome of this procedure is to sell our output for less than the cost of the input. This is the road to bankruptcy, not full employment. To prevent foreigners from enter ing the U.S. and "taking away" American jobs, Congress is consid ering enacting repressive alien em ployment penalties. Under this pol icy, employers would be punished for hiring illegal aliens. Aside from making things tougher for all Hispanics seeking employment, the program would require an elaborate and ultimately expensive enforce ment effort. All legal residents would be issued official working papers.

Government agents would patrol places of employment checking doc uments. Courts would receive the added load of prosecutions for the victimless crime of hiring a person. Counterfeiting of official papers would provide another avenue of profit for organized crime. This pro specti ve trampling of liberties will place a further dragon the economy, as taxes to support bureaucrats, judges, and prisons draw more re sources from the productive sectors of the economy. To stimulate the U.S. economy Congress proposes to expend prodi gious sums on public works. Men are to be put to work building roads, dams, waterways, sewers, public buildings of every sort. Of course, there is no information on how valu able these presumed public assets might be. The public sector has no means of evaluating the return-on investment from the construction of these types of facilities. Malinvestment of Resources In an abstract sense there may well be a need for roads, dams, and the like. Unfortunately, we do not know how much of these products is needed. It is possible, even likely, that many, if not most, of these pub1983 MAKE-WORK WON'T WORK 565 lic works will return only pennies on each dollar expended. The probable consequence of a massive public works program is the malinvest ment of scarce capital resources.

Since it requires capital to sustain employment opportunities, the mal investment of billions of capital will inexorably reduce future employ ment. To alleviate the plight of dis placed workers and the "hard core" unemployed, Congress is wont to en act job-training programs. On a the oretical basis, we'd be led to predict that this would be an inefficient means of preparing people for jobs. Bureaucracies lack the economic in centive structure to effectively pro vide appropriate training. The past experience of the government in this area bears out the theoretical pre diction. The Comprehensive Employment and Training Act (CETA) was noto riously ineffective in training the unemployed for work. A majority of the participants in CETA never ob tained productive employment as a result of their job training. Govern ment job-training programs are a waste of time and money. Human talent that might otherwise be con structi vely employed will be wasted in misguided and futile efforts.

Money to fund this activity will be diverted from the productive sector. This will decrease employment and output in this sector. Since the government is already operating in the red, any programs to combat unemployment will likely be financed with borrowed money. Government borrowing crowds out the private. sector. Because the fed eral government has the sovereign power to seize wealth with which to pay its debts, it goes to the head of the line of borrowers. In the financial world, creditors would prefer to make loans to the government, since it can seize re sources, than to private firms which might go bankrupt if consumers don't buy their products. As a result, pri vate firms must offer to pay higher interest rates to obtain funds. This raises the cost of capital for success ful borrowers. Such firms will have less money available to expend on labor. Firms unable to pay the higher interest expense must cut back their plans for future output. Lower fu ture output will mean fewer job op portunities. In either case, govern ment borrowing will reduce private sector employment.

HigherTaxes Afford No EffectiveSolution In order to avoid this crowding out of private borrowers, some members of Congress urge an increase in taxes. With more tax revenue the govern ment wouldn't have to borrow as much, thereby lowering interest rates. While this may appeal to sim plistic analysts, it is a ludicrous al566 THE FREEMAN September ternative. A hike in taxes will still remove resources from the private sector. Faced with a higher tax bur den, firms may resort to borrowing in order to finance their operations. Again, this will put upward pres sure on interest rates. Firms not choosing to borrow resources to re place taxed capital will be forced to cut back their plans for future out put. The results would be funda mentally the same as if the govern ment borrowed the money. At this point it is often suggested that a consumption tax, rather than an income tax, would solve the prob lem of draining private sector capi tal. How this magic is to be per formed remains unexplained. Taxes on consumption will reduce con sumption. Consumers will be able to purchase fewer units of output at a higher cost per unit. Firms will sell fewer units and experience lower revenues. The net result of this con sumption tax will be lower private sector income. Thus, while not taxed directly, firms will still be forced to either borrow more money or cut back output.

Of course, the federal government has granted itself the authority to create money. Perhaps there will be neither increased borrowing nor taxing by the government. How ever, the creation of money does nothing to augment the quantity of real goods and services. The govern ment will use this newly created money to claim real resources' with out having to produce an equivalent real output. As long as the money creation process is unanticipated by the market, the effect of this policy is a transfer of resources from pro ducers to the government. This will tend to have a negative effect on the overall output of the economy, as re sources are shifted from more to less productive uses. If .the money creation process is antiCipated, holders of existing stocks of money will insist on higher inter est rates to compensate for the loss of purchasing power that results. This leads to higher costs for bor rowers, with all the attendant re ductions in output and employment.

Another consequence of money cre ation is the destruction of the value of the dollar. This discourages the holding of liquid assets. Not only is there a precipitate rush to accumu late tangible assets like gold or sil ver, but commerce becomes more cumbersome as the monetary unit fluctuates in value. Time, effort and resources must be diverted to meth ods of forecasting currency deprecia tion and developing strategies to deal with it. A by-product of the depreciation of the value of money is the erro neous overstatement of income that results in lifting. firms and individ uals into higher tax brackets. This increased tax burden diverts re sources from the productive sector, 1983 MAKE-WORK WON'T WORK 567 leading to lower output and employ ment. It would appear that none of the schemes being contemplated by Congress affords any hope of im proving the employment situation. All of the schemes rely upon the forcible transfer of resources from the productive environment of volun tary exchange to an environment of politically determined uses. This type of policy sends the wrong signals to human actors in the economy. In stead of devoting energies to produc tion, individuals are encouraged to act defensively or predaciously. Can there be anyone who does not rec ognize the enormous drag that the necessity for defensive action places on an economy?

It is bad enough that, interna tional lawlessness leads to to enor mous weapons expenditures. How ever, we should not overlook the enormous devotion of resources to pay for lobbying to get or prevent legislation aimed at enlisting the government to seize resources that cannot be obtained by voluntary ex change. Armies of tax experts, law yers, and influence peddlers repre sent a sad waste of talent and resources on nonproductive activi ties. The magnitude of the loss suffered by the American people as a result of the government's pillage ap proach to economic policy is. huge. The standard of living we enjoy today is dependent upon the accumu lation of capital over time. Policies that provide the incentive to create and accumulate capital improve the standard of living. Policies that pro vide the incentive to consume and destroy capi tal lower the standard of living. Excessive Spending Government programs to create jobs by seizing and spending more resources are precisely the wrong cure for unemployment. Govern ment spending has been increasing at a faster rate than inflation. Since the 1975 recession, federal spending has risen 50 per cent faster than in flation. If government spending really stimulates the economy, shouldn't unemployment be getting lower? The fact that government spending has not had this effect points out the precarious predica ment of the predatory society.

In contrast, even the slightest moderation of government rapacity would pay big dividends. For exam ple, let us suppose that the rate of growth of government spending had been held to match the rate of infla tion over some recent time period. What would have been the employ ment impact of such a policy? What if the government had responded to the 1975 recession by moderating its consumption of private sector re sources in this fashion? The cumulative effect of such a 568 THE FREEMAN September -policy could have been quite dra matic. The compound creation of capital invested at an average rate of return could have enabled our economy to accumulate over $600 billion more resources than pres ently exists. This additional capital could support an additional5V2 mil lion job opportunities. (See table be low). This estimate of the impact of the government's spending would seem a modest portrayal of the total cost of government meddling in the economy. What if expenditures had actually been cut, rather than merely held constant? What if the morass of government red tape and regulation had been reduced? What if positive trends in these policy areas were to kindle a greater optimism among creative and productive people?

The Reagan Administration orig inally had some promising proposLong Thrm Opportunity Cost of Excessive Federal Expenditures ($ in Billions) Inflation Cumulative Cumulative Federal Proof Opportunity Permanent Year Outlays· Budget 2 Excess 3 Cost4 Jobs Lost 5 1976 $366 $346 $ 20 $ 21 300,000 1977 403 368 35 60 900,000 1978 451 398 53 121 1,700,000 1979 494 440 54 188 2,400,000 1980 580 502 78 284 3,100,000 1981 663 551 112 424 4,200,000 1982 730 590 140 603 5,500,000 Notes: (1) Does not include off~budget expenditures. (2) Expenditures necessary to keep pace with inflation as measured by the Consumer Price Index. (3) Excess of federal outlays over and above what was necessary to keep pace with inflation. (4) Capital accumulation sacrificed to pay for excessive government spend ing. Assumes a 7% average annual return on investment-the after tax, after~dividend reinvestment rate for the Dow Jones Industrials.

(5) Estimated number jobs that could have been created if capital had been allowed to accumulate in the private sector instead of being taxed away to finance federal spending.

1983 MAKE-WORK WON'T WORK 569 also Red tape and regulation were to be reduced. Taxes were to be cut. Government spending was to come down. Some positive actions were taken. Oil prices were decontrolled. Phased income tax reductions were enacted. Not much headway has been made, though. Early on, the Administra tion decided merely to slow the rate of growth in government spending. Despite much anguish and travail, the rate of growth in government spending still exceeds the rate of in flation. Real expenditures under the Reagan Administration are increas ing at virtually the same pace as un der the Carter Administration. Now, proposals for revenue enhancement abound. Make-work jobs bills are the order of the day. What America needs is a simple program to promote economic Jobs for All growth. The role of government in this program is to stop interfering with voluntary productive activity.

Regulations like minimum wages should be removed. Sanction of coer cive collective bargaining should be repealed. Restraints on trade should be abolished. Subsidies to the ineffi cient should cease. Grants of monop oly must be rescinded. Laws against victimless crimes in voluntary ex change between consenting adults must be dispensed with. Finally, the bloated budgets of government at all levels have to be trimmed. Returning resources to the pri vate' productive sector will do more to alleviate unemployment and pov erty than any other policy available to government. The wealth and well being of ourselves and future gen erations hang in the balance. @ IDEAS ON LIBERTY A free job market would provide "full employment" and greater produc tion of the things men want most. Competition might drive down some dollar wage rates, but living standards would have to be higher. With more goods and services competing for every dollar, prices would be lower and everyone with a dollar would be entitled to a share of the increased production. Those now overpaid might temporarily suffer, but in the long run we would all be able to satisfy more of our wants.

With a free market in jobs, every man would be free to take the best offer available. Every employer would also be free to hire the applicants that pleased him most. No one would remain long unemployed. There would be jobs for all, more wealth produced, and a greater satisfaction of everyone's wants. What is more, the economic loss and dread of un employment would evaporate. PERCY L. GREAVES, JR.