Why Government Can't Create Jobs; M. Ahlseen

Students often ask the obvious question: Why is government policy grounded in such a flawed theory? From a political point of view, advocating and implementing Keynes ian policy is the surest way to election and re-election. The gains from printing and spending money are immediate, highly vis... ible, and can be concentrated on individuals who make up powerful voting blocs. The costs of this policy are incurred at a later date and can be spread thinly across the entire population, making the link between policy and long-run consequences difficult for the voting public to perceive. The fading in recent years of old-line Keynesianism in academic circles provides little comfort. Even as the number of demand-managers continues to decline, it is from this shrinking group of economists that government officials seek advice and recon ciliation. And opportunities to lecture to the seats of power rather than in the halls of learning have a way of changing some econ omists' minds about the advisability (polit ical if not economic) of managing aggregate demand. Printing and spending money in pursuit of both short-run stimulation if not long-run stability remain the order of the day.

There is good reason, then, to study Keynesian theory: It helps us understand what the policymakers in government are likely to do in any given circumstance. But to understand the actual effects of their demand-management policies in the long run as well as the short, we need a more enlightening theory-one that recognizes what market forces can do on their own to maintain macroeconomic stability and how those forces are foiled by government supplied stabilization. D WHY GOVERNMENT CAN'T CREATE JOBS by Mark Ahlseen A ny nation needs a certain number of government employees in order to function. But ever since the Employment Act of 1946 a different view of government employment has emerged: that government Mark Ahlseen is Associate Professor ofEconom ics at King College in Bristol, Tennessee. can alleviate downturns in economic activ ityby spending-or "investing"-funds on projects that will stimulate employment.

The government may be either a direct employer (as when it increases the numbers in our armed forces) or an indirect employer (as when it increases spending on highways, which increases employment in construc390 THE FREEMAN • OCTOBER 1993 tion companies). As a nation we may need larger armies or more and better highways, but that is not germane to the discussion at hand. The insidious notion persists that govern ment job creation actually generates an increase in employment. According to this view, if construction companies increase employment by 100,000 jobs due to a $3 billion government spending program to finance highway construction, then employ ment is 100,000jobs ahead of what it might be in the absence of the program. Rarely does the public debate focus on how employment in other sectors is affected when the government seeks the $3 billion necessary to finance its program. These effects are important but, unfortunately, less visible because they are spread among hundreds, if not thousands, of employers.

Government spending, including spend ing designed to stimulate employment, may be derived from three sources. The first is taxes. If individual income taxes are raised by $3 billion to fund our highway project, disposable income is reduced by $3 billion. Consequently, individuals will demand less clothing, fewer appliances, and so on. Pri vate sector employers will notice and re spond by laying off workers. Since most of us will agree that we can spend our income more efficiently than can the govern ment-if only for the fact we do not have to pay a bureaucratic overhead charge-lay offs in the affected companies will exceed the employment added by companies con structing the new highways. If corporate taxes are raised instead of individual income taxes, they will eventu ally result in higher prices for consumers, lower real wages for workers, and lower returns for investors. All of these result in a decreased ability to buy clothing and appli ances with the net result that unemployment increases, not decreases.

A second source of funds is government borrowing, but this borrowing increases the price of lendable funds, which reduces the amount of investment in the private sector. Consequently, fewer new factories, ma chines, and homes will be built. Not only does this decrease in private investment slow economic growth, it results in addi tional unemployment in these industries. A final source of funds is the govern ment's central bank, which can create new money. However, this monetary inflation results in price inflation by eroding the purchasing power of the dollar. This de crease in purchasing power will eventually increase unemployment as well. Dnfortunately , the political appeal of gov ernment spending stems from the fact that the jobs created are noticeable to the aver age voter, while the handful ofjobs lost here and there are not attributed to the govern ment spending program. Interestingly, from 1960 to 1988 there has been a positive, and statistically significant, correlation between public aid (as a percentage of GNP) and the unemployment rate. Conventional wisdom would have the public believe that as gov ernment "invests" in people the unemploy ment rate decreases. Yet the opposite is the case. For the same years there has been a positive, though statistically insignificant, correlation between government employ ment (as a percentage of total employment) and the unemployment rate. This suggests that as government work is created more jobs are lost elsewhere resulting in a rising unemployment rate.

As a nation, we undoubtedly need gov ernment employees for such things as na tional defense, police protection, and ad ministering our court system (though I do question our founders' wisdom in relegating the delivery of first-class mail to government employees). But it is a fallacy of the Keynes ian legacy that government can reduce un employment by priming the pump with spending programs. Government needs to reduce spending and taxes in order to leave income in the hands of individuals who earned it and who can spend it much more efficiently than the government can. 0 THEFREEMAN IDEASON L1BERlY A LIFE-SAVING LESSON FROM OPERATION DESERT STORM by Donald J. Boudreaux O peration Desert Storm is considered to be one of the American military's greatest victories. The goal given by the United Nations was to drive Saddam Hus sein's troops out of Kuwait. Regardless of one's opinion of the scope of this goal or of the propriety of United States military in volvement in foreign nations, the fact is that American armed forces accomplished their task. They did so completely, unambigu ously, quickly, and with very little loss of life. Americans should be especially grateful for this last fact.