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Can the government create jobs?

Written By: Jason Shafrin - Dec• 10•09

On Tuesday, President Obama unveiled a plan to use repaid TARP monies to fund a job creation program.  The question is, can the government actually create jobs?

Initially, one would say yes.  If the government hires more workers, this is job creation.  If the government hires more contractors, this is job creation.  If the government gives subsidies to businesses to increase employment, this is job creation.  Isn’t it?

One must first wonder where the government is getting the money to pay for the job creation programs.  Let us assume that it is from taxpayers.  In this case, the government is taking money from individuals to ‘create jobs.’  However, by increasing taxes, consumers have less money to spend on goods and services.  When consumers buy less stuff, firms will cut jobs.  The net effect likely will be a wash.  The government ‘creates’ jobs by paying money itself and destroys jobs by raising taxes.

What if the government funds the job creation with debt?  If the debt is only purchased by Americans, we have the same problem.  Consumers purchase government debt rather than buying products.  Again the net effect is likely a wash.

Now let us think expand our thinking.  Assume we live in a global economy where foreigners buy our bonds.  In this case, the government may be able to create jobs somewhat in the short run .  Foreigners will have less money to buy American exports if they buy our bonds, but likely only a fraction of foreigners income is spent on American goods.  Thus, the extra money the government receives from foreigners can create American jobs in the short run.  Subsequent generations, however, will have to pay back the loans from foreigners in the form of higher taxes.  Thus, increased job creation now comes at the expense of decreased job creation in the future.

Let us also think about business cycles in the creation of jobs.  The U.S. just went through a bad economic downturn.  Individuals and firms were saving more and buying/investing less.  Thus, firms had a smaller market to which they could sell goods.  If the government taxes (or borrows) from individuals and firms, and decides to spend all this money on ‘job creation,’ employment could actually increase.  Currently, the marginal propensity to spend will likely be higher for the government than for consumers or firms.  However, increased marginal propensity to consume implies a decreased marginal propensity to save.  With lower savings rates, there are fewer funds available to investors to invent new ideas, invest in new technologies and provide the foundation for long-run technical growth.  Interest rates will rise.  Currently, the Federal Reserve has held down interest rates by printing more money, but this will likely cause inflation in the near- to medium-term.

As any economist knows, there is no free lunch.  The government may be able to create jobs in the short run to counteract dips in the business cycle, but these debts must be repaid in the long-run.  Thus, in the long-run the government does not create jobs.  Innovative individuals and firms create jobs.  Further, this post has not even discussed the problem that the government will likely misallocate funds and may hire the wrong type of workers for long term economic growth.

If the government really could create jobs in the long-run, then the government might be able to maximize job growth by spending ad infinitum.

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2 Comments

  1. Jim says:

    Key sentence—“Innovative individuals and firms create jobs”. Exactly. Now how do we begin to foster and teach innovation?

  2. Jonathan Dursi says:

    Do you think that the creation of the interstate system in the 1950s, which created a high-speed network for the movement of people and transport of goods across the country, in the long term created jobs or not? Do you think having an educated workforce in the long term creates jobs or not? Does having a robust physical or legal infrastructure help with economic activity or hurt it?

    How is what you’ve written different from:

    “One must first wonder where [the innovative new business] is getting the money to pay for the job creation programs. Let us assume that it is from [investors]. In this case, the government is taking money from individuals to ‘create jobs.’ However, by [taking money from investors], consumers have less money to spend on goods and services. When consumers buy less stuff, firms will cut jobs. The net effect likely will be a wash. The [innovative new business] ‘creates’ jobs by paying money itself and destroys jobs by raising [investment capital].

    What if the [innovative new business] funds the job creation with debt? If the [bonds are] only purchased by Americans, we have the same problem. Consumers purchase [the bonds of the company] rather than buying products. Again the net effect is likely a wash.”

    If you wrote that facile analysis as above, you’d be rightly ashamed of yourself. The velocity of money is not fixed; borrowing money at low interest rates when no one else is able to borrow substantial money can increase economic activity (and in fact, the current bond spread is a pretty strong market indicator that the government should be borrowing more money than private firms); and even on top of that, building (or even maintaining) real physical infrastructure can have huge multipliers.

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