Do Government Programs Really Create Employment?

Now that we are past the debt limit crisis, Washington discussion is beginning to (finally) pivot back to the more pressing issue in the nation – the high unemployment rate. There is a persistent belief in Washington, in both parties, that government stimulus can create employment. This, of course, is the essence of Keynesian economic theory – that in times of recession the government should spend money, even if it has to borrow that money, to make up for the reduced demand in the rest of the economy.

Set aside the inconvenient fact that this Keynesian theory has never worked – it didn’t work in the US depression of the 1930s, it didn’t work when Gerald Ford tried it. It didn’t work when George W. Bush tried it. It didn’t work when Japan tried it in the 1990s. And it hasn’t worked thus far in the current recession, despite more than a trillion stimulus dollars injected into the economy.

It is certainly true that the government can create “jobs”. It could, for example, just pay people to dig holes and then fill them up, or put them into the federal bureaucracy and that would create “jobs”. But that activity wouldn’t be productive employment; it wouldn’t do anything to improve the economy because it doesn’t, directly or indirectly, add wealth to the economy. Only innovation and production in the private sector really adds wealth to the overall economy. All the government can do is reallocate investment, and it does that far less efficiently than market force do.

And of course while the jobs created are visible, the source of the funds for the jobs isn’t as visible. To put that money into the economy, the government has to first take it out of the economy in the form of taxes, and then return it, less a significant cut for expenses. This is true whether the government takes it from today’s taxpayers, or borrows and takes it from tomorrow’s taxpayers. There is no free lunch here.

One can make an argument for doing something more useful with stimulus money than just digging holes and filling them up. Stimulus funds can be used, for example, to repair and expand essential infrastructure, like roads, bridges, power lines, etc, and these, if done intelligently, do at least add to the future health and competitiveness of the economy. Unfortunately the political incentives in Congress seem to prevent any rational allocation of such funds, so that, for example, under political pressure from powerful Congressmen $420 million of last year’s stimulus money went to expand the Morses land boarder crossing in Vermont, which averages only 2.5 cars per hour. And, as I mentioned in a post several days ago, after-the-fact accounting for the stimulus funds shows that it cost about $287,000 per job created or saved for a year - hardly an impressive use of funds.

So in fact government isn’t very good at creating “real” jobs (ie – not just make work or more expensive bureaucracy). Only private enterprise can really create employment that adds wealth to the economy, and all the government can do is try to set the tax and regulations conditions so that the private sector can prosper.

Which means that government stimulus funds are, at best, an inefficient short-term solution. They put money into the economy now (after first talking it out of the economy in taxes), but they do nothing to solve the structural problems that caused the recession in the first place. In fact, they probably make the structural problem worse, first by removing from the economy money that might have gone for investment, second by increasing the federal debt, and finally by allowing politicians to kick the real problem down the road to future years