The discussion in Washington over how best to “create” jobs is a bit surreal. In part, this is a semantic gripe. This may sound like nit-picking, but it’s important to understand that jobs are created in the private sector, not by politicians. More specifically, they are created when businesses think that the amount of revenue generated by new employees will exceed the total costs (including those imposed by government) of putting those people on the payroll.
But perhaps my grousing is unfair. Politicians would probably admit that they simply want to “create” the conditions that lead to job creation. But even by that more realistic standard, the Washington debate often is surreal for the simple reason that too many politicians think that a larger burden of government will boost job creation.
The Failure of Big Government
President Obama, for instance, routinely urges more government spending to “stimulate” job creation. This assertion takes two forms. The most common argument is that government spending has a “multiplier effect.” The new outlays, we are told, inject money into the economy and jump-start growth, leading to more jobs as businesses increase production in response to higher demand.
The problem with this argument, as explained in an earlier Federalist article, is that government can’t inject money into the economy without first taking money out of the economy, either by borrowing or taxation. This is why Keynesian spending didn’t work for Herbert Hoover and Franklin Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, or Obama in 2009.
Advocates of government-driven job creation also make the mistake of looking at the jobs that are “created” by government spending, such as bureaucrats at a new agency, while failing to consider how many jobs would have been created if the money to fund the bureaucracy had been left in the productive sector of the economy.
This type of thinking would have been very disappointing to the great French economist, Frederic Bastiat, who sagely observed that, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
There are also arguments in Washington that government spending can indirectly create jobs. This is the rationale for job-training programs, which are supposed to give people some skills and training so they can get jobs and/or earn more money.
Unfortunately, decades of research have failed to uncover evidence that these programs are successful. Instead, there’s a long track record of waste, duplication, fraud, and failure. And even if the programs were streamlined and efficient, it may be expecting too much to think that bureaucrats can teach people what’s required to succeed in the private sector.
Wishful Thinking on the Right
While the left has bad ideas and has delivered poor results, some proposals from the “right” aren’t much better. Consider a recent article in National Affairs by Michael Strain of the American Enterprise Institute. Entitled “A Jobs Agenda for the Right,” the piece is filled with proposals that are distressingly reminiscent of the big-government-lite platform of pre-Reagan Republicans.
Consider, for instance, these passages and then ask whether they could have been uttered by Harry Reid or Nancy Pelosi.
- He writes that “conservatives should see that there is a role for macroeconomic stimulus.” This statement isn’t necessarily troublesome, though advocates of economic liberty generally use language about long-run growth while interventionists talk about short-run “stimulus.”
- It’s hard to give Strain the benefit of the doubt when you look at other statements. He claims, for instance, that “government spending can support economic growth during a recession” That Keynesian statement sounds more like Brookings than AEI.
- He also has Obama’s faith in “shovel-ready jobs,” extolling “the desirability of a multi-year program of high-social-value infrastructure spending.” At no point in the article, though, does he explain how vote-maximizing politicians will direct funds to the infrastructure projects with “high social value.”
- To be fair, he’s not a doctrinaire Keynesian. He wants to finance additional spending, at least in part, with higher taxes, suggesting “a reining in of tax expenditures.” There’s nothing wrong with cutting back on tax preferences (properly defined), but the money should be used to lower tax rates rather than expand the burden of government spending.
- He also delves into monetary policy, arguing that the Fed should “let the economy run hotter” by increasing the acceptable level of future price increases.
- And while writing for National Review late last year, he endorsed extended unemployment benefits – notwithstanding the wealth of evidence that such policies encourage joblessness.
Not all of Strain’s recommendations, to be sure, involve more government. He criticizes occupational licensing laws and regulations that impose significant barriers to entrepreneurship. He urges reform of a fraud-riddled disability system that lures people into permanent dependency. And he calls for more immigration from the kinds of people – highly skilled and educated – who would be very likely to create jobs.
But some of his market-oriented proposals are laden with tinkering and social engineering. He recognizes that minimum-wage laws undermine employment markets, but instead of arguing that government shouldn’t restrict labor contracts between consenting adults, he wants to micro-manage.
One of his proposals would involve “significantly lowering the minimum wage for the long-term unemployed for at least the first six months after the date they begin work at their new job.” That would help people with modest work skills (assuming they can’t get even more money by doing nothing), but should government be tilting the playing field in favor of some types of workers over others?
He also endorses “an expanded Earned Income Tax Credit or with wage subsidies exclusively available to the long-term unemployed.” Such policies obviously would draw some people into the workforce, so there would be some benefits. Once again, though, we should ask why there should be more redistribution, particularly when the funds are conditional on long-run unemployment. There could even be perverse unintended consequences, such as making it attractive for someone who’s been out of work for four months to wait another two months before looking for a job.
A Real Jobs Agenda: Free Markets and Small Government
It may not be an agenda tailored to appeal to politicians, who generally want to be seen as “doing something,” but the best way to create jobs is to get government to stop trying to help. Free markets and small government are far more likely to produce the conditions that lead to more employment.
In other words, let the private sector flourish. The pursuit of profit is a powerful force for growth. To quote one of my favorite people, “businesses are not charities. They only create jobs when they think that the total revenue generated by new workers will exceed the total cost of employing those workers. In other words, if it’s not profitable to hire workers, it’s not going to happen.”
The real-world evidence may be the most compelling data. Jurisdictions such as Hong Kong and Singapore tend to produce more jobs and growth than statist nations such as France. In America, states such as Texas with smaller public sectors tend to out-perform states such as California where the burden of government is much larger.
If we really care about workers, particularly those without jobs, the most compassionate approach is prosperity rather than dependency.
Dan Mitchell is an economist and senior fellow at The Cato Institute. Read his blog here and follow him on Twitter.
