Why Government Can't Create Jobs by Mark Ahlseen

[Stephane Budge]

Any 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 can alleviate
downturns in economic activity by 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 construction 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 government 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 employment is 100,000 jobs 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 spending 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.
Private sector employers will notice and respond by laying off
workers. Since most of us will agree that we can spend our income more
efficiently than can the government 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 constructing
the new highways.

If corporate taxes are raised instead of individual income taxes, they
will eventually 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 appliances 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,
machines, and homes will be built. Not only does this decrease in
private investment slow economic growth, it results in additional
unemployment in these industries.

A final source of funds is the government’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 decrease
in purchasing power will eventually increase unemployment as well.

Unfortunately, the political appeal of government spending stems from
the fact that the jobs created are noticeable to the average voter,
while the handful of jobs lost here and there are not attributed to
the government 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 government
“invests” in people the unemployment rate decreases. Yet the opposite
is the case. For the same years there has been a positive, though
statistically insignificant, correlation between government employment
(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 government employees for such things
as national defense, police protection, and administering 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 Keynesian legacy that government can reduce
unemployment 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.