Wednesday, February 18, 2009

Creating Jobs or Making Work ?

I've stolen the excellent headline from this Reason Magazine article which poses the very relevant question to its readers. In the current media coverage of each government's bailout or stimulus package, there is repeated mention of "jobs".

For a free-market advocate, this terminology causes quite a bit of hesitation and discomfort. Not all jobs are the same, clearly. But when government spends hundreds of billions (from taxpayers of course) on short term projects to provide jobs, there are many issues.

If there were absolutely no hazards involved, government could just pay half of the unemployed to dig holes, and the other half to fill them in. Unemployment would vanish. But in truth, so would our capital, our wealth, our standards of living and productive capabilities.

Henry Hazlitt, in "Economics in One Lesson", described a raft of foolish "make work" programs introduced during the Great Depression by FDR. For example, the teamsters in New York introduced a regulation so that all truck drivers visiting New York state had to hire a local New York truck driver to sit beside them for navigation. You had 2 truck drivers doing the job of one.

Government spending has an undeniable track record of being very inefficient and costly. So we often hear the argument put forward in recent times that we need any kind of spending, no matter what, just to "stimulate" our economy.

And with the mention of the word "economy" in that context, most free marketers will once again shudder at the misuse of the word:

The beauty of Obama's dual argument is that he can say the stimulus package is all about putting Americans back to work and then, when challenged on the question of whether this is an efficient way to do that, he can say all the work needs to be done anyway. Conversely, when challenged on the question of whether all these projects are really worth the money being spent on them, he can cite the jobs they "create or save" as a backup justification.

From a technical perspective, a job is created when an employer offers a salary in exchange for a worker's labor. So even if that employer is the federal government, and the salary comes from a stream of tax revenues (or future tax revenues, or even the printing press, for all those governments getting deep into debt), then that still counts as a "job", right ?

No it surely does not.

The nature of a job surely counts. A job that is created when a private employer hires labor, paid for with his own capital, as part of a business that seeks to maximise profit is a real job. Each employer is sacrificing his own wealth, and expects something in return from the employee. Each employer seeks to maximise profits, improve productivity and innovate and grow their business over time, which is the very engine of economic growth and allows for more employment or higher incomes in the future.

The free market consists of millions of voluntarily employed people, developing their skills and applying them across a range of industries, each of which produces something that is in demand and can earn revenue. As we can see, the majority of people are employed by, and receive their income from, the free market.

The same cannot always be said of the public sector. The nature of government work is that a central planner or bureaucracy is given a budget to spend, and chartered with a responsibility to both employ people and to spend their annual budget (or else they won't receive their budget in full the following year).

I read another chapter from Milton Friedman's "Free to Choose" last night which established that when you spend your own money and your own priorities, you seek to both get good value, and to get something that satisfies your own priorities. The hazard occurs when you spend somebody else's money towards somebody else's priorities, where there is no consideration of the budget, and no consideration of that other person's priorities.

Government spending falls entirely into this category. Whilst tax cuts, especially cuts in business tax and income tax, would provide the free market much more capital to employ people in dynamic and growing industries.

It seems clear that each stimulus project is designed to be short term - building roads, highways, green energy, refurbishing schools. Now these sound like noble goals in themselves, but what happens to the workers when these projects expire ?

The private sector would deploy labor and other critical inputs in a much more sustainable way, and use them dynamically and efficiently where they are most needed.

The article concludes:

If the projects really were cost-effective, of course, there would be no need to cite the jobs they create. And if creating jobs were an end in itself, as Obama often seems to think it is, there would be no need to find projects that are worth doing because of the public benefits they deliver. In fact, it would be better to throw money around willy-nilly so as to maximize job creation, in which case we surely could get more than 3.5 million jobs for $787 billion.