Gross Versus Net Job Creation

One of my pet peeves is when politicians trumpet their particular program as a “job creator.” In Michigan, we have the Michigan Economic Development Corporation, which is a partnership of the state government and local governments and is headed by a board of directors comprised of business people. According to their website, they “have the ability, authority and reach to serve as a one-stop resource for business retention, expansion and relocation projects.” The idea behind this project is to create jobs in Michigan.

Similarly, the Obama administration has been trumpeting “green jobs” as the jobs of the future. Government subsidies of these types of companies, the administration argues, will lead not only to a better planet, but to greater job creation.

I have no doubt that these types of initiatives create jobs. After all, Jeff Daniels tells me that the MEDC creates jobs in all of the commercials. However, this is gross job creation whereas I am concerned with net job creation. In other words, as Bastiat would argue, these programs highlight what is seen and ignore what is unseen.

To give an example, when President Obama was pushing the stimulus package, he repeatedly highlighted the fact that moving health records to an electronic form would create jobs. Of course this is true. There must be somebody who accomplishes this task. However, isn’t it also true that those who do the filing in doctor’s offices around the country will no longer be necessary. Thus, it is not clear whether this creates jobs on net. This is not to say that this policy is undesirable, but rather that the “jobs creation” justification is not entirely clear. (Also, I am not singling out the Obama administration. I chose this example because it has long been a political talking point.)

It is particularly disheartening, however, to see the same claims made by economists. For example, Paul Krugman recently made the claim that such restrictions on greenhouse gas emissions would give companies “a reason to invest in new equipment and facilities even in the face of excess capacity.” Again, there is little dispute that companies will have to adjust their behavior and invest in new equipment (otherwise the policy isn’t effective). However, is there any reason to believe that this type of investment is beneficial? Don Boudreaux provides an excellent response:

Technological innovations benefit society not by giving firms “a reason to invest in new equipment and facilities,” but by reducing costs – not by making resources scarcer (by artificially increasing demands for them) but by making resources go farther in their capacity to satisfy human desires.

If “a reason to invest” were sufficient to restore economic vigor, then war and natural disasters would do the trick even better than would government restrictions on greenhouse-gas emissions.

Again, this is not to say that any of these programs are necessarily bad. Certainly, if one thinks that global warming is a serious threat, then perhaps a policy that limits greenhouse gas emissions is a good policy. The problem, however, is that these policies and programs are often not sold on their direct purpose or merits. Rather, politicians use arguments of economic growth and job creation.

You Cannot Be Serious!

The debate over stimulus has no progressed to the point at which certain individuals are now claiming that wasteful government spending is stimulus. Case in point, Jonathan Chait:

Normal spending is judged on those terms–whether the goods or services justify their cost. The point of stimulus spending, by contrast, is simply to spend money–on something useful if possible, wasteful if necessary.

I similarly heard an economist — who shall remain nameless — on one of the financial news networks arguing that we could literally boost the economy by paying people to dig holes and fill them back in. This is utter nonsense!

Frederic Bastiat wrote in Economic Sophisms:

But what constitutes the measure of our well-being, that is, of our wealth? Is it the result of the effort? Or is it the effort itself? There is always a ratio between the effort applied and the result obtained. Does progress consist in the relative increase in the first or in the second term of this ratio?

[...]

According to the first thesis, wealth is the result of labor. It increases proportionately to the increase to the ratio of result to effort. Absolute perfection, whose archetype is God, consists in the widest possible distance between the two terms, that is, a situation in which no effort at all yields infinite results.

The second contends that effort itself constitutes and measures wealth.

This is indeed at the core of the debate. Those who argue that wasteful spending will jump-start the economy are either disingenuous or simply do not understand how wealth is created. Wealth is not created by turning on the printing presses and handing individuals checks for a worthless day’s work. On the contrary, that is how wealth is destroyed!

Jonathan Chait further succumbs to another fallacy:

World War II was an effective stimulus that, economically speaking, consisted of 100 percent waste. If war hadn’t broken out, we could have enjoyed the same economic benefit by building all those tanks and planes and dumping them into the ocean.

Those who repeatedly make the claims that the New Deal or World War II got us out of the Great Depression are arguing against solid empirical evidence (from Barrack Obama’s CEA Chair Christina Romer no less). Romer’s influential paper concludes:

Monetary developments were a crucial source of the recovery of the U.S. economy from the Great Depression. Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942.

[...]

That monetary developments were very important, whereas fiscal policy was of little consequence even as late as 1942, suggests an interesting twist on the usual view that World War II caused, or at least accelerated, the recovery from the Great Depression. Since the economy was essentially back to its trend level before the fiscal stimulus started in earnest, it would be difficult to argue that the changes in government spending caused by the war were a major factor in the recovery.

Further, any effects on growth from World War II largely had to do with the effects of financing, not with spending:

. . . Bloomfield’s and Friedman and Schwartz’s analyses suggested that the U.S. money supply rose dramatically after war was declared in Europe because capital flight from countries involved in the conflict swelled the U.S. gold inflow. In this way, the war may have aided the recovery after 1938 by causing the U.S. money supply to grow rapidly. Thus, World War II may indeed have helped to end the Great Depression in the United States, but its expansionary benefits worked initially through monetary developments rather than through fiscal policy. [Emphasis added.]

Critics, such as Krugman, will perhaps note that the spending during the 1930s was not truly stimulus in the sense that it was not financed with deficit spending. However, as I have previously detailed, given that the empirical evidence suggests that Ricardian equivalence is a good approximation of the actual behavior of individuals, it is likely that the effect of financing would be equivalent to the effect of a tax increase.

Ultimately, regardless of one’s stand on the need for stimulus, it is necessarily true that any form of government stimulus must be justified by its intrinsic value. The practice of wasteful spending, on the other hand, destroys wealth.

Green Collar Jobs

An IBD editorial hits the nail on the head:

The thinking is that we can radically alter our economy and at the same create millions of well-paying “green-collar jobs.” Even some business groups embrace the idea.

“The one thing that the Chamber of Commerce and the Sierra Club agree on,” notes energy lobbyist Scott Segal, “is that the answer to climate change is transformative technologies.”

Maybe so. But claims that spending on green technologies will create “millions” of new jobs, as both Hillary Clinton and Barack Obama have repeatedly claimed, are false.

Such assertions rest on fallacious economic logic that sounds good on the stump but in reality results in a lower standard of living and fewer jobs for all Americans.

When Bill Clinton recently suggested that “we just have to slow down our economy” to cut greenhouse gases, he accidentally uttered the truth: The brave, new “Green Society” being planned for us now in the nation’s capital would be better called the “Lean Society.”

As any economist will tell you, adopting new green technologies isn’t cost-free; it requires trade-offs. Money spent on curbing greenhouse gases is money that can’t be spent elsewhere, so opportunities will inevitably be lost.

Perhaps these legislators should read some Bastiat.

Channeling Bastiat

Jeff Tucker channels Bastiat:

…the first assumption that we live in a free-market world is simply not true. In fact, it is sheer fantasy. How is it that journalists can continually get away with asserting that the fantasy is true? How can informed writers continue to fob off on us the idea that we live in a laissez-faire world that can only be improved by just a bit of public tinkering?

The reason is that most of our daily experience in life is not with the Department of Labor or Interior or Education or Justice. It is with Home Depot, McDonald’s, Kroger, and Pizza Hut. Our lives are spent dealing with the commercial sector mostly, because it is visible and accessible, whereas the depredations of the state are mostly abstract, and its destructive effects mostly unseen. We don’t see the inventions left on the shelf, the products not imported due to quotas, the people not working because of minimum wage laws, etc.

Because of this, we are tempted to believe the unbelievable, namely that government serves the function only of a night watchman. And only by believing in such a fantasy can we possibly believe the second assumption, which is that the problems of our society are due the to the market economy, not to the government that has intervened in the market economy. [Emphasis added.]

The Broken Window Fallacy

With every disaster, there is always someone who makes a comment like this:

“In the odd nature of economic accounting, this will probably be a stimulus,” said Alan Gin, a University of San Diego economist. “There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”

Somewhere, Bastiat is frowning.

HT: Mises.org

Quote of the Day

“In our days, certain sentimentalist schools reject as false all social science that does not go the length of establishing a system by means of which suffering may be banished from the world. They pass a severe judgment on Political Economy because it admits what it is impossible to deny, the existence of suffering. They go farther—they make Political Economy responsible for it. It is as if they were to attribute the frailty of our organs to the physician who makes them the object of his study.”

— Frederic Bastiat, Harmonies of Political Economy