Can Government Create Jobs?

by Young Back Choi

Modern politicians of all strips promise to create jobs; in this time of economic downturn, the promises of job-creation are with growing urgency. But can government create jobs?

If by jobs one means any scheme by which people are paid money wages, the answer is, of course, “yes”. But there are real jobs that create value and there are phony jobs that destroy value. Government-created jobs are largely value-destroying phony jobs.

The basis of a real job is the decision on how to create value. If one knows a preferred way of creating value, one would be self-employed. A variation of this is founding a business, offering jobs to others. For the entrepreneur to be able to hire others, of course, others must be persuaded that they can create more value working for the entrepreneur than they could manage either by working for another entrepreneur, or by becoming self-employed. As soon as the entrepreneur realizes that the jobs he has offered fail to create value, naturally, he would withdraw the job-offers, laying-off employees. Whether one is working for oneself or for others, a job is a value-creation process.

Suppose a rising level of unemployment is noticed. Keynesians would argue that unemployment is wasteful; the economy is giving up the values that the unemployed could have produced had been employed. But this appealing idea misses one crucial point: the current level of unemployment reflects the fact that at the moment neither entrepreneurs, nor the unemployed themselves, have any idea of how to create value.

Politicians, eager to deliver good tidings to people, of course, would have no patience for such subtlety. They embrace economic magicians offer more appealing solutions: Government should create jobs. But how can government create jobs? There are basically three possible ways the government can make difference on the level of unemployment—government-created jobs, government-protected jobs, and jobs induced by expansionary macroeconomic policies.

(1) Government-created jobs, that have steadily increased, include jobs in government bureaus, jobs at government sponsored enterprises, as well as jobs at private enterprises doing business exclusively with governments.

Multiplying more government-created jobs, however, is not a good way to reduce unemployment. Beyond what is needed for the production of minimal level of public goods, government-created jobs are not real jobs. They destroy value. A society in which the majority of jobs are government-created would be rather poor. (Think about the extreme case of socialism where all jobs are government created.)

(2) Government may prevent the elimination of jobs at some firms, especially if they are regarded as “too big to fail” or “too politically sensitive to let it fold”, by providing a privileged exemption from competition, or subsidies, or both. Artificially maintaining struggling firms in order to save jobs, is maintaining value-destruction processes. That a firm is on the verge of bankruptcy is an indication that the firm is not creating value, but destroying value. (Instead, its rivals are creating value and better service the consumer.)

By providing subsidies to struggling firms, the government may temporarily avert a large scale layoff (and keep the rate of unemployment from rising), but it ends up prolonging the value-destruction by the “jobs” so saved. The government is in fact conscripting tax-payers and consumers into the value destruction process. Had tax-payers been allowed to spend their money as they see fit, other genuinely value-creating jobs would have been created.

(3) Keynesians advocate expansionary government policies to reduce unemployment, observing that if an economic downturn is left unattended, it may spiral downward into another Great Depression.

The advocates of expansionary policy don’t care whether a business downturn is a symptom of the market discovering the un-sustainability of previous business expansions, correcting previous mistakes, and looking for new profitable opportunities. They do not see that widespread business failures represent innumerable profitable opportunities for other entrepreneurs, or that negative externalities of business failures and liquidation of value-destroying activities would be more than compensated by positive externalities of new ventures found on newly emerging profitable opportunities. Nor do they realize that expansionary policies divert resources from other uses and commit the fallacy of broken window, focusing on the stimulus of expansionary policy (the seen), ignoring what it forecloses (the unseen.) They simply regard the risk from the possible contagion too great. Hence we hear shrill scare-mongering by pundits and interested parties.

Often an economic downturn is a result of previous expansionary government policies. If the government keeps interest rates artificially low, there will be a general over-investment. The untenable business expansion must be corrected soon or later. The resultant business contractions and increase in unemployment, often characterized as a market failure, should rather be attributed to incentive-distorting government policies and bungled policy responses making the situation worse. A general economic downturn of this type may be avoided only if the government refrained from pursuing short term political expediencies, such as expansionary policies.

Instead, the government always proposes to solve the problem at hand, saying “in the long run we are all dead”. The short term fix of throwing money randomly at economic downturns may seem to temporarily alleviate symptoms, or at least satisfy insistent and loud political demands. However, short term fixes prolong the process of adjustment and tends to create dependency, which calls for more intervention in the future, just as a drug addict crave for increasing doses.

3 thoughts on “Can Government Create Jobs?

  1. I actually wrote a piece on something similar yesterday… I wish I had waited until I read this, because it would have been useful for my own (inferior) treatment.

    Thanks anyway!

    (in other words… great article)

  2. It is possible that a downturn can be a result of aggressive expansionary policies, but in the current case I think that would be a very misguided argument.

  3. Jock – Care to explain that position? I think expansion policies explain it very well… You get increased credit into the economy, investors get that money and funnel it into areas that look like they’re going to keep growing (houses) the investment capital is lost when people stop buying/paying off mortgages.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s