“…government does not create jobs”

I would prefer it if more politicians sounded like Herman Cain.  Here is a great paragraph that he wrote in today’s Wall Street Journal:

As a longtime leader in the business community, I know firsthand that government does not create jobs. It can only create the conditions in which businesses operate. These conditions can spur growth, or they can suppress it. The conditions imposed by the current administration have suppressed growth.

I’ve heard Cain derided by both left and right as a simple “pizza maker”.   Yet, I’ve heard very few politicians who understood this truth.

A refreshing look at jobs

I much prefer Phil’s take (HT: Arnold Kling) on jobs to Megan McArdle’s.

From Phil:

The same technology that is eliminating jobs also connects us and empowers us in ways unimaginable just a few years ago. Maybe what’s becoming obsolete is not jobs per se, but the idea that they are something that you simply find.

Increasingly, perhaps, a job is something that we each have to create. We can’t count on someone else to create one for us. That model is disappearing. We have to carve something out for ourselves, something that the machines won’t immediately grab.

That sounds difficult, maybe even a little dangerous. We’re all comfortable with the idea of “finding” a job. We search for them; we hunt them; we land them. All of these images assume the job already exists.

But to create something new…what does that even mean? Do we all become entrepreneurs? (I think the answer to that question is yes, although many of us will have to learn to be entrepreneurs within existing organizations.) Ultimately, it means we have to find something useful to do, something so useful that others are willing to pay for it.

In other words, as my grandparents use to say, go out make yourself useful to somebody.

Is it worth it? Can we afford it?

Alan Blinder, Princeton Economist, continues to make a mistake regarding government jobs.  Writing about Our National Jobs Emergency in the Wall Street Journal yesterday he repeated the error I wrote about in this post.

Blinder wrote:

Every day brings new proposals to slash government spending. But as I noted on this page last month, those are ways to kill jobs, not create them. As a matter of fact, despite all the cries of “big government” or even “socialism,” public-sector employment has been falling.

Over the past two months, while private businesses were adding a measly 130,000 new jobs to their payrolls, governments at all levels were shedding 87,000 workers. Looking over a longer period, public employment at all levels is down by 522,000 jobs over the last two years. Does that make sense in a jobless recovery?

The answer is yes, it makes perfect sense.  As I noted in my response to him last month:

Public spending should not be accepted based on the idea that it creates jobs.

Justifying expenditures because it creates jobs is not any better when evaluating public spending than it is when evaluating private spending.  When you spend money, is creating jobs a key factor in your decision?  No.  You justify your spending based on the direct benefits you receive.

Whether the economy is in a ‘jobless recovery’ is a red herring and irrelevant to whether or not government should shed jobs.

The answers to the following two questions are what’s relevant:

1) Is the value created from these jobs worth it?  Though a better way to ask this question when you’re spending someone else’s money is, would you pay for these jobs if it was your own money that you were spending?   (If so, why aren’t you?)  Hint: The value should be created as a product of the work performed.

2) Can the government afford these jobs?

Government revenue is down because the economy is hurting and folks are out of work.  When a business experiences revenue declines, shedding jobs to keep the firm viable is a tough, but responsible, response.  Financial insolvency or bankruptcy is not responsible and hurts many more people.  Life is full of hard choices.

When individuals experience declines in income, they shed expenses also.  They typically do not continue to spend by borrowing from credit cards in hopes that their spending will help the economy.  Some do and we all know it doesn’t end well.

Let’s say my income declined and I consider cutting my expenses by eating more home cooked meals.  I don’t consider if my action will further hurt the economy.  Quite frankly, I’m not smart enough to know if it will or not.  Neither is Blinder, though he believes he is.

I am smart enough to make responsible choices for my situation.  I ask the two questions.  Is it worth it?  Can I afford it?

Once folks like Blinder harness government to serve purposes beyond these two questions, it’s hard to go back.  The Blinders of the world will tell us we need government jobs to help the economy in bad times and they will tell us we need government jobs, for whatever reason (e.g. to solve something they believe the market is not addressing), in good times.  For them, there always seems to be good, though dislocated, reason for growing government and no acceptable reasons for decreasing it.

What is a job?

Creating jobs is effective political rhetoric.  Who would be against creating jobs?

But a job is different than just giving someone money.  It’s a subtle difference that few people understand.

Allen Sanderson explains it in this article, Jobs, Jobs, Jobs (via Greg Mankiw’s blog).  In this paragraph Sanderson gives the typical economic refrain:

…pay 100,000 people salaries of $50,000 a year to dig holes in the ground every morning and another 100,000 folks  $50,000 annually to fill up those holes in the afternoons. That’s also $10 billion in spending—and 200,000 new jobs created. Of course, at the end of the day we will have the same level of output as before to show for our “shovel-ready” efforts.

Most people can clearly see that the effort of digging holes and refilling them produces no benefit.

But, much of government spending does produce visible benefits, like repairing roads or building bridges.  So, people view Sanderson’s example as extreme and discount it.

What they don’t consider is whether those visible benefits from government spending was worth the cost or whether there were better alternatives for the spending.

Several years ago in my hometown someone in local government got the idea to spruce up a couple houses in a blighted neighborhood to spur revitalization.

They city spent $1.1 million to renovate two homes in a blighted neighborhood and eventually put the homes on the market for about $160,000 each and they didn’t sell for anywhere near that. That project was not even close to be worth the cost.

I’ve been thinking about how to better differentiate between an activity that produces benefits in excess of costs, like a job, and an activity that doesn’t.

Here are some thoughts:

  1. A job is something you would willingly spend your own money on to have done.
  2. If charged with the financial accountability of an organization (which means you get fired if you do a poor job of making decisions that create value for the organization), it’s something you would willingly spend the organization’s money on.
  3. A job isn’t something that you would spend money on only if you have no direct accountability to it.  Most of public spending falls into that category.

When you willingly spend your own money, you consider two criteria:

  • Will the benefit exceed the cost?  In the business world, this is known as a cost-benefit analysis.  In economics this is known as evaluating consumer surplus.
  • Are there alternatives that will bring me more bang for my buck, that is, provide more benefits than this option?  In economics this is known as opportunity cost.

Private spending is not perfect. Like most things, it is trial and error. In many cases we misjudge potential benefits and later discover that the benefits were not worth the cost. But, we then use that as a learning experience for the future.

We  stop spending money on the things where the the benefits did not exceed the cost. We get better at knowing our options and projecting benefits. These simple feedbacks drive private spending to be an effective generator of value in an economy.

Public spending does not often have to satisfy these same two criteria.  In the public spending arena many other criteria come into play, and few of those have to do with whether the spending is generates benefits in excess of the cost.

Here are some of these criteria:

  • Will this create a multiplier effect to stimulate the economy? How much of a factor is the economic multiplier effect when you spend your own money? Not much.
  • Will I [politician] be able to claim that I was hero for spending other people’s money to solve some problem in order to encourage people to vote for me?
  • Will this spending of other people’s money please a special interest group enough to garner me campaign donations and other favors (like lobbying jobs in my post elected life) from that special interest group?
  • If I vote for this spending of other people’s money that politician B supports, will politician B vote for my ideas on spending of other people’s money so I can claim to be a hero?

So, the next time a politician pushes a big spending project, ask yourself if it would be something that you would be willing to put your own money into.

Who’s accountable to the spending and what happens to them if the spending doesn’t generate enough benefit to offset the cost?  If cost-benefit isn’t governing the spending, what is?