Wednesday, February 20, 2008

Creating Jobs vs. Creating Wealth

(An excellent example of job creation. Read about the "broken window fallacy" here.)

Don Boudreaux:

Like economic alchemists, Senators Clinton and Obama peddle plans to spend billions of taxpayer dollars on various government projects that will create millions of jobs ("Obama's economic plan," February 20).

Creating jobs - creating demand for workers - is no challenge. Vandals and arsonists do so routinely. What is a challenge is to create opportunities for workers to earn good incomes while producing real value for others, where value is confidently measured by the amounts that buyers voluntarily pay for what is produced. As far as I know, Sens. Clinton and Obama (and, for that matter, McCain) have never created a business whose success relied upon producing outputs efficiently and then selling these outputs at prices attractive to consumers.

So why suppose that any of their "plans" to create innovative industries and jobs are anything more than the cheap-to-dream-up fantasies of self-important politicians accustomed to spending other people's money?

Great question!


thinking said...

While I do agree that we need to be careful with any ideas about new govt programs, I think many points of this argument fail.

First, most presidents have never run a business; that's just the way it is. Even Reagan, who is generally revered by conservative economists, had never run a business or created jobs in the private sector before becoming president.

It just seems that every time someone wants to criticize a politician on economics, they trot out the line that he/she has never run a business. If one wants to argue that only past business owners should run for public office, then fine. But this shouldn't be used as a criticism, unless it is also used against those more conservative politicians who also lack business experience.

Also, one has to realize that a president is far more than a CEO, and requires other skills to be successful.

Second, govt does already spend huge sums of money that do create jobs by investing in new technologies, research, etc. Consider the defense industry, almost entirely supported by the govt. Govt sponsors all types of pure research, including health research, some of which is picked up by the private sector and used to great profit. Even the internet began as a Dept of Defense initiative.

Then there's the space program. Most conservative economists cite the space program's innumerable technological spinoffs into the private sector as one of the main reasons to continue it. And now even rudimentary forms of private space travel initiatives are taking off...which would probably not exist at this stage without the prior govt investments.

In fact, I do think investing in "green" technologies and new forms of energy production can and will pay off huge in the private sector. This is an excellent idea whose time has come.

I know some conservatives just cannot embrace environmentalism, but that's OK because the next president surely will.

So I just don't think this is a black and white issue. And if you take the Boudreaux argument, then you must also favor immediate cessation of the space program, all govt sponsored health research, etc.

Brian Hollar said...

Thought, you bring up some interesting points. Let me see if I can address some of them.

First, did you follow the link to read about the broken window fallacy? If not, please do so. It is both insightful and accurate. If somebody wants to create jobs, all they have to do is hire two shifts of diggers. One to dig holes during the day and the other to fill them at night. You can keep the whole nation employed using this strategy, but you will end up with nothing for all of your efforts, other than the debt the government incurs to pay them.

Second, Boudreaux is dead on the money is saying vandals and arsonists create jobs. That's not what makes an economy grow.

Third, Reagan is often lauded by conservative economists precisely because he made it his aim to get the government off of the back of industry, to reduce regulations, and ease the tax burden. Rather than coming up with a "plan" to create jobs, he trusted in the free market to do so -- if the government would get out of the way. Boudreaux is criticizing politicians who take the opposite approach -- trying to use government to "manage" business. Take a look at the Soviet Union to see how well that idea works.

Fourth, I would not say a president is far more than a CEO, but rather that he is far different from a CEO. I agree it takes other skills to be successful. Many presidents would make awful CEOs.

Fifth, to say good things came out of the space program is only looking at one side of the ledger. The question is at what cost? It is debatable whether or not the cost was worth it. From a standpoint of return on investment from the technological spin-offs, I think it would be difficult to argue that it was a successful research program. It's also difficult to say none of those technologies would have existed without the space program. I think NASA served its greatest good in boosting morale during the Cold War and creating a non-violent platform where the USA and Soviets could compete against each other. The technological spin-offs were a side-effect of that.

Sixth, I think a lot of the private space travel initiatives would be much farther along except for the existence of excessive government regulations on air and space travel.

Seventh, the best way to produce effective "green technologies" is through private initiatives. The government may have a role in internalizing the negative externalities of pollution into the price system by implementing some sort of carbon tax. It would be simple, effective, and incentivize the private sector to develop new technologies to reduce carbon emissions. No technology will succeed until it is cost-effective to utilize it. I doubt the government will use this tactic, however, because it is in the self-interest of politicians to create complex codes and rules that the can manipulate to give their constituents and lobbyists special privileges that allow them to stay in power.

For the reasons outlined above, I think the argument does not fail and it is a black and white issue. Politicians seeking to "fix businesses" and "create jobs" through "government plans" are simply amount to throwing rocks through many windows.

thinking said...


I do not think this has to be a black and white issue, with either no govt involvement and a total market based system or a Soviet style command and control economy.

Indeed, in the western world we have a mixture...the key is what is the proper point on the spectrum to maximize results.

As for Reagan, I loved the guy but let's admit that Reagan spent billions of dollars on the defense industry (and wisely so I think). But aside from the greatest benefit of winning the Cold War, this also created a huge stimulus to the economy, and did indeed lead to the development of countless technologies that ended up having spinoffs in the consumer sector. So Reagan ended up having a huge govt economic stimulus program after was just called a military buildup.

As for the space program, I guess we can never really know if the investment was worth it, or if an alternate approach would have worked better.

However, I don't believe the barriers to privatization of space travel have been excessive govt regulations. Indeed, it seems that the govt if anything is trying to keep up on the fly as entrepreneurs experiment with space travel.

I think in space travel you had such a tremendous endeavor with such great risk that I cannot conceive of any private initiative that would have or could have tackled this at first.

Many elaborate and costly technologies first come out of the defense industry because only the govt is willing to undertake the risk.

In fact commercial aviation took hold after WWII using mostly ex-military planes. So while the airplane was not invented as part of a govt program, I do think it's safe to say that the development of aviation was hastened by intense govt involvement in the form of developing military aircraft.

Then there's the health care sector. I am all for private research, but there is no doubt that govt sponsored research is essential as well and I am glad that it exists.

So I don't want an economy totally controlled by the govt, but nevertheless govt does have a role to play. I don't think it would be wise to wish it to shrink to zero.