Creating Jobs Is No Excuse for Wasting Money
December 5th, 2009 . by economistmomThis week the White House hosted a “jobs summit” to brainstorm about the best ways to create more jobs in the U.S. economy. In opening the summit, President Obama touted the job-creating success of the “Recovery Act” passed earlier this year (citing this CBO report just released), but also cautioned that it doesn’t mean we can afford to keep repeating it. From the transcript (emphasis added):
PRESIDENT OBAMA: Now, let me be clear. I am open to every demonstrably good idea, and I want to take every responsible step to accelerate job creation. We also, though, have to face the fact that our resources are limited. When we walked in, there was an enormous fiscal gap between the money that is going out and the money coming in. The recession has made that worse because of fewer tax receipts and more demands made on government for things like unemployment insurance.
So we can’t make any ill-considered decisions right now, even with the best of intentions. We’re going to have to be surgical and we’re going to have to be creative. We’re going to have to be smart and strategic. We’ll need to look beyond the old standbys and fallbacks and come up with the best ideas that give us the biggest bang for the buck.
In an interview I did with NPR’s Scott Horsley prior to the summit, I said something similar–the basic point being that even if we need more deficit-financed stimulus, it’s still not true that just any old deficit spending will do. You see, we can’t afford to do stupid deficit-financed spending or tax cuts, because then the short-term (and even longer-term) benefit of the policy can’t possibly outweigh the cost of compounded interest. Which means we would be better off not doing it. So just because we may wish we had more jobs in this country, doesn’t mean we have an excuse to just throw more money out the door–certainly not when we seem to need the money for so many other things like expanded health care coverage, more troops in Afghanistan, and, oh yeah, saving for the future.
It appears that both Obama and you make the assumption that government can create the jobs we need by their policies and spending money. An incorrect assumption. The jobs needed for recovery will come from small businesses and entrepreneurs, so rather than talk about what we should spend to create jobs (laughable!) we should be talking about what policies and tax measures can we take to encourage the recovery of small businesses and entrepreneurs.
Murf,
I sometimes think I’m the most anit-government guy around but I think your comment is over the top.
Government can both create and facilitate the creation of jobs. It can create jobs directly through adding jobs to the government payroll. You and I may not like that outcome but it is certainly a way to create jobs.
One step removed, government can create demand for goods and services, the fulfillment of which creates jobs. You can think about this narrowly (highway construction) or broadly (lawyers for tax compliance). Again, you can debate the merits of this job creation but it is job creation nevertheless.
Finally, government can offer incentives (tax credits as an example) for job creation. This is least direct but still assists in the creation and maintenance of jobs.
Having said all of that, I believe government’s ability to influence the overall macroeconomy is modest. I don’t blame Presidents or Congresses for good or bad performance here.
The “jobs” thing is greatly overdone. It’s not jobs but productive jobs that count.
As Milton Friedman notably pointed out at this point of the political argument in an earlier recession, if the government really just wants to “create jobs” that’s easy: e.g., ban all use of tractors and other mechanized farm equipment and hire all the people needed to run farms by manual labor. Presto! More jobs created than could possibly be filled!
The right way to think about deficit spending in general is from the point of view of the people who have to pay the bills when they come due. Two *very* oversimple, but nevertheless illustrative, examples.
1. Mother-A’s family was doing pretty well until recently, but they just went through a string of bad luck, and the family income has dropped. They are having hard-times, and she has trouble providing for her family. But, one day, she sees a run-down apartment building that she determines to be a great prospect for a renovation business opportunity. Being capital-poor, she borrows enough money both to purchase the property and for the restoration - lets say in one loan. After repairs and marketing, the building is now full of tenants whose rent more than pays for the mortgage - and the leftover profit makes the family more prosperous. Then, five years later, tragically, she dies, and her daughter inherits the business, but also the debt and those interest payments. From the daughter’s perspective, however, the plusses overwhelm the minuses and the Mother’s “deficit spending” would be judged perfectly wise and prudent - it improved both the family’s standard of living in the short-run, AND it left a legacy that improved their lot in the future *because the future dividends that are derived from that well-invested loan exceed the burden of servicing that debt*. It even produced an *external* benefit because it created some jobs and wages in the earliest stages when the renovation was being performed - and eventually, it paid back the debt in full, providing the benefit of a decent return to capital to the lender. Daughter-A is justifiably proud of Mother-A’s discipline and industriousness, and inspires Granddaughter-A with many retellings of the tale.
2. Mother-B is exactly like Mother-A in all respects except for one - the choice of project. Mother-B finds an obscure and thinly populated Alaskan island connected to the mainland only by means of an unreliable ferry. The island has an indigenous language name, which by bizarre coincidence of Eskimo-English homophony, sounds like “Nowhere”. Mother-B thinks that a bridge would be a great idea. People would gladly pay a toll much higher than the ferry charge for a quicker way across. They would also travel across the strait more frequently, and furthermore, more people would move to the island because of the added convenience. The only problem is that Mother-B had been wildly over-optimistic, as was her tendency, and after the bridge is built business never picked-up by anywhere near the amount she had projected. She too dies, and Daughter-B is now left holding the bag, and it’s a rotten one. She cannot make the debt-payments on the basis of the tolls, and faces the choice of permanently lowering her standard of living even further to pay the bills, or of defaulting and declaring bankruptcy. Sure, the project created some jobs at the time, but Daughter-B would have been better off had Mother-B done *nothing at all*. As for externalities - if she defaults, the lender suffers a loss too, and then there is less capital remaining *which would have gone to creating more jobs in Daughter-B’s time, but which, having been wasted and squandered on an “inefficient allocation” by Mother-B, in now not available to anyone*.
One large theme of any theory of fiscal stimulus in a severe economic downturn is based upon two assumptions - 1. That severe contractions can change the economically-relevant attitudes to an extent that they manifest vicious cycles of negative-feedback, self-reinforcing downward spirals, etc… - in other words - a panic taking the economy much further down than a rational correction would warrant, and 2. That the eventual bottoming-out of such a scenario creates a new, permanently lower, “unit-root” base of potential-output from which the recovery of future growth will be based because of the depreciative losses in physical and human capital that occur during a period of idling of these resources.
Given this model - it becomes possible to justify a deficit financed intervention in the same way as in the Mother-A example above - that is - one should be able to show that it will 1. Arrest the post-correction decline early enough that 2. Future stable-era levels of production will be higher than those that would be extant without an intervention, and by an amount greater than that needed to service the debt incurred to enable the intervention.
That’s all well and good, but of course, the problem is that money can be spent and invested in all kinds of ways - and not all of them are the same, of equal benefit, or even any good at all. What if our descendants inherit all this debt and get nothing but a bunch of bridges to Nowhere? It is possible to make bad investments publicly just as it is privately. The government is uniquely capable of spending money imprudently, foolishly, corruptly, and perhaps even counter-productively. In other words, money can be allocated diversely and yield a wide heterogeneity of impacts depending on how it was spent. There is absolutely no automatic guarantee to the net-benefit of deficit spending - and we owe it to the future to be as careful and justified as possible in our expenditures.
Econometrically - this heterogeneity is frequently - and in my view, wrongfully and clearly erroneously - assumed away in estimates of aggregate effects of aggregate actions, and the price for the analytical convenience is probably too high. Consider the recent estimates of “Saved and created jobs”. Certainly, all additional government spending creates some temporary positive effect on employment - it’s clear that *some* jobs were created or saved - but the means by which the figures reported in the press were arrived at assume that every extra dollar spent tends to have some predictable, average effect on overall employment in a way that *ignores the possibility that much of the stimulus money might have been spent in ways dramatically-less-efficient-than-usual-in-the-private-economy in terms of boosting future output and current employment levels*.
I don’t find this so hard to believe, especially after things like cash-for-clunkers and the auto-bailouts (which have yet to yield profit-making-businesses and so have preserved organizations that are continuing to destroy value overall). There are lots of things the government could be doing to create millions of jobs, but like EconomistMom says, it may not be worth it for those that have to pay the bills.
Even forgetting the huge cost of the bailouts, $800 Billion just for “stimulus” is a *lot* of money, and by hiring people directly at the (full cost) rate of $40,000 a year, the government *could* potentially hire 5 million people for 4 years just to dig and refill holes. But as much as we want to see unemployed people (like myself) put to work, we don’t want them doing things like that just for the sake of “saving and creating jobs” if the future ends up even worse because of it.
One final thing - the government has received a lot of flak for the tax-rebate portions of the stimulus, the popular accusation being that this money was “banked and idled” by most folks and didn’t contribute to aggregate demand or employment. I haven’t seen any hard evidence showing dramatically increased deposits (only a tiny increase in the still-too-low savings rate so far), so I’m skeptical of the claim. In an ultra-heavily-indebted society – like ours, unfortunately - lots of people have negative net-worth (over a third of households I believe, and that’s ignoring housing!), when most people get some extra windfall money, they don’t put it in the bank to get 0.01% interest, they should (well, ideally) use it to pay off high-interest-debts.
It’s technically true that a $1,000 tax-rebate, when put towards a credit card debt at a recently raised-rate of 30%, does not technically constitute “additional consumption or aggregate demand”, but, assuming (unrealistically, unfortunately) that the debtor is responsible and her debt is permanently ratcheted downward, it is the equivalent of giving the debtor a perpetual extra income of $300 a year. This is a lagged but permanent boom to consumption – since in American almost all of that is likely to be spent – and at demand levels even higher than prior to the windfall – and perhaps enough higher to generate the taxes to pay back the government for the debt on the rebates. But that question, of course, is the same place where we started.