Tis’ the Season to Dispel Economic Fallacies
America has been severely plagued by a deficiency in economic knowledge over the past century. This ignorance on economic policy allowed populist politicians to implement bogus programs that have had a deleterious effect on society. Today, Obama et al. continually push for more public works projects and denigrate anyone who is opposed. For this reason it is important to reexamine the logic behind make-work programs.
In a recent interview on 60 Minutes, Governor Chris Christie (R-NJ) discussed his obligation to scrap a train tunnel that would have connected New Jersey to Manhattan. Christie stated, “The bottom line is I don’t have the money. And you know what? I can’t pay people for those jobs if I don’t have the money to pay them.”
Critics of Christie’s decision point to the 6,000 jobs that would have been created. But as Christie mentioned, there isn’t money to fund those jobs. This brings us to an important question: what is the purpose of lowering the unemployment rate? On the surface, the answer seems obvious. Most will say, “To create economic growth.”
The seemingly obvious answer is unfortunately woefully wrong. What would happen is everyone in the country was given a government job where they were responsible for digging ditches and filling them back in at the end of the day? The nation would be at full employment so society must be maximizing prosperity, right?
Sadly, even though everyone is technically employed in this scenario, no one would survive without people to provide food. All other goods and services would cease as well because all of societies labor resources would be allocated to digging ditches.
Clearly most public works jobs are not as wasteful as the jobs described above. The problem however, is with the varying interests that the government and an entrepreneur have in creating projects.
In the case of the New Deal or the stimulus package, the main goal was to put people back to work. As noble as this cause is, it misses the point of job creation. A government official will search for work that can be done, not jobs that are needed.
The politician and bureaucrat have no incentive to initiate a cost efficient project. If it loses money, which it most likely will, those in charge can always go back to Congress or their state legislature and request more money.
The entrepreneur on the other hand, is motivated by entirely different incentives. He is much less haphazard in his selection of projects. His primary focus is not to create jobs but to create profits for himself. In this endeavor he chooses wisely a project that will be in high demand in order to maximize profits.
But why is this good? Why is it considered positive that the entrepreneur, motivated by greed, earned huge profits through his new business creation? As Adam Smith so poignantly stated, “By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”
Unlike the picture painted by most liberals, economics is not a zero-sum game. It is very common that all the parties involved in a transaction will benefit. In the scenario above, the entrepreneur benefited by acquiring significant wealth from his profitable endeavor. The consumers benefited through the good or service provided by the entrepreneur that they were seeking. Additionally, the workers employed by the entrepreneur benefited from the wages they received in return for their labor.
What of the benefits from the government project? Obviously, the big winner here is the politician who will undoubtedly tout the success of the increase in jobs. The workers employed by the project will also benefit from the job created for them (that is until the project is completed and the worker is back on the unemployment rolls).
The real losers are everyone who pays for the creation of the project through their tax dollars and never receive any benefit. Lastly, depending on the degree of inanity of the project the rest of society loses as valuable resources are spent on a project only a few want.
Next time a politician promotes the idea of a jobs bill to put people back to work, be very skeptical. Politicians are not magicians. They cannot create jobs without taking money from someone else. In all likelihood, they are taking from you and me.