The Ideological Attack on Job Creation

Responding to Anti-Government Arguments

By Marty Wolfson

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org/archives/2012/0512wolfson.html


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This article is from the May/June 2012 issue of Dollars & Sense magazine.

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“Government doesn’t create jobs. It’s the private sector that creates jobs.”
—presidential candidate Mitt Romney, speaking at Wofford College, Spartenburg, S.C., January 18, 2012

It is jarring to hear pundits say that the government can’t create jobs. It is even more jarring to hear the same refrain from someone whose job was created by the government! Perhaps Mr. Romney has forgotten, or would like to forget, that he used to have a government job as governor of Massachusetts.

But surely those currently on the government payroll have not forgotten, like the chairman of the House Republican Policy Committee, Rep. Tom Price (R-Ga.). He used the same talking points, “The government doesn’t create jobs. It’s the private sector that creates jobs,” speaking on MSNBC’s “Andrea Mitchell Reports” last June. Rep. Price apparently thinks he doesn’t have a real job, but what about teachers, firefighters, police officers, and school cafeteria workers? And what about the 2 to 4.8 million jobs—in both the public and private sectors—the U.S. Congressional Budget Office estimated were created by the 2009 U.S. economic stimulus package?

The “government doesn’t create jobs” mantra is part of a coordinated right-wing campaign to prevent the government from creating jobs and promoting the interests of working families, and to instead encourage a shift in the distribution of income towards the wealthy. It is supported by ideologically motivated arguments and theories from conservative economists and anti-government think tanks. In what follows, these arguments are addressed and criticized, in the hopes of clearing away some of the confusion undermining a vigorous government program to put people back to work.

The Argument That Government Spending Can’t Increase Jobs

A Senior Fellow at the Cato Institute says the idea that government spending can create jobs “has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy.” This argument is wrong for several reasons.

First, the government can inject money into the economy. It does so whenever it finances its spending by selling bonds to the Federal Reserve. In this case, money is created by the Federal Reserve when it buys the bonds. It creates a reserve account on its books; money is thus created without any reduction in money elsewhere in the economy.

Alternatively, the government can finance its spending by taxes or by selling bonds to the public. This is the case envisioned by the Cato analysis. The argument is that the money spent by the government is exactly balanced by a reduction in money in the pockets of taxpayers of bond buyers. However, if the taxpayers’ or the bond buyers’ money would otherwise have been saved and not spent, then there is a net injection into the economy of funds that can put people to work.

The argument made by the Cato Institute is actually a variation of another theory, known as “crowding out.” In this theory, government spending creates competition for real resources that “crowds out,” or displaces, private investment; private companies are unable to obtain the workers and capital they need for investment, so that any jobs due to government spending are offset by a decrease of jobs in the private sector.

This theory is valid only when there is full employment because there would be no idle resources, labor or capital, to put to use. In that case, though, neither the government nor the private sector would be able to create net new jobs. In contrast, in a situation of unemployment, it is precisely because the government can access otherwise idle resources that it can create jobs.

And, of course, that is exactly the situation we are in. As of March, the official unemployment rate stood at 8.2 %. Adjusted for underemployment, e.g., by counting those discouraged workers who have dropped out of the labor force and those workers who are working part-time but would like to work full-time, the more accurate unemployment rate was 14.5%.

The Argument That Cutting Government Spending Creates Jobs

Consistent with anti-government ideology, conservative economics asserts not only that government spending can’t create jobs, but also that cutting government spending creates jobs. Here’s how the argument goes: less government spending will reduce the government deficit; smaller deficits will increase the confidence of businesses that will invest more and in that way create more jobs. According to John B. Taylor, an economist affiliated with Stanford’s conservative Hoover Institution, “Basic economic models in which incentives and expectations of future policy matter show that a credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future.” (Interestingly, an analysis by economist Robert Pollin of the Political Economy Research Institute at the University of Massachusetts-Amherst finds that Taylor’s empirical model concludes that the stimulus bill was ineffective—but only because it included too much in tax cuts as opposed to direct government spending.)

This assertion is based more on wishful thinking than empirical validity, and has been criticized by Paul Krugman as depending on belief in a “confidence fairy.” But it is not just liberal economists like Krugman who are critical of this theory. A confidential report prepared for clients by the investment bank Goldman Sachs concluded that a $61 billion cut in government spending from a bill passed by the House of Representatives in February 2011 (but not enacted into law) would lead to a decline in economic growth of 2%. And economist Mark Zandi, formerly an advisor to Republican presidential candidate John McCain, concluded that this $61 billion reduction in government spending could result in the loss of 700,000 jobs by 2012.

Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System, stated that “the cost to the recovery [of steep reductions in government outlays now] would outweigh the benefits in terms of fiscal discipline.” Even the International Monetary Fund, in its semiannual report on the world economic outlook, concluded that “the idea that fiscal austerity triggers faster growth in the short term finds little support in the data.” Also, in a review of studies and historical experience about the relationship between budget-cutting and economic growth, economists Arjun Jayadev and Mike Konczal concluded that countries historically did not cut government spending and deficits in a slump and that there is no basis to conclude that doing so now, “under the conditions the United States currently faces, would improve the country’s prospects.”

The Ryan Budget: A Path to Prosperity?

On March 29, the House of Representatives passed Rep. Paul Ryan’s budget proposal, called the “FY2013 Path to Prosperity Budget.” It would be a disaster for working Americans. It shreds the safety net; according to the Center for Budget and Policy Priorities, 62% of Ryan’s trillions in spending cuts come from programs affecting low-income Americans. The vast majority of tax cuts would go to corporations and upper-income Americans. Yet Ryan claims that his budget brings the “size of government to 20 percent of [the] economy by 2015, allowing the private sector to grow and create jobs.” But an independent analysis by Ethan Pollack, a researcher at the Economic Policy Institute, concludes that Ryan’s budget would result in the loss of 4.1 million jobs by 2014.

The Argument That Private Spending Is Always Better than Public Spending

Another way that right-wing economics tries to discredit the idea that the government can create jobs is to assert that private spending is always to be preferred to public spending. There are several rationalizations for this view.

One is that private spending is more efficient than public spending. This ideological refrain has been repeated consistently, and gained a following, over the past thirty years. But repetition does not make it correct. Of course, the proponents of this argument can point to examples of government mismanagement, such as that following Hurricane Katrina. However, government bungling and inefficiency by an administration that did not believe in government does not prove the point. A much more grievous example of inefficiency and misallocation of resources is the housing speculation and financial manipulation—and eventual collapse that brought us to the current recession—due to a deregulated private financial system. Yet for free-market ideologues, this somehow does not discredit the private sector.

Some people think that economists have “proven” that “free” markets are efficient. The only thing that has been proven, however, is that you can arrive at any conclusion if your assumptions are extreme enough. And the assumptions that form the basis for the free-market theory are indeed extreme, if not totally unrealistic and impossible. For example: orthodox free-market economics assumes perfectly competitive markets; perfect information; no situations, like pollution, in which private decision-makers do not take account of the societal effects of their actions; even full employment. But none of these assumptions hold true in the real world. Also, the distribution of income is irrelevant to the conclusions of this theory. The distribution of income is simply taken as given, so that the results of the theory are consistent with a relatively equal distribution of income as well as a very unequal distribution. As economist Joseph Stiglitz has said, “Today, there is no respectable intellectual support for the proposition that markets, by themselves, lead to efficient, let alone equitable outcomes.”

A second reason for supposing that private spending is to be preferred to public spending is the notion that public spending is less worthwhile than private spending. This means, for many people, reducing government spending as much as possible. For example, Grover Norquist, founder and president of Americans for Tax Reform and author of the anti-tax pledge signed by many members of Congress, said that he wanted to “shrink [the government] down to the size where we can drown it in the bathtub.” The anti-tax, anti-spending crusade has in many cases been successful in reducing government budgets, on the national as well as the local level. This has resulted in a significant decrease in government services. Although some people are attracted to the view that government spending should always be reduced, they probably at the same time don’t want to drive on roads and bridges that aren’t repaired and they probably want fire trucks to arrive if their house is on fire. Perhaps, too, they wouldn’t automatically prefer twelve kinds of toothpaste to schools, parks, and libraries.

The Argument That Government Spending Is Wasteful

Another argument contends that public spending is wasteful. Discussions of government accounts generally do not take account of public investment, so all public spending is essentially treated as consumption. As such, it is considered unproductive and wasteful by those who wish to disparage government spending. In other words, the government budget does not make a distinction between long-term investments and other spending as corporate budgets do.

One implication of treating all government spending as consumption is the notion that the federal government should maintain a balanced budget. To put this in accounting terms, on this view government accounts are considered to only have an income statement (which shows current revenues and current expenditures), not a balance sheet (which shows assets and liabilities).

Corporations, in contrast, maintain balance sheets. They don’t balance their budgets in the way that the budget hawks want the government to do. Private investment in plant and equipment, for example, is accounted for on the asset side of the balance sheet; borrowing to finance this investment is accounted for on the liability side. Interest on the debt is accounted for on the income statement, and it is only the interest, not the outstanding debt balance, that has to be covered by current revenues. The assumption behind this accounting is that borrowing to finance productive investment will generate the revenue to pay off the borrowing.

In other words, corporations borrow on a regular basis to finance investment. So they only attempt to balance their current expenditures and revenues and not their capital budget. Much confusion about private and public spending, and also about budget deficits, could be avoided if discussion focused on a federal government balance sheet. In that way, current spending that needs to be balanced with current revenue could be separated from long-term investments that will increase the productivity of the American economy. Such investments, in areas like infrastructure and education, can increase future economic growth and income, and thus generate more tax revenue to pay off the debt. Just like a private company’s investments, they are legitimately financed by borrowing.

Government Can Indeed Create Jobs

The main point, though, is this: whether financed by borrowing or taxes, whether consumption or investment, government spending that increases the demand for goods and services in the economy is not wasteful. It has the ability to employ underutilized resources and create jobs. Ultimately, a job is a job, whether created by the private or public sector. A job has the potential to enable workers to support themselves and their families in dignity. We should not let ideological arguments keep us from using every available means to promote the basic human right of employment.

MARTY WOLFSON teaches economics and is the director of the Higgins Labor Studies Program at the University of Notre Dame.

SOURCES: Congressional Budget Office, “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From April 2010 Through June 2010,” August 2010; Daniel J. Mitchell, “The Fallacy That Government Creates Jobs,” The Cato Institute, 2008; John B. Taylor, “Goldman Sachs Wrong About Impact of House Budget Proposal,” Economics One blog, February 28, 2011; Paul Krugman, “Myths of austerity,” The New York Times, July 1, 2010; Jonathan Karl, “Goldman Sachs: House Spending Cuts Will Hurt Economic Growth,” The Note, 2011; Mark Zandi, “A federal shutdown could derail the recovery,” Moody’s Analytics, February 28, 2011; Pedro da Costa and Mark Felsenthal, “Bernanke warns against steep budget cuts,” Reuters, February 9, 2011; International Monetary Fund, World Economic Outlook: Recovery, Risk, and Rebalancing, 2010; Arjun Jayadev and Mike Konczal, “When Is Austerity Right? In Boom, Not Bust,” Challenge, November-December 2010, pp. 37-53; Joseph Stiglitz, Foreword, in Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Times, 2001; David Aschauer, “Is Public Expenditure Productive?” Journal of Monetary Economics, 1989, pp. 177-200; Robert Pollin, “US government deficits and debt amid the great recession: what the evidence shows, Cambridge Journal of Economics, 2012, 36, 161-187; Kelsey Merrick and Jim Horney, “Chairman Ryan Gets 62 Percent of His Huge Budget Cuts from Programs for Lower-income Americans,” Center on Budget and Policy Priorities, March 23, 2012; Paul Ryan, The Path to Prosperity, March 20, 2012; Ethan Pollack, “Ryan’s Budget Would Cost Jobs,” The Economic Policy Institute, March 21, 2012.

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