Government “Job Creation”

I’m sure you heard that the Obama administration announced Friday that the government’s fiscal stimulus program has helped create or save almost 650,000 jobs so far.

On the subject, Vice President Joe Biden said:

We’re moving in the right direction. We’re starting to make real progress on the road to recovery. Quite simply, the Recovery Act is performing as advertised.

Are the administration’s claims accurate?

The short answer is, probably not, but it really doesn’t matter.

Government projects may create jobs that did not exist before, but the net effect on the economy will always be negative. Because jobs don’t matter, production does.

To quote my former professor, friend, and famous economist, Walter Block:

If the media tell us that "the opening of XYZ mill has created 1,000 new Jobs," we give a cheer. When the ABC company closes and 500 jobs are lost, we're sad. The politician who can provide a subsidy to save ABC is almost assured of wide-spread public-support for his work in preserving jobs.

But jobs in and of themselves do not guarantee well-being. Suppose that the employment is to dig huge holes and fill them up again? What if the workers manufacture goods and services that no one wants to purchase? In the Soviet Union, which boasted of giving every worker a job, many jobs were just this unproductive. Production is everything, and jobs are nothing but a means toward that end.

Imagine the Swiss Family Robinson marooned on a deserted South Sea island. Do they need jobs? No, they need food, clothing, shelter, and protection from wild animals. Every job created is a deduction from the limited, precious labor available. Work must be rationed, not created, so that the market can create the most product possible out of the limited supply of labor, capital goods, and natural resources.

The same is true for our society. The supply of labor is limited. We must not allow government to create jobs or we lose the goods and services which otherwise would have come into being. We must reserve precious labor for the important tasks still left undone.

Alternatively, imagine a world where radios, pizzas, jogging shoes, and everything else we might want continuously rained down like manna from heaven. Would we want jobs in such a Utopia? No, we could devote ourselves to other tasks—studying, basking in the sun, etc.—that we would undertake for their intrinsic pleasure.

Instead of praising jobs for their own sake, we should ask why employment is so important. The answer is, because we exist amidst economic scarcity and must work to live and prosper. That's why we should be of good cheer only when we learn that this employment will produce things people actually value, i.e., are willing to buy with their own hard-earned money. And this is something that can only be done in the free market, not by bureaucrats and politicians.

Block alludes to the Broken Window Fallacy above in the sentence, “We must not allow government to create jobs, or we lose the goods and services which otherwise would have come into being.” This fallacy explains why the claim “Government job creation boosts the economy” is patently false and requires some further explanation.

To quote Henry Hazlitt’s Economics in One Lesson:

Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

So it is with government “job creation”… we lose the goods and services that would have otherwise come into being.

Consider the Obama administration’s claim that the 640,000 jobs were created from $159 billion of stimulus spending (a cost of almost $250,000 per job, most of which are temporary, and many last for just weeks). But where did that $159 billion come from?

It came from you and me… the taxpayers. What would we have used that $159 billion for had it not been taken from us?

Some of us would have spent it on food, some shelter, some luxury goods, and some may have saved and invested the money. Indeed, if that $159 billion had not been taken from us, then every business we would have purchased from or invested in would be better off. They would have received more revenue and produced more goods, and potentially would have hired more people to make and sell those goods.

But it doesn’t stop there. If that $159 billion had been left in our hands, we would have spent and allocated it on things that are the highest priority for us. This action would have sent a series of signals through the market of what to produce more of and what to invest more in. It would have encouraged competition among suppliers of the various items being purchased, driving them to find more efficient and effective ways to create superior, more innovative products for less. This is how the market creates wealth. Competition spurs innovation and creative destruction, which increases productivity.

So, instead of the $159 billion, higher employment, more goods and services, and more innovative businesses producing what society values more, we have 640,000 (mostly temporary) jobs producing what society values less… and that’s assuming the administration’s claim is accurate.

Which scenario do you prefer?

More Bank Failures

An article from CNNMoney.com recently reported that nine subsidiaries of FBOP Corp., a multistate holding company that included California National Bank of Los Angeles, succumbed Friday to the nationwide banking crisis, bringing the total number of banks closed by regulators this year to 115.

Here’s an excerpt from the article:

The Federal Deposit Insurance Corp. said the nine banks in California, Illinois, Texas and Arizona that made up the privately held FBOP were taken over by U.S. Bancorp of Minneapolis. The banks, which had combined assets of $19.4 billion and deposits of $15.4 billion, will open Saturday as U.S. Bank branches.

The nine banks are Bank USA N.A. of Phoenix, California National Bank of Los Angeles, San Diego National Bank of San Diego, Pacific National Bank of San Francisco, Park National Bank of Chicago, Community Bank of Lemont in Lemont, Ill., North Houston Bank in Houston, Madisonville State Bank in Madisonville, Texas, and Citizens National Bank of Teague, Texas.

Together, the nine banks had 153 offices.

To read the entire article and watch the embedded interview with FDIC chair Sheila Bair, please click here.

Casey Research Chief Economist and co-editor of The Casey Report Bud Conrad weighs in with his take on the referenced article.

It's really much worse than the article lets on. We should be closing several hundred banks almost immediately. The problem is that the FDIC is out of money. So they are just kicking the can down the road and ignoring many problems. The result of that is that the banks get into even worse trouble every day. You see, the law is that the FDIC is supposed to promptly close any institution that doesn't meet its capital requirements. If it does so, it wipes out the shareholders, but normally there is some equity left in the operation, and the cost to refund the depositors is very small.

But by letting the banks hang on, they lose more and more every day, to the point that when they are closed down, the net negative difference between assets and liabilities is a big loss, and then, when the FDIC does close them down, there are huge losses to be made up. Even in this case, the FDIC has done a deal to kick the can down the road by giving the carcass to USB and letting them figure out later how bad the losses have actually become.

The FDIC says this bailout will cost $2.5 billion. I'm willing to bet that they are hiding losses just as they've been avoiding taking over banks until it's far too late. The combination is that they've built up a reservoir of big losses that they in no way can handle. The whole organization has been mismanaged from top to bottom since the beginning, when Paulson was telling Sheila Bair what to do. She was supposed to be running the tight ship of an insurance company, and she became part of the government scam.

Furthermore, the FDIC has guaranteed debts of over $300 billion by the big banks, lowering their interest rate on that debt so that the profits accrue more rapidly on the investments. The FDIC has no business doing such operations.

Perhaps the worst line in Sheila Bair's interview here is her saying that the public has absolutely no reason to be scared that their deposits would not be covered. Her glib talking over interviewers very fast and acting confident reminds me of Geithner. They are driving all of us over the cliff.

Chris again. Thanks Bud for your always honest and insightful take.

Chris Wood
Casey Research, LLC