Thursday, November 12, 2009

The Alleged "Job Creation" - Quick Case Study

We’ve been told that Government can and should spend vast sums of money in order to “create jobs.” Here’s an article about Oregon's success thus far:

To summarize the article, it seems that Oregon counts a job as “created” no matter how long it lasts, so a 6 hour ditch-digging is counted as one job created. A year-long construction manager position would also be one job created. They’ve claimed to create 3,236 jobs thus far with these standards. The article’s investigation finds that the average work-time for these “jobs” is actually just 35 hours each!!! If we re-calculated based on jobs being 1 year, full time, then the state has created just 54 jobs. The article further states that, if they continue at the current rate of job creation, they will create 688 full-time, year-long jobs.

Oregon's state program (separate from the Federal stimuli) has a cost of $176,000,000.

Thus, the Oregon State Government will have been able to create full-time, year-long jobs for as little as $255,813 each, assuming the program remains as effective as it has been. I would suggest that the marginal cost of each job will actually get higher, because those jobs which are easiest to create, and those most “shovel-ready” (an excellent moniker when one considers the economic grave-digging which is occurring), will be utilized first. It will become more difficult over time to effectively spend the funds… the easy, obvious programs will be exhausted.

A legitimate businessman creates jobs which produce more wealth than they cost. The state creates jobs which cost more than they produce. Businessmen have the incentive to produce. The state has the incentive to employ. This fundamental schism cannot be overstated. Politicians don’t worry, however, because they think wealth comes from the number of people employed, instead of the amount of production per person employed. It is no wonder they have this view… every job created is a vote.

As a final point, I would suggest that individual states are better able to efficiently allocate spending programs than the Federal Government. It is unlikely the Federal Government, with $787 billion to spend, will be more efficient per dollar than Oregon with its much more manageable $176 million. Continuing this line of reasoning, districts are likely to more effectively allocate resources than states, towns more effectively than districts, neighborhoods more effectively than towns, and, wait for it… individuals more effectively than neighborhoods. Case in point: it would not cost me a quarter million dollars to create a job. Yet, I must be missing something here, for if individuals could allocate their own resources, then hundreds of thousands of government jobs wouldn’t be necessary and the government has not suggested that such is the case.

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On Spending and Keynesian Displacement

Squeezed forth by the global financial crisis, certain detestable economic myths are bubbling through every legislative orifice. As the hand of retribution grips down on the world’s monetary system, a gooey slime of absurd premonitions have oozed out of a dormant consciousness and now run dripping down the sides of the grotesque political apparatus known as the United States Federal Government.

Among this unpleasant, problematic residue, something called the “Keynesian Multiplier,” a term more appropriate for intergalactic weaponry, has convinced a vast swath of society that not only will an unrelenting expenditure of wealth increase everyone’s prosperity, but it is in fact the best way to pull the world out of a debt-ridden depression. Virtually every political leader, save perhaps Czech’s prescient Vaclav Klaus, is enamored with spending. Why do politicians give credence to Keynesianism? Because it provides an intellectual veneer under which to usurp power, grant favors, and spend the wealth of the peasantry (benevolently preventing peasants the burden thereof).

The Keynes allegory suggests that heightened spending creates “demand,” which then allows companies to produce goods and make money, thereby enabling subsequent spending. The corollary is of course that without such spending, demand will plummet in a vicious cycle, leading presumably to a revisitation of the stone age economy.

What is overlooked (or more likely intentionally ignored for political purposes) is that spending necessarily involves an important opportunity cost – when you spend today, you can’t spend tomorrow. Whatever is purchased now not only comes at the expense of the money in your pocket, but more importantly at the expense of the future purchase otherwise made. It is not so much money that one surrenders to acquire the new television as it is next month’s potential patio furniture. There is thus an unseen – to gratefully utilize Bastiat’s term – cost in every expense: that of the future product which is never purchased because the means by which to purchase it have been depleted in the present. The future purchase is sacrificed in favor of the present purchase, so while the television producer is pleased with his increased sales today, the patio furniture factory will unknowingly have one less sale in the subsequent month.

This unavoidable mechanism of economics is why the concept of a “Keynesian Multiplier” is so absurd (unless one realizes the multiplier is likely less than 1). For by increasing demand in the present, one is necessarily decreasing demand in the future. The Keynesian Multiplier doesn’t provide a net gain in wealth and demand, it provides a transfer of wealth and demand from the future to the present. And when a wide array of future demand is transferred to the present, for example by the Federal Government, one should not be surprised to see macro indicators, such as GDP, increase. Such figures indicate present activity but do not account for the forgone activity in the future. The positive GDP figure appears on the front page of the paper, the public cheers, the politicians wave, bow, and then feign surprise at corporate earnings in subsequent quarters. Could any example be more perfect than the Cash for Clunkers program?

The Keynesian witch-doctors will retort that when a man spends now, it allows the next guy to spend, and then the next, and so on until finally someone down the line is able to buy from the first man. Well, ask yourself, has any wealth been created by this circular transaction? To the extent that some of those products are consumed after the trade, one is likely to find a net loss in wealth after all the trades have completed. This is because production did not occur, and when each man in the chain bought something from the next man, he sacrificed his ability to produce with that wealth. Unless enough of the men traded their wealth for some asset which allowed productivity to increase, a net loss will have occurred. For this reason, individuals can’t just spend money to make money. Intelligent investment must be accomplished, and this is not usually an easy or expedient challenge. One might suggest that when the government spends a trillion dollars, a great deal of that is unlikely to fall into the “intelligent investment” category… it would fall into the “consumption” category. While GDP figures will have increased, wealth will not have been created. If the government had any skill in investing, what need would there be for taxes?

Sacrificing future consumption in favor of present consumption should be at the discretion of individuals considering their own finances. Such sacrifices should not be forced upon the public through government spending diktats, euphemistically referred to as “stimulus.” One should not require unnatural prescience to take such a “stimulating” policy to its logical conclusion. By transferring future consumption to the present, the government can appear as the benevolent shepherd guiding its flock, but this illusory growth is of course temporary, for future spending will have been sacrificed. Further, the capital savings required for real investment will have been consumed; businesses will find it more difficult to acquire resources as those resources will already have been depleted.

Just as one man cannot spend his way out of debt, neither can two men, nor five. A small community could not spend its way out of debt, nor could a village, nor five. How many individuals must be added to the shopping spree before their collective wealth starts rising? How many times must a man trade money for goods with his neighbor before they both retire wealthy? Clearly, something more than a transaction is required for wealth to grow. That thing is production, a process tortuously suffocated in an environment of debt.

Keynesianism is a farce(akin, almost ironically, to alchemy) – yet its preeminence remains firmly endorsed by an organization desperately seeking any excuse to control the lives of its subjects, and its gaping fissures remain unexamined by a public inculcated in the very schools funded by the same organization.

Let us hope the average citizen becomes more aware of this charade. It is production and savings, not consumption and debt, that must nurture a despondent nation stricken with the dregs of statism.

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