Archive for July 17th, 2011

Whenever you hear politicians talking about ‘creating jobs’, you know at least one thing: they have no clue whatsoever about economics. Ideally, you should not pay too much attention to them. But since jabbering about new jobs is part of most politicians’ rhetorical equipment, the point deserves a brief review.

Whenever the government decides to ‘create jobs’, the decision implies rising government spending. The money needed is either borrowed or collected through taxes. In both cases, the same money is no longer available in the private sector. Thus, even if state-run programs create some new jobs, this is done at the expense of other, private-sector jobs. The net effect is almost certainly in the negative.

A simple example of this misleading policy can be found in Obama’s humongous stimulus package. Despite spending almost a trillion dollars, unemployment rates have remained very high. After a tiny drop of one percentage point, the rate is already increasing again.

US unemployment rate - 1950 to 2011 / US Bureau of Labor Statistics

Before some claim that without a stimulus package the rate would have reached 15 or 20%, well, this is an old trick. Whenever politicians’ favored programs fail, they try to justify their mistakes by arguing everything would have been far worse without the program. But just as in the courtroom, the onus lies with the spenders. They have actively (mis-)used coercion to get and spend other people’s money. They have to prove the net benefit.

And finally, for the Keynesians among us, two minutes of ingenuity on government spending:


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