Can the government create jobs? To listen to our President, past Presidents, and other elected leaders, one could be forgiven for thinking the answer is “yes”. I beg to differ.
First, there is an exception or two. If the Administration increases the size of the U. S. military, it has created jobs. If the government expands the number of civil servants, it has created jobs. But we need to recognize that these jobs are paid for either by increasing taxes or by borrowing. The former removes money from the economy now, thus neutralizing any positive effect on GDP. Borrowing money to pay the salaries, merely shifts the balancing reduction in GDP to the shoulders of our children.
So where does job creation come from? In the main, it is private industry that creates jobs–corporations, partnerships, proprietorships and non-profit organizations as well. Why do they create jobs? Not for the sake of improving our employment numbers, but because their decision-makers sense an opportunity to use the additional labor to further their aims and goals.
So, what the government can and should do, is to create the environment which encourages private organizations to take risks and expand. Thus, the government through its words and actions can be indirectly responsible for creating jobs, and over time, significantly so. The tools the government has to work with include tax policies, spending levels and choices, regulations, promotion of exports, trade deals, and generally expressed words that build or weaken confidence.
In their haste to take credit or place blame, politicians conveniently forget or remember (as it suits their personal PR machine)that the economy often works with substantial time leads and lags. Business cycles can be lengthy, and policy changes may take months or years to work themselves through the economy. Thus the great recession of 2008-2009 occurred under President Bush, but had at least some of its roots in the housing policy decisions of the Clinton administration. And the Obama recovery was fostered by some policy decisions made late in the Bush administration (by the way, I am not holding Bush blameless for the recession!). Part of Clinton’s brilliant economic record was the good fortune of serving during the Great Internet Revolution and after the Reagan economic expansion, and part of Jimmy Carter’s economic malaise was the result of the oil shock and the distortions of price controls from former Republican administrations.
On a humorous note, the Reagan tax cuts, which were partly responsible for the great growth of the 1980s and 1990s, were passed in about May, scheduled to take effect in October. I distinctly remember a well-known Texas Democrat wailing in August that the tax cuts were a rotten idea, because, “See, they aren’t working!”. It might help if the government had more individuals with real world business operating experience to balance the attorneys and community organizers.
To conclude this post, I’d say the government does not create jobs in a meaningful way directly, but has an extremely important indirect effect on whether or not private organizations do. Future Posts on the subject of economics will cover taxes, regulations, trade, and the interesting Keynes’ discussion of “animal spirits”.