Freeman

ARTICLE

Government Intervention Creates Chaos, Not Jobs

JUNE 01, 1981 by DONALD SENESE

Students of history are familiar with the significant truth embodied in the often quoted remark of the writer and philosopher George Santayana in his work The Life of Reason: “Those who cannot remember the past are condemned to repeat it.” This axiom holds true for those proponents of governmental interventionism in the economy who view government as the instrument to bring economic prosperity through government-sponsored jobs creation and job training programs.

The proponents of this economic interventionism use a variety of approaches to involve government in the market place—vocational training, public service employment, on-the-job training, institutional training, work experience, and job placement programs. These attempts to replace the operation of the market economy with government interventionism have gone under a variety of names including the Civilian Conservation Corps, the Works Progress Administration, the Job Corps, and the latest version, the Comprehensive Employment and Training Act jobs program.

All of these attempts over the years have violated a basic concept of our constitutional form of government—the moral freedom of the individual to participate in the market place without excessive governmental coercion or regulation. We can better understand the fallacy of this approach by examining the interventionist philosophy which motivates it, why such efforts fail, and the need to resist such interventionism if we are to maintain man’s essential freedom and the operation of the free enterprise system.

The Interventionist Philosophy

The major impetus for government-sponsored employment and training for employment programs has been the economic philosophy of John Maynard Keynes, which has been prevalent in United States economic policy for almost the past half century. Keynes, who put forth his views in The General Theory of Employment, Interest and Money, advocated income redistribution and supported efforts by the central government at jobs creation.

The thrust of The General Theory revealed opposition to the assumption that in a society based on free enterprise there were mechanisms of adjustment which automatically produced the conditions for full employment for workers and resources for productive employment. The au thor made it clear that he lacked confidence in the ability of competitive markets to expand employment and production.

Keynes viewed unemployment and economic depressions as the result of a deficiency of aggregate demand for goods and services. One way to stimulate aggregate demand, he reasoned, is through government expenditures which would have a multiplier effect on the economy. An increase in government spending without an increase in taxes was equivalent in effect, Keynes asserted, to an autonomous expansion of private investment.

While preferring that government spending should be on projects which he deemed of “social utility” (e.g., schools, parks, public housing), the important element in Keynes’ economic philosophy focused on the necessity of government spending to aid the whole economy. And even if the unemployed were put to work on jobs which appeared useless for the growth of the economy (e.g., ditch-digging, leaf-raking), the incomes of these workers would be used to buy products (e.g., clothing, food) which would help stimulate the economy. Keynes thus accepted the myth that government, by spending the resources of its citizens, could spend itself to prosperity.

According to Keynes, a central government, through public works and other expenditures, could help stimulate the economy despite increased inflation and budget deficits. Rejecting the traditional economic wisdom of the dangers of excessive governmental spending and the need to accumulate savings in the economy, Keynes had developed a new theory of employment and income which had as its consequence a whole series of public policies focusing on the need for governmental intervention to deal with unemployment in a free enterprise economy.

During the depression of the 1930s, federal spending had been used extensively to combat unemployment by creating jobs in the public sector and providing training to the unemployed. Despite little evidence of success, the programs were continued and even grew larger and larger. Yet, it was in the post-World War II period that the Keynesian influence had its greatest impact on United States economic policy.

Keynesian Policies Fail

Successive U.S. presidential administrations have turned to government spending for employment training and jobs creation despite budget deficits and, indirectly, the inflation it creates. And as the economists James D. Gwartney and Richard L. Stroup have reminded us, the Keynesian macroeconomic thinking established the foundation for the policies which provided the United States with the inflation, unemployment, and stagnation of the 1970s.[1]

The experience with Keynesian economics has been a disappointing failure for the U.S. economy. These expansionist policies (including inflation, high taxes, budget deficits, and rapid growth in the money supply) have not promoted full employment or even economic growth. That great economist Hans F. Sennholz has reminded us that a tax burden which is heavy during a period of expansion becomes destructive during stagnation and decline. Rather than helping the working man, these misguided policies have hurt him, failed to provide significant employment for the unemployed, and placed a drain on the economy which has resulted in a decline in the American standard of living.[2]

Advocates of the Keynesian policies reveal an ignorance of economics which confuses the short-term and the long-term results for a nation which follows Keynesian economic policies. While policies which seek to accelerate demand beyond the expectations of buyers and sellers may reduce the short-term rate of unemployment, the result of such inflationary policies in the long run is to increase the economic problems of a society, leading to high rates of both inflation and unemployment.

Why Employment Programs Fail

Despite the rhetoric of government officials that government-created jobs have added “X” number of jobs to the economy, a closer examination reveals the fallacy of this claim and the inevitable failure of such programs to improve the economy.

Work is the process of forming capital such as goods and services for future consumption. There are two economies in which people may work: (1) a barter economy in which services are exchanged free from government regulation, and (2) the money economy in which government money is being used as a medium of exchange. The major distinction between the barter economy versus the public economy is the visibility of the transactions to the government in the latter. Once a transaction becomes visible to the government, it becomes subject to government regulations so that those individuals participating in the public economy must be willing to give a share of their work to government (e.g., taxes). Individuals will shift to this public economy when it is easier to trade their work for someone else’s in the public economy. One individual trades his labor (e.g., a carpenter) with those who are willing to trade for other items—groceries, housing, insurance, and the like.

The Incentive to Work

Government can assist production in a free enterprise economy by making work more attractive than non-work. If an individual can keep a significant part of the results of his labor he is more willing to work. However, if government acts through coercion (e.g., taxes) in taking away the fruits of his labor, the worker is less interested in working in the public economy. In addition, if non-work is more attractive either through welfare benefits or unemployment benefits, the individual will choose non-work or leisure.

Jude Wanniski has explained how this lesson applies to CETA-type government jobs programs:


Government programs to “create jobs” usually fail because the designers of the programs ignore the incentives of the barter economy . . . Such offers are frequently spurned by those government has targeted, for they would not only have to give up their transfer (welfare, etc.) payments, but also their tax free work or leisure in the barter economy. The new governmental jobs will instead attract individuals who are already employed in the public economy, but at lower rates of pay than the new positions being devised by government.[3]

Besides the inefficiency inherent in government created jobs, the government acting as the agent for creating jobs violates the personal freedom of the individual in a free enterprise economy. These programs violate certain fundamental moral principles which view man as a free individual with the right of choice in the economic system. The government in effect robs the working man of the fruits of his labor through taxes in order to subsidize another individual, possibly at a higher rate of compensation, for doing non-productive work.

The government programs also can be faulted for disrupting the operation of the market economy. Permanent jobs are created when there is a climate of freedom the investor is willing to put his money in an enterprise where he will receive a desirable rate of return, a businessman will open a plant or factory or business with the expectation that he receive a profit, and the worker will attempt to sell his labor to the highest bidder with the most desirable return for his work. This freedom of choice benefits all parties concerned in a free market economy. Government-created jobs programs deny the operation of this successful system.

Resources Wasted

When the government intervenes in the economy, government bureaucrats take money from the taxpayers and direct money to projects without any concern for the best use of resources. Because of their mistrust and misunderstanding of the market principles, these resources are allocated to a variety of uses—additional governmental jobs, controversial experimental programs, public works. The government through high taxation, expansion of the money supply, and intervention in the credit markets to finance these projects helps to drive out individuals who seek financing in the private sector.

No government action can substitute for the effective operation of the free market economy. When government seeks to employ people, it must take these resources from the resources of the private sector which is the productive sector and the operation of the government jobs programs becomes merely another way to redistribute income. Whether the central government is paying out high welfare payments or salaries for non-productive jobs, the result is to reward “non-work” at the expense of the productive sector. These so-called government jobs only place a greater burden on the taxpayer, and the resulting government spending only delays the time for full recovery during an economic slowdown.

Training for What?

The same dismal results have come from government job training programs as from the jobs creation programs. A 1977 study by the Congressional Budget Office concluded that even intensive government training programs failed to raise the lifetime income potential of partici pants. The study found that the average manpower training enrollee, either a young person or a member of a minority group, achieved an annual post-training income differential of only $400. This differential resulted not so much from the training but as a result of the individual working more hours per week or in working more weeks per year.[4]

Many of these government training programs train workers for jobs which do not exist, and thus funds from the taxpayers are used to keep a person unemployable. The most effective training programs are those originating from companies who train employees with potential for jobs in which they are then placed. If workers are already trained or have a marketable skill, immediate work is provided for the unemployed. The opportunity for real jobs creation can only come when government creates a climate for private enterprise and does not at tempt to compete with it for employment of workers.

Some critics see the jobs creation programs put in operation during an “emergency” as a step toward the destruction of the free enterprise system, with the government assuming the role of central planner and chief employer for the economic system. The distinguished journalist John Chamberlain has noted that ever since the beginning of social life men have swung between ex tremes of freedom and coercion, voluntary association and community compulsion, family “mutualism” and State-imposed order. While man can exist under either system, he notes that it is only when cooperation is a matter of free election and the voluntary approach predominates that man can live creatively.[5]

One needs only to look to Great Britain whose government leaders have been devoted followers of Keynes to discover the crisis in its economy—a low growth rate, a poor rate of productivity, a deteriorating physical plant, high inflation, high unemployment, and a high degree of social unrest. Despite warnings, the British continued to plunge into disaster. The consequence has been to make Britain the latest version of the “Sick Man of Europe”.[6] Will the United States learn this lesson before it is too late?

The Need to Return to Free Market Principles

Critics of government intervention in the U.S. economy have stressed that the difference between a Keynesian approach and the classical free market approach goes beyond mere economic theory and reflects a significant difference in social policy. This factor is illustrated in the difference between a $14 billion reduction in federal taxes and a $14 billion expansion of public programs, the latter strongly supported by the Keynesians.

The reduction in taxes (and government interventionism) acts as an incentive to strengthen the private sector and enlarges the sphere of private control over spending. The expansion of public or government spending, favored by the Keynesians, limits the private sector and expands the public sector where allocation decisions are made by government officials, not the factors of demand and supply. The stakes are not only economic efficiency and decision-making control, but personal freedom as well.

Critics of the CETA program have often cited the many abuses in these programs as funds have been used to provide additional political jobs, pay salaries for old jobs previously funded by local taxes, pay for bartenders and lounge managers, support muscle-building programs for women, and funding activist anti-business groups. However, even without these many scandals, these programs would be defective because of the attempt by government to perform a function which economically and morally belongs to individuals operating in the private sector.

Bureaucratic Inefficiencies

The great economist Ludwig von Mises pointed out many years ago the difference between profit management and bureaucratic management in his notable work Bureaucracy (1944). The grave inefficiencies of bureaucracy were inherent and inescapable, von Mises reminded his readers, and these led to the failures of government-promoted and government-controlled programs in a nation’s economy.[7]

A more recent study has added more ammunition to the critics of these job programs promoted by the central government. Two research scholars, Kim B. Clark and Lawrence H. Summers, noted that there was no evidence that billions of dollars spent on special jobs programs had any real results. These professors found there is evidence that as aggregate demand increases, and the general level of economic activity grows, employment increases for all groups in the economy, including young adults and even older workers. Rejecting the argument that special programs are needed to help minorities in the economy, they noted that in the case of black teenagers, who have an unemployment rate of 36 per cent, benefits occur since employment in that group rises by 6 per cent for every I per cent increase in economic activity.[8]

The 1980s should be a time to reduce the failing economic policies of the 1970s that have brought inflation, stagflation, and economic hardship—policies which have reduced the standard of living of the American people and seriously weakened the role of the United States in the international community.

Policies for Growth

The importance of incentives in the political and economic sphere must be recognized, replacing governmental interventionism. Economic policies to encourage savings and capital formation in order to maintain a healthy growing economy must be pursued and the result will be productivity, stable demand and prices, and reduced inflation. Only through a growing economy based on the principles of the free market do all the citizens—especially the disadvantaged—gain by an increase in their standard of living.

Policy leaders in the U.S. government must shift the economic emphasis to the supply side of the market, realizing the negative impact of high tax rates on total output and the income transfer payments that have ultimately penalized the efforts of low-income families to help themselves.

When productive citizens are allowed to keep their income, the incentive is present for economic growth and increased productivity without government-sponsored work programs.

The incentive to save will provide the funds necessary for the tools, high technology, and modern machinery which will aid the increase of production per manhour.

A frugal central government, balancing the budget and restricting the growth of the money supply, will enhance economic growth, reduce inflation, and get people back to work in the private sector in permanent jobs which will help the economy to grow.

The time is now to roll back the Keynesian influence over public policy in the United States. The theory that government spending causes people to produce must be rejected. Government spending does not cause economic growth but it does cause economic disruption through inflation and interference in the market place.

Restoration of Incentives

Incentives must be restored for production, employment, investment, and new enterprises. A sound economic policy can make rapid progress toward the completely achievable goal of restoring growth to the economy and increased productivity and employment.

We can only preserve the moral freedom of the individual and economic prosperity by the market solution, not by a government imposed solution. In warning against the road to serfdom from oppressive government, the Nobel prize economist Friedrich A. Hayek noted that although history does not repeat itself, we can learn from the past in order to avoid a repeat of the same process. His admonition should be a clear message to those who love freedom and oppose government jobs programs: “The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century”.[9]

Real prosperity and strength for the economy will only come when such ill-fated schemes of government intervention as the CETA program are abandoned in favor of using the strengths of the free market unhampered by the heavy hand of government regulation. Heeding the prophetic words of George Santayana, free men will recall the failure of government to create jobs or restore employment and will seek the answer for a strong economy in the time tested principles of the free market. []


1.   James Gwartney and Richard Stroup, “The Creation of Economic Chaos: Inflation, Unemployment, and the Keynesian Revolution,” The Intercollegiate Review (Fall/Winter, 1980), p. 3.

2.   Hans F. Sennholz, “Standards of Living Are Falling,” The Freeman (February, 1981), p. 8.

3.   Jude Wanniski, The Way The World Works (New York: Simon and Schuster, 1978), p. 84.

4.   Public Employment and Training Assistance: Alternative Federal Approaches (Washington, D.C.’ Congressional Budget Office, 1977).

5.   John Chamberlain, The Roots of Capitalism (Princeton, New Jersey: D. Van Nostrand Company, Inc., 1965), Revised Edition, p. viii.

6.   R. Emmett Tyrrell, Jr. (editor), The Future That Doesn’t Work: Social Democracy’s Failures in Britain (Garden City, New York: Doubleday and Company, Inc., 1977), Introduction, pp. 1-2.

7.   Ludwig von Mises, Bureaucracy (New Re-chelle, New York: Arlington House, 1969 (Re print of 1944 edition), pp. 122-123.

8.   Kim B. Clark and Lawrence H. Summers, Demographic Differences in Cyclical Employment Variations, Working Paper No. 514, Cambridge, Massachusetts: National Bureau of Economic Research, 1980; Also see “Debunking the Efficacy of Special Job Programs,” Business Week (September 1, 1980), p. 8.

9.   Friedrich A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1965), p. 240.

Dr. Donald J. Senese, a former professor of history at Radford University, is a Senior Research Associate with the House Republican Study Committee, U.S. House of Representatives.

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June 1981

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