Why Government Jobs Programs Destroy Jobs
NOVEMBER 01, 1987 by THOMAS J. DILORENZO
In an effort to spur economic development, several bills have been introduced in Congress to resurrect Depression-era “public works” programs. Such legislation has been heartily supported by organized labor and other interventionist groups.
But such programs cannot reduce unemployment any more than the Depression-era programs did. The unemployment rate was higher in 1939—despite millions of workers placed in government jobs by the Roosevelt administration—than it was in 1.931 on the eve of President Roosevelt’s election.
The reason why government jobs programs cannot create jobs is straightforward: Even though the programs may “create” jobs for some workers, the resources to pay for the programs must be extracted from the private sector. Taxing the private sector reduces its ability to create jobs, so, at best, government jobs programs can only alter the composition of employment, not the total volume. More government jobs are created, but at the expense of fewer private-sector jobs.
This basic economic truth is nothing new. In 1848 French economist Frederic Bastiat wrote that he “loses patience completely” over claims that government spending programs can create jobs. Whenever the state opens a road, builds a palace, repairs streets, or digs a canal, wrote Bastiat, “it gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.” Bastiat concluded that so-called government jobs programs were, therefore, “a ruinous hoax, an impossibility, a contradiction.”
Indeed, there is much evidence that government jobs programs not only do not create jobs; they actually eliminate them. For instance, in 1982 the Wharton Econometric Forecasting Associates estimated that a government jobs program proposed during that year would cause a net reduction of 20,000 jobs. In another study of the same program, Nobel Laureate economist Milton Friedman forecast that as many as 100,000 jobs would be lost by that particular government “job creation” program.
This might seem illogical at first, but there are sound reasons why government jobs programs are bound to destroy jobs. One is that public works projects must comply with the Davis-Bacon Act, which stipulates that wages paid on Federal contract work must be the “prevailing wage” in the area, which is usually the union scale, as determined by the U.S. Department of Labor. The jobs that are “created,” therefore, are relatively highly paid; the ones that are displaced elsewhere in the economy are usually lower paid. So if a union worker makes, say, $12 an hour in Davis- Bacon wages, he or she may be replacing two less-skilled workers who, because of their lower skills, might be able to make only $6 an hour. One job is created, two are eliminated.
Another reason why government jobs programs increase unemployment is that much of the money extracted from the taxpayers to pay for the programs isn’t used for wages, but for “administration.” The federal government’s own Office of Management and Budget (OMB) reported that during the 1970s only 2 per cent of all the money allocated for local public works programs went to persons previously unemployed. Much of the money apparently went to “the lawyers, accountants, engineers, and consultants” brought in to plan the programs and to workers already employed. And many public works programs are capital intensive, requiring large expenditures on tools, machinery, and raw materials, not wages. Those expenditures may stimulate employment in the tool and machinery manufacturing industries and in the raw materials industries, but it still must come at the expense of fewer private-sector jobs elsewhere.
Because of these expenses OMB found that the cost of “creating” jobs with public works programs has been as high as $198,059 per job annually. Thus, the tax money spent on each government job could have paid for as many as ten $20,000 a year private-sector jobs.
A Substitution Effect
Another stumbling block to governmental job creation is that many local governments typically substitute Federal subsidies for their own spending on public works. As Robert Vaughn, an adviser to former New York Governor Hugh Carey explained, “federal jobs programs retard public works spending by state and local governments because they defer their own projects in the hope of getting federal aid.” An example of this substitution effect is the CETA program. East St. Louis, Illinois, once had two-thirds of its municipal work force on the CETA payroll; San Diego and Miami had 47 per cent; and 16 per cent of all municipal workers nationwide were on the CETA payroll in 1978.
Despite the logic and evidence suggesting that government jobs programs are unable to create jobs, on net, they are still politically popular, as they were over 100 years ago in Bastiat’s time. Their popularity stems from the fact that the jobs “created” are highly visible, whereas the jobs lost are difficult to identify as being caused by the programs.
Politicians always make a great fuss over the jobs they create, but understandably ignore the ones they have taxed out of existence. Jobs programs promise something for nothing, but in reality they rob from Peter to pay Paul. This is an inevitable consequence of governmental intervention in the economy, for as James R. Schlesinger once wrote:
The tool of politics . . . is to extract resources from the general taxpayer with minimum offense and to distribute the proceeds among innumerable claimants in such a way as to maximize support at the polls. Politics, so far as mobilizing support is concerned, represents the art of calculated cheating—or more precisely how to cheat without really being caught.
Thus, there is a moral as well as an economic dilemma posed by governmental jobs programs. The dilemma will not be resolved until it is widely recognized that it is illegitimate for government to grant special favors to one group of citizens at the expense of another. Those who defend government jobs programs on moral grounds (i.e., that they display compassion toward the unemployed) must be asked the following questions: How is it moral to put one group of citizens out of work, for reasons they do not understand, in favor of another? How is it moral for politicians to deceive their constituents by telling them that government is “creating” jobs, when they know in fact that it is not?
The best situation is one in which more jobs are available to all citizens at the expense of no one. And the evidence is overwhelming that free enterprise and economic growth are the only means of achieving this. The real job generator in the economy is not the public but the private sector.
The performance of the U.S. economy from 1983 to 1987 is a textbook example. During that time the private sector created over 13 million new jobs despite the absence of any new government jobs programs, making the United States the envy of the world as far as job creation is concerned. Moreover, contrary to claims by organized labor and other interventionists that these new jobs are low paying, the U.S. Department of Labor recently reported that nearly half of the new jobs are in the highest-paid category as classified by the Labor Department, and only 6 per cent are in the lowest paid. This performance is in stark contrast to our European trading partners. Despite a greater reliance on governmental jobs programs, there has been a net loss in jobs in Western Europe during the past 15 years.
The key to job creation is private-sector economic growth. And it is no secret that govern mental policies conducive to economic growth are tax reduction, expenditure restraint, monetary stability, and regulatory relief for American industry. The best way to create jobs is to have a healthy private sector. Government spending on jobs programs (and most everything else) may provide some citizens with valuable benefits, but job creation is not one of them.