William R. Allen is professor of economics at UCLA; he and William Dickneider collaborate on the Midnight Economist radio program, syndicated by the Reason Foundation of Los Angeles.
Universities have a special mission. Not only do they teach the accumulated lore and wisdom of the tribe, but they also push out the boundaries of knowledge. Teaching and learning old truth, much less discovering additional truth, require uncommon characteristics. Students and professors are to be insightful, honest, and dispassionate—hardheadedly adhering to the highest standards of logic and evidence.
Alas, there is much dribbling between the cup of ideal and the lip of reality. There are, of course, scholars who struggle effectively and fruitfully with important problems and issues. But the campus is infested with soft and silly charlatans who rely, not on disciplined sense, but on emotional sensibility, on persuasion only through rhetoric, on pressure of ideology, on charisma rather than comprehension.
A campus newspaper essay illustrates the point. Written by a graduate student of history, the article discerns (as all campus newspaper essays do) grievous problems—poverty, drugs, unwanted pregnancies, mental disease, homelessness. After listing the problems, the essay makes no attempt to explain their causes. Nor does it try to use knowledge of how the world works to suggest even limited strategies of marginal improvement. Rather, it only pleads for comfort, general reassurance that (in ways admittedly mysterious) a government leader will resolve our pains and frustrations.
But where are these reassuring leaders? We are political orphans. “I would give anything,” the author cries, “to hear” Franklin Roosevelt and Lyndon Johnson “once again calling the nation to arms in a war against poverty.”
Whining for leadership from someone in the White House or on a white horse will not give us prosperity or freedom. Nor will it give us more jobs. Yet, with employment slumping, politicians, like university poseurs, would have us believe in a simple solution. With vast public works projects to build and rebuild so-called infrastructure—roads, bridges, sewers—we could increase jobs.
Maybe we have neglected our infrastructure. Perhaps we would be more productive if we invested more in maintaining and expanding such basic capital. But the condition of our infrastructure commonly is not the central issue. The more immediate question is whether government spending would increase total employment.
Public works programs clearly would directly create specific jobs. But expansion of public works jobs is likely to cause jobs to contract elsewhere, with little net change in employment. Other employment will contract because federal expenditures on public service jobs must somehow be financed. If the federal government is to increase spending for public works, then it must reduce other government expenditures, raise taxes, or deficit-spend.
If government reduces spending for other programs, such as national defense, then fewer workers will produce guns. Or if government reduces transfer payments to individuals, then fewer workers will produce the butter that beneficiaries would have demanded. In either case, decreases in federal expenditures in one area to make room for increases in public works will not increase total employment.
Instead of curtailing some of its other spending to increase expenditures on public works, government might curtail private consumption and investment by raising taxes. With private spending down and government spending up, public jobs are traded for private jobs, but total employment is not increased.
If, alternatively, government finances the expansion of public works by enlarging its already-swollen deficit, then it will either have to borrow existing money or create new money to pay its increased bills. If it is to borrow existing money from the community, government would compete more intensely with businesses and households for scarce credit. More credit would then go to government and less to private firms and individuals. Government spending of borrowed funds would displace private spending of private funds. Again, some jobs are traded for others.
Finally, what if government financed its increased deficit spending by creating new money? In this instance, spending would not fall in other areas, so new public works jobs would not reduce other employment—initially. But down the line, increased money creation, if continued fast enough and long enough, will raise prices. And higher prices—which are a form of taxation—would threaten future productivity and employment. We would then obtain a bit more force-fed employment today at the expense of less employment and more misery tomorrow.
No matter how government finances it, greater spending for public works jobs is not likely to increase the total number of jobs. Economic thinking leads to this conclusion, but does history support it?
Our economy is not a laboratory in which experimentation easily yields conclusive evidence. But we can look at how government spending in general has related to total employment.
From 1960 to 1992, bigger increases in federal spending were not typically associated with larger increases in payroll employment. Indeed, the loose relationship that existed over those three decades is quite the opposite. Faster growth of employment has been associated with slower growth of federal spending; and slower growth (or reduction) of employment was more likely when federal spending grew faster.
In 1975, government spending exploded by more than 23 percent, and employment change was actually negative; in 1980, spending shot up by over 17 percent, and employment was virtually constant. To take longer illustrative periods, from 1962 to 1966, spending rose at a below-average annual rate of 6.7 percent, and employment expanded robustly at 3.4 percent. In contrast, from 1975 to 1981, spending surged at 14.2 percent per year, and employment rose at only 2.2 percent.
Like poverty, homelessness, and other complex problems, today’s sluggish employment growth has no easy solution. We can do better than we have done in sustaining a vigorous economy. But it should be apparent, even to the denizens of academia, that government cannot simply and surely spend us to rapidly expanding employment.