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Wednesday, November 25, 2009

The Continuing Fallacy of Government “Creating Jobs”

Earlier this year, I wrote some commentaries based on Lawrence Reed’s excellent 1981 Freeman article, “7 Fallacies of Economics.” Not surprisingly, these fallacies pop up again and again.

The latest rendition of the “Fallacy of Production for its Own Sake” is in a Wall Street Journal commentary by Robert Reich, secretary of labor during Bill Clinton’s administration. Lamenting what he sees as an “economic imbalance” between the United States and China, Reich declares:

Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35% of the Chinese economy; 10 years ago consumption was almost 50%. Capital investment, by contrast, rose to 44% from 35% over the decade.

…the larger explanation for Chinese frugality is that the nation is oriented to production, not consumption. China wants to become the world’s pre-eminent producer nation. It also wants to take the lead in the production of advanced technologies. The U.S. would like to retain the lead, but our economy is oriented to consumption rather than production.

Unfortunately, there’s more:

Deep down inside the cerebral cortex of our national consciousness we assume that the basic purpose of an economy is to provide more opportunities to consume. We grudgingly support government efforts to rebuild our infrastructure. We want our companies to invest in new equipment and technologies but also want them to pay generous dividends. We approve of government investments in basic research and development, but mainly for the purpose of making the nation more secure through advanced military technologies.

Even getting past silly terms like “inside the cerebral cortex or our national consciousness,” this article reflects the utter ignorance that influential Americans have about economics. Reflected in Reich’s article is the same mantra that he and others like him have been spouting for years: The government must direct the economy through subsidies, laws, and taxes to ensure that we engage in more production and less consumption. For example, 25 years ago Lester Thurow claimed that the implementation of a European-style “value-added” tax would “stimulate” more production and would be a “true supply-side policy.”

Now, I don’t have a degree from MIT and am not an economic “elite,” but I do remember something in my studies that said that a tax on producers would push supply curves to the left. A nice way to say it is this: More taxes on production means less production. And this is a “supply-side” economic solution?

Unfortunately, people like Reich see the economy as putty to be manipulated as government officials would like. Do we have “global warming”? Then subsidize the manufacturing of windmills and other high-cost devices to produce electricity or the making of vegetation-based fuels. Despite the fact that subsidies mean that we must use more resources to create fewer goods, lawmakers and their advisers apparently see no irony in this fact.

For example, we hear that by directing production of electricity and fuels, government is “creating green jobs.” While that might be true in that new jobs will have to exist to make these particular goods, nonetheless it is akin to claiming that going back to the horse-and-buggy will “solve” transportation problems.

Adam Smith said it best when he noted that “consumption is the sole end and purpose of all production.” Unlike what Reich claims, an economy cannot be oriented solely toward production or solely toward consumption. One cannot consume unless one produces, and if one produces but those who produce are not permitted to consume, then we see the perverse result of increased production actually making people poorer than they should be.

The United States has not earned its standard of living for many years. Government has been hostile to free markets and common sense. We have lived on virtual handouts from the rest of the world by sending them depreciating dollars, a state of affairs that is going to end soon enough, especially if the government makes it difficult to produce goods in the name of “creating jobs.”

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.