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Wednesday, June 10, 2009

What Is Seen and What Is Unseen: Government “Job Creation”

Barack Obama says his roughly $800 billion American Recovery and Reinvestment Plan could save or create between three and four million American jobs by 2010. Many of these proposed jobs—building or repairing roads, bridges, and buildings—recall the New Deal. There is a modern twist, of course, with the promise to develop “alternative energy sources” such as wind farms, solar panels, fuel-efficient cars, and the like. “The jobs we create will be in businesses large and small across a wide range of industries,” Obama promised, “and they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long term.” (emphasis added)

First, one may ask: how can Obama and his economic advisers know what kinds of jobs will position our economy to “lead the world” in the long term? Indeed, how can we expect anyone to know what kinds of jobs will be able to offer such a guarantee of wealth and security, considering the enormous complexity of our world? Billions of individuals are constantly making decisions based on their own expectations about the future. Potential ideological shifts and their inevitable changes to policy funding and support complicate matters further. This is without considering technological advancements that can turn the best-laid central plans into white elephants. There is little an individual or group can possibly know or predict for the future, particularly on such a large scale as three to four million jobs.

However, assuming Obama and his advisers are right—that his plan will indeed save or create that many jobs—what proof do we have that it will leave us better off than if it’s not implemented at all?

In his essay “What Is Seen and What Is Not Seen,” the French classical-liberal economist Frédéric Bastiat explained that there is a tendency to recognize only the intended consequences of an action (what is seen). However, there are often other, subsequent effects that are not perceived as connected to the action (what is not seen). Furthermore, the short-term effects of an action can sometimes be quite different from the longer-term, unseen consequences.

In the case of public works, Bastiat explained that government produces nothing independent from the resources and labor it diverts from private uses. When government borrows money to create jobs, what is readily seen are people employed and the fruits of their labor. However, what is generally not considered are the many things that could have been produced if the capital had not been removed from the private sector to fund the government programs in the first place. Such policies necessarily benefit some (the favored workers) at the expense of others (those who would have had the jobs that were not created) and eventually the taxpayers, who have to repay the debt.

What Is Seen

New Deal public-works projects provided plenty of evidence for Bastiat’s theory. They not only failed to help lift the economy out of the Great Depression but also served to make it “great.”

First, many jobs created under FDR benefitted few besides those employed—in things like studying the history of the safety pin, collecting campaign contributions for Democratic Party candidates, chasing tumbleweeds, and cataloging 350 different ways to cook spinach. (See Lawrence Reed’s Great Myths of the Great Depression,

In addition, much of the “job creation” was directed according to political preferences, rather than where jobs were arguably needed most. For instance, a disproportionate amount of public relief went to western “swing states” expected to help Roosevelt win votes in future elections, rather than to the poorest states, such as those in the South, which were already solidly Democratic during this period. Relief and public-works spending also seemed eerily to increase during election years, and it has been shown that votes for FDR correlated closely with jobs and other special government benefits given. (See Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.)

What Is Unseen

New Deal job-creation projects also impeded productivity by discouraging private firms from adopting new technologies. A prime example is a government farm in Arizona where a dairy crew discovered that it could turn a profit only by using milking machines, rather than milking by hand, and eliminating some jobs. But that would have violated the terms of a government loan. So the machines were not brought in, and the staff members who made the suggestion were fired. (Amity Shlaes tells the story in “The New Deal Jobs Myth.”)

Roosevelt is still celebrated for his job-creating measures because the people who gained employment were easily seen. However, what wasn’t (and isn’t) so easily recognized is that to pay for his public-works experiments, the government sucked up much of the available capital by selling bonds and collecting taxes, including a 5 percent withholding tax on corporate dividends and ever-rising income taxes. The top income tax rate hit a staggering 90 percent. Thus the New Deal had the unintended consequence of prolonging the Great Depression by diverting resources that could have been used to create wealth.

Barack Obama and his advisers should take a lesson from history. The New Deal and its public-works projects were a disaster, and it would be remiss to think they should be given another try. As Bastiat explained, government doesn’t create wealth; it only diverts it. When government controls wealth it inevitably tends to serve political ends rather than consumers. FDR’s New Deal policies are a testament to that, and if they are repeated in response to our current economic crisis, it will only hinder the recovery.