The task of government is to govern. Its fundamental duties are: to defend its citizens, to adjudicate cases amongst its citizens, to represent its citizens in dealings with foreign entities. In a democracy, the citizens determine who are its enemies, what its laws and rights are to be, with whom they want to deal. To protect a venue for our pursuit of happiness is nice, but historically rare. A government requires money to function. In a democracy the citizens determine how they wish to tax themselves. In non-democratic regimes professional politicians make these decisions for the citizens. When a government moves beyond its basic responsibilities, it does so at its own peril – or that of its citizens. That is not to say that governments should not venture into other fields when appropriate. The transcontinental railroad here in the USA would not have been possible, at the time, without federal assistance. Likewise, for better or worse, the splitting of the atom. Or the moon landing. Or the freeing of the slaves. But there are certain activities where governments have traditionally fielded dismal records. One of them is “running the economy.”
That is not to say that the government does not have a definitive role in the economy; it does: producing sound money, protecting valid contracts, adjudicating disputes, regulating economic activity across political boundaries, to name a few. Venturing further afield often invites disaster. For example, when the Roman government attempted to stop inflation with the Edict of Wages and Prices (301 AD), it brought an already exhausted economy to its knees.
Another economic activity into which governments have historically dipped their fingers is job creation. Aside from altruistic concerns for its citizens, government is usually motivated to job creation by one of three deeper desires: to stimulate the economy to create more tax revenue; to keep people occupied and not politically volatile; or to keep people fed and not hungry and even more volatile.
Governments have only three ways of stimulating job creation. Two are quick and easy, with glamorous short-term results but disastrous long-term consequences. The third is slow and hard, but ultimately more productive.
The easiest way for a government to create jobs is to hire people to do government jobs. Since governments need people to man the posts, this sounds like a no-brainer. There are, however, certain hazards. One is that government bureaucracies have a tendency to grow beyond healthy limits; they metastasize into bloated creatures devouring every coin in the people’s pockets. The pages of the history of ancient Rome are littered with the futile attempts of emperors to subdue this beast. Likewise, the history of twentieth century America. And since governments rarely are able to produce wealth on their own, they must acquire it elsewhere to feed the beast. Short of stealing it in war from its neighbors, that leaves taxing its citizens. So, for each job created in the government, money must be taken from one citizen to pay another. Up to a certain point this is necessary. But the creation of superfluous jobs makes the government akin to the town in which everyone is a barber and they all cut one another’s hair - and no progress is made.
Another traditional way to create jobs is to dream up “make-work” jobs, to devise something for the people to do and get paid for, so they can eat and stay off the streets. Historically, this is another favorite. The pyramids of Egypt were perhaps the most colossal of all make-works projects. To keep the people occupied during Nile flood time, the pharaohs, it is believed, hired the sweating hordes to build the monuments. In similar fashion the emperor Vespasian (reg. 69-79) attempted to get some of the mob of Rome off their collective gluteus maximus to construct the Colosseum. And the beautiful temples and theaters of the Greeks across the Mediterranean were, for the most part, government financed. FDR employed some 8 million over the life of the WPA doing everything from archaeology to bridge building, photography, painting, sculpture, and parks creation. Untold numbers must have been employed in public works projects over the ages and were paid and fed. We today have certainly enjoyed the aesthetic benefits of these ancient and modern projects. But others had to pay the price.
There are other problems with government make-work projects, besides the matter of paying one citizen out of the pocket of another. Many of these projects have been, throughout history, low skill jobs. Granted, low skill jobs are always going to be necessary in every society, but many of the public works projects of the past offered no opportunity for skills acquisition. It was more desirable to get many employed rather than a few trained. The men Vespasian employed out of the Roman mob for the shovel-ready job of Colosseum construction were not architects, masons, or sculptors; they were grunt laborers, who were not about to be trained and admitted into the stoneworker or mason unions. Moreover, the necessity of employing and keeping employed low skilled labor severely retarded any progress in Roman technology and engineering (a subject for my next blog post).
Another problem of the public works project is the down-stream cost of maintenance. Great, the temple is built! But the temple doesn’t maintain itself. Money is going to have to be found for its upkeep and repair. So, let our government build a new school in some impoverished community and create a number of short term jobs there (grunt labor?). When the school is built and staffed, who is going to pay the teachers and staff or fund the buildings’ maintenance? Unless wealth is created in that community with non-government, non-make-work jobs, tax money from outside the community will have to be diverted there.
That brings us to the last way a government can stimulate job creation: to clear the way for private firms and individuals to do the job. This is the most difficult, with no spectacular short-term headlines but with sounder long-term results. A case is often made for government funding of research and development - our atom splitting, again. But like the Roman bread dole, government grants often become a way of life for scholars and scientists. The results can actually stultify progress in some cases. Either the research results produced for the government must conform to what is politically fashionable at the moment (global warming comes to mind), or the “solution” is postponed to keep the funds flowing.
Another possibility is for the government simply to alleviate what hinders job creation most: taxes. What of the old dictum, “businesses do not pay taxes?” Well, they don’t. But they do pass the tax on to the consumers in the form of higher prices. The higher something costs, the fewer of them will be purchased; the fewer purchased, the fewer workers needed to produce them.
When Warren Harding was elected president in 1920, he inherited a crippling recession from Woodrow Wilson that easily could have morphed into a depression (some historians think it already was). Harding slashed business taxes and reined in federal spending to howls of protest and recrimination (R.K. Murray, The Harding Era). By the mid-twenties (he died in 1923) unemployment was at an estimated 1.8%, the national debt was being paid off, and the GNP was on the rise. Harding is not hailed as a great depression fighter because he never let one happen. FDR’s policies, however, may well have prolonged and exacerbated the depression he inherited (Amity Shlaes, The Forgotten Man). Harding and FDR provide a stark contrast to the role of government towards job creation.
So, why do politicians opt for the quick, flashy short-term fix and not the long-term solution? An easy answer might be because of an ignorance of economics and history. But there is a more fundamental reason. A political decision, by its very nature, is designed to enable the politician to hold on to power; politicians must be seen by their constituents to be doing something now! Politicians are not answerable to the constituents of a later generation. Most telling in this regard is that FDR knew perfectly well that his Social Security scheme would be broke by 1980. Personally, he felt bad about strapping the citizenry of the 80s with a colossal debt. But the more cynical of those around him noted that none of them were going to be around in 1980.