Monday, June 14, 2010

The Fallacy of Job Creation

The fallacy of job creation by government was first exposed by the French economist Bastiat in the 19th century with his story of the broken window. Imagine a young boy throws a rock through a window, breaking it. The townspeople gather and bemoan the loss to the store owner. But eventually one notes that it means more business for the glazier. And another observes that the glazier will then have money to spend on new shoes. And then the shoe seller will have money to spend on a new suit. Soon, the crowd convinces themselves that the broken window is actually quite a good thing.

The fallacy, of course, is that if the window was never broken, the store owner would still have a functioning window and could spend the money on something else, such as new stock for his store. All the breaking of the window does is force the store owner to spend money he wouldn't have had to spend if the window had been left intact. There is no net gain in wealth here. If there was, why wouldn't we recommend urban riots as an economic recovery program?

When government attempts to "create" a job, it is not unlike a vandal who "creates" work for a glazier. There are only three ways for a government to acquire resources: it can tax, it can borrow or it can print money (inflate). No matter what method is used to acquire the resources, the money that government spends on any stimulus must come out of the private sector. If it is through taxes, it is obvious that the private sector has less to spend, leading to losses that at least cancel out any jobs created by government. If it is through borrowing, that lowers the savings available to the private sector (and raises interest rates in the process), reducing the amount the sector can borrow and the jobs it can create. If it is through printing money, it reduces the purchasing power of private sector incomes and savings. When we add to this the general inefficiency of the heavily politicized public sector, it is quite probable that government spending programs will cost more jobs in the private sector than they create.