Beware of Government Job Creation Schemes

To pull us out of the current recession, politicians on the state and federal level are jumping on the job creation bandwagon. Governor Kulongoski wants to spend a billion dollars on transportation infrastructure, in part to put Oregonians to work. President-elect Obama wants to spend hundreds of billions of dollars to create millions of infrastructure and so-called “green” energy jobs.

Infrastructure and alternative energy projects may or may not be good investments, but selling them as job creation engines almost certainly will end in disappointment. Government is not likely to make better investment decisions than the private sector, yet it will be government that takes money from the private sector, in both higher taxes and misdirected borrowing costs, to fund these projects.

Just remember the bridge to nowhere in Alaska. Building it would have created jobs, but eventually everyone realized that it would simply deflect money from more productive projects. Yet in today’s climate, don’t be surprised if many bridges to nowhere are proposed, and funded, because job creation is now such a high government priority.

Green energy projects should raise the same concerns. Many such projects won’t pencil out without massive government subsidies. So funding them will be a net drain on the economy, even while politicians point to the jobs created.

Jobs are good, but let’s make sure that they make the overall economic situation better, not worse.


Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.

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  • Steve Plunk

    That job creation scheme may sound good to some but for a guy like me it will cost a bundle. Not only will my weight mile tax go up but the proposed boost in registration fees will kill me every year at renewal time.

    These job creation proposals are little more than payoffs to the unions who supported the Dems in the election. If the good Gov wants to stimulate the economy perhaps a tax holiday or less business regulation. The false premise that Oregon’s roads are crumbling is no excuse for a tax increase during a recession.

  • Jim Labbe

    “Government is not likely to make better investment decisions than the private sector”

    Government actually could make better investments for society especially if and where it invests in things for which the private sector has not and would not invest simply because there is not profit to be made. A prime example, is investments in the protection and restoration of natural ecosystems to enhance multiple services they provide society: air and water quality, water quantity, reduced natural hazards, and the numerous social and economic values of native biodiversity. Ecosystem services do yield real economic benefits demonstrated in part by their replacement cost.

    We have over 200 years of environmentally destructive development in the United States. Fortunes were made extracting resources but there has been a tremendous costs and impacts born by society and future generations. Government programs like the Civilian Conservation Corp of the 1930s could do a tremendous amount of economic good in the near-term and the long-term by making investments that protect, enhance and restore local and regional ecosystems.

    Jim Labbe

  • John in Oregon

    Steve has raised some important questions about the soundness of the Governors “investment in transportation infrastructure”. When I initially heard the Governors announcement I remember thinking didn’t we already do this? A few minutes turned up this.

    *Oregon House Passes $2.5 Billion Bridge-Repair Bill, Funded from Driver Fees.*
    Portland, Ore. Knight Ridder/Tribune Business News
    Jul. 2003

    “A centerpiece of Gov. Ted Kulongoski’s jobs-stimulation plan cleared the Legislature on Wednesday when the House approved a bill that would pump $2.5 billion into Oregon’s lackluster economy to fix hundreds of cracked bridges across the state.”

    So I thought where are those bridges? Why are we doing this yet again once more? Why didn’t this work just 5 years ago?

    Then I thought further and understood that Ted Kulongoski’s bridge project then, and today’s rehashed transportation project are both based on the failed economic thinking of 1935. Even today students are given a skewed view that free market capitalism as the cause of the Great Depression and only government intervention brought about America’s economic recovery.

    This thinking is based on the view of John Maynard Keynes. Keynes claimed that what drives the economy is personal consumption or aggregate expenditures. In other words spending.

    Keynes said that in hard times business cut back on production to avoid surpluses. As they cut back they will of course need less labor and high unemployment will result.

    According to Keynes the culprit is private investment expenditures on machines, buildings, factories, and so on. In other words Keynes claimed that private investments by businessmen are ultimately irrational and entrepreneurs are like sheep that blindly follow the herd.

    For Keynes the holy grail of economic recovery is Government Spending. Spend up economics. A tool President Roosevelt implemented for nearly 10 years with no results.

    In fact FDR’s Treasury Secretary, Henry Morgenthau, said in his private diary;

    “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot.”

    *FDRs policy of Keynesian Spend up Economics failed.*

    In 1938 Columnist Walter Lippmann wrote that;

    “[W]ith almost no important exception every measure he [Roosevelt] has been interested in for the past five months has been to reduce or discourage the production of wealth.”

    *Wealth Creation*

    At the end of WWII Milton Friedman and Anna Schwartz began compiling historical data of what actually happened during the Great Depression. As the data was collected it became obvious that the facts were at odds with the standard Keynesian explanation. Spending is not what drives the economy.

    The data shows that in hard times business makes rational decisions to cut back on production to avoid surpluses. As they cut back they need less labor and unemployment will rise.

    Business also makes further rational decisions to reduce prices to attract sales. Falling prices put pressure on business to find more efficient methods of production, to reduce costs.

    The data show that a key element of recovery is private investment expenditures on machines, buildings, factories, and so on. Business decisions to become more efficient, to produce goods and services at a lower cost are very rational decisions.

    The primary element of recovery is capitol investment. The reduction in cost of production of goods. The creation of wealth. The creation of capitol resources that will sustain on going growth.

    Consider Governor Kulongoski’s jobs-stimulation plan for a moment. Spending Government money will give a man a job. When the job is finished. What then?

    Shortly after taking office US President John Fitzgerald Kennedy faced a faltering economy. A faltering economy that had been one element of the just completed presidential campaign. Washington DC wisdom told JFK to spend money, told JFK to follow the new deal solutions.

    President Kennedy did not follow conventional wisdom. JFK rejected conventional wisdom, rejected John Maynard Keynes, choosing instead to follow the data of Milton Friedman and Anna Schwartz. Kennedy cut taxes and controlled Government spending, fueling a recovery that lasted until LBJ chose Guns and Butter, Viat Nam and the Great Society.

    *“Give a man a fish; you have fed him for today. Teach a man to fish ; and you have fed him for a lifetime”* Author unknown

    Today Governor Kulongoski, a Democratic Congress, and the Office of the President Elect propose a stimulus package. John Maynard Keynes spend up economics. When the stimulus has been consumed, what then?

    We will have given the man a fish for today and made the man a slave for tomorrow.

    In this light the big three bail out is no different. The bail out avoids the needed reduction in cost of production of vehicles. The bail out prevents the creation of capitol resources that will sustain on going growth. The bail out prevents creation of wealth

    *The auto bail out gives auto workers a fish for today.*

    The proposed “investment” in costly energy is the same. Government mandating the use of costly energy stifles the creation of wealth. A true investment would encourage capital development to reduce the cost of solar energy production. Mandates suppress the need to reduce costs, suppress the creation of energy wealth.

    A true investment would be basic research and capitol development which reduces the cost of solar energy production. Basic research that allows efficient storage and transport of solar energy.

    *Mandates are a fish for today. We all know the smell of a fish after three days.*

    • dean

      By and large people being laid off today, especially in the auto industry already know how to fish, both literally and metaphorically. The problem, as Jim Labbe suggests, is that we wrecked the rivers and there are too few fish to feed too many people. And if we have also wrecked our industrial economy it doesn’t matter how good a welder one is.

      Public works projects are not a long term solution to unemployment. They are a “bridge” solution. They can keep able people working and paid and off the dole, hopefully making some useful things that will last a while, until such time as private industry has a new use for their skills. It’s counter-cyclical macro economics and it has worked int he past. Anyway, what’s the alternative? Let people go hungry? Let deflation take over? Not politically acceptable and not good economics.

      • Bob Tiernan

        “Public works projects…can keep able people working and paid and off the dole, hopefully making some useful things that will last a while…”

        A major downside, as noted by Isabel Paterson in 1943, is that many such projects generate nothing and are a drain in that they require more of our money just to be maintained.

        Oh, and I wonder if Jim Labbe is aware that FDR’s public works projects did a lot of damage to the environment he claims to be concerned about.

        Bob Tiernan

  • Jim Labbe

    Bob,

    I am well aware that many of the public works projects during the New Deal had significant environmental impacts. I would absolutely agree that whatever good came from the dams on the Columbia River proved calamitous to the native salmon fishery culturally and ecologically Perhaps a new New Deal program to remove some dams is exactly what is needed.

    However, other programs- including the CCC- did a lot of good for our cultural and natural heritage. For example, the CCC soil conservation work particularly in the mid-west educated thousands about the value of soil to our civilization and the impact of crop rotation or other techniques to prevent erosion. The CCC enriched our historical and cultural heritage as well. Are you really prepared to say that work of constructing Timberline lodge or the Gorge Scenic Highway generated nothing?

    The problem here at Oregon Catalyst and at the Cascade Policy Institute is the ideological predisposition that says government can do no good unless it is making war and private business can only do good. That is the kind of thinking- if you can call it thinking- that isn’t likely to learn from our historical experience.

    Jim

    • dean

      Jim…the gorge scenic highway predated the ccc. But there are lots of other good examples on National Forests and Parks.

      Bob…yes some…maybe even many public works projects generate low value. So do many private sector investments. There is a building in downtown Portland that was built so badly it was never leased out and has been unoccupied for over 20 years. Should we conclude the private sector always or usually makes bad investments?

      • Steve Buckstein

        “There is a building in downtown Portland that was built so badly it was never leased out and has been unoccupied for over 20 years. Should we conclude the private sector always or usually makes bad investments?”

        No, but that’s not the point. When private investors make bad investment decisions the losses generally just affect them. When government makes bad investment decisions we all pay the price. Human nature being what it is, nobody invests other people’s money as carefully as they invest their own money. Sure, government may do some things right, but it’s less likely to do so than the private sector.

  • Jim Labbe

    Dean. Right. The Historic Highway was completed in 1922. The CCC was involved in construction of several of the existing campsites and trails along the highway. The larger point is that historic public investment have benefited past generations and left positive economic and cultural legacy to the present one.

    Steve: Would you say we aren’t currently suffering the consequences of bad private financial investments? It seems to me recent events have highlighted the collateral damage of highly leveraged and/or highly speculative private investment activities.

    Moreover, to the extent private investment does not account for social and environmental costs of doing business (and therefore externalizes them on society), we clearly suffer “the losses” of some private investment.

    Jim

    • Steve Buckstein

      Jim, I did state that bad private investment decisions “generally” just affect those making them. Of course some such decisions can be incredibly harmful to the rest of us, as we’re witnessing today.

      • dean

        Steve…as you know I’m for a mixed economy. I don’t assume government projects are inherently good or bad, nor do I assume private projects are inherently wise or prone to negative externalities.

        But it seems very clear the present recession has been generated by bad private investments, and by definition these are affecting many who had nothing to do with them. I know some argue that certain government policies led investors to make these bad investments, particularly in housing. I don’t agree. Investors are not children. They chose to send capital to poorly thought out investments as adults.

        Anyway…both good and bad decisions are made in both public and private sectors. “Job creation schemes,” obvious pejorative (“scheme”) aside, are a way to get some useful things done while keeping food on the table for people who otherwise would have no work and no income. It beats welfare, and it beats letting yet more people lose their homes or go hungry….in my liberal opinion.

        And there are many useful things that need doing that the private sector can’t or won’t do.

  • Bob Tiernan

    “The problem here at Oregon Catalyst and at the Cascade Policy Institute is the ideological predisposition that says government can do no good unless it is making war and private business can only do good.”

    Not even for a second, Jim. That’s an incredibly poor conclusion. I don’t think I know anyone who believes that, but apparently there are people who think that there are people who think that. If you looked into it some more (objectively), you might find that we agree on a lot more than you realize.

    Your other errors in response to my message have been pointed out by others.

    Bob Tiernan

  • John in Oregon

    The actual auto industry workers (Ford, GM, Chrysler) may well know how to fish. It seems however that the UAW does not. Otherwise why else would the union insist on the “Job Bank” which is a euphemism for paying the worker 90% of salary to sit in a room 8 hours a day year after year doing nothing when there is no work.

    Actually the big 3 are an excellent example of what I was discussing above. That energy policy may be a factor that tips the balance from a recession to a Great Depression.

    I know that many point to the UAW as the reason for the big 3 demise, and frankly an unreasonable wage structure is a big factor. But only one factor of three.

    Bad management decisions, such as building factories they contractually cant sell when closed, is another.

    The third is (surprise, surprise) Government. With energy policy that drives fuel prices up and down like a whipsaw, choking work rules, pollution rules that change at the drop of a whim, and CAFÉ standards that prohibit import of fuel efficient vehicles the big 3 build overseas.

    It all adds up to the straw that breaks the camels back.

    My point is that same kind of actions by Government that turned the 1929 recession into the 12 year Great Depression are present today and energy policy is a huge player.

    Dean you asked > *Do you have ANY information that backs up your claim that of 77,000 bridges built under Roosevelt, that most were as you say, “bridges to nowhere?”*

    See Lawrence W. Reed “Myths of the Great Depression”. The more modern metaphor of the bridge to nowhere is mine. The term that Reed used was boondoggle which is historically relevant. Boondoggle was first used by the New York Times in a 1935 article about the WPA and ever since has been the standard and indispensable epithet for purposeless and wasteful projects in government and business.

    > *I’ve also read more recent analyses from economists including Krugman and Bernanke. *

    One thing to keep in mind is that Krugman tends Keynesian and more than most Krugman is known for letting his bias creep in. Its must to read him for prospective, but he is know as a bad news bear.

    As to the claim that the Great Depression demonstrates that market economies are inherently unstable and must be managed by the government to avoid large disaster.

    Milton Friedman and Anna Jacobson Schwartz showed convincingly that the Federal Reserve’s 1921 to 1929 monetary policies were largely to blame for the 1929 stock market crash.

    In 2002 Ben Bernanke who was then a Federal Reserve Bank governor, said:

    *“I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”*

    Dean you say > *Hoover failed to use the spending power of the government to halt or reverse deflation, and he failed to support relief efforts. He assumed the market would self-correct soon enough.*

    This is factually incorrect. In response to 1929 Hoover instutited the largest peace time tax increase in history and the Smoot-Hawley tariffs which ignited an international trade war.

    During the 1932 campaign Franklin Delano Roosevelt called for a 25-percent reduction in federal spending, a balanced federal budget, a sound gold currency “to be preserved at all hazards,” the removal of government from areas that belonged more appropriately to private enterprise, and an end to the “extravagance” of Hoover’s farm programs.

    Dean you asked > *So the Obama tax you are assuming is a carbon tax? Interesting. Everything I have read suggests he is going for cap and trade, not a carbon tax. You must have better inside information than I have.*

    All I can report is Obamas answer to the San Francisco Chronicle editorial board that he would make the cost of electricity skyrocket and that people could use coal but he would make the cost bankrupt them. The editorial board didn’t ask any follow up but that is typical of the Legacy Media.

    Either way massive extractions from the economy are still extractions and Obamas recent comments indicate he is hell bent on doing so at the expense of the economy.

    Some of the references I used were;

    Ivan Pongracic Jr
    The Great Depression According to Milton Friedman

    Governor Ben S. Bernanke
    Remarks at the University of Chicago, Chicago, Illinois
    November 8, 2002

    Lawrence W. Reed
    Myths of the Great Depression

    Alan Reynolds,
    “What Do We Know About the Great Crash?”

    Hans F. Sennholz,
    “The Great Depression,”

    Murray Rothbard,
    America’s Great Depression

    Benjamin M. Anderson, Economics and the
    Public Welfare: A Financial and Economic
    History of the United States,

    Milton Friedman and Anna Jacobson Schwartz,
    A Monetary History of the United States

    Lindley H. Clark, Jr.,
    “After the Fall,”

    Lawrence H. White
    Why Krugman is wrong about Friedman

  • John in Oregon

    I have thought occasionally why I often respond to Deans comments. I have concluded its primarily because Dean often raises thoughts and ideas worthy of discussion.

    Nevertheless I do find a frustrating tendency to adhere to the WWII principal that a falsehood repeated often enough is the truth. Case in point;

    > *But it seems very clear the present recession has been generated by bad private investments, and by definition these are affecting many who had nothing to do with them. I know some argue that certain government policies led investors to make these bad investments, particularly in housing. I don’t agree. Investors are not children. They chose to send capital to poorly thought out investments as adults.*

    A short version of the above statement is that banks chose to give loans to those who would not be able to repay in order to make a lot of money. Does that seem reasonable? Is that just silly?

    Or

    Does it seem more reasonable that the Courts and Government made these loans a condition of being in the banking business?

    For background consult that bastion of conservative thought The Village Voice and their article;
    * Andrew Cuomo and Fannie and Freddie
    How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis*

    Or the IBD;
    *Stop Covering Up And Kill The CRA*

    Jim > *The problem here at Oregon Catalyst and at the Cascade Policy Institute is the ideological predisposition that says government can do no good unless it is making war and private business can only do good. That is the kind of thinking- if you can call it thinking- that isn’t likely to learn from our historical experience.*

    I disagree. For me, and I assume the CPI, the question is the appropriate roll of Government and Business. For example the policing of business activity and punishment of fraud is a clear Government roll. When Government steps out side that roll and tries to make bushiness decisions that’s well outside a proper roll.

    That is the lesson of the failure of the New Deal.

    • dean

      John…there is a difference between a “falsehood” and a different interpretation. You believe the mortgage crisis leading to the financial crisis was brought about primarily by government policy. Based on the evidence I’ve seen, I don’t. That doesn’t make me a liar, unless I don’t believe I am saying.

  • Bob Tiernan

    Dean pointed out that, “There is a building in downtown Portland that was built so badly it was never leased out and has been unoccupied for over 20 years.”

    Well, I don’t know if such a building exists or not, but its existance in such a state has no negative effect on me any more than Beacon Rock’s existance has. In the meantime, I’m sure the owner pays property taxes.

    Bob Tiernan

  • Bob Tiernan

    Jim, there was one other point I wanted to make regarding your comment that. “The problem here…is the ideological predisposition that says…private business can only do good.”

    Those who believe in a property-based, individual rights economic system such as free enterprise are strong advocates of having a court system available for individuals who need to address cases of fraud (a type of aggression), theft, or other damages committed by any private individual or firm. This is often mentioned in writings on the subject, so I don’t know how you could have missed it. I’m not sure how you can say that anyone who expects a court system to be used to deal with private individuals or firms is someone who also believes that those individuals or firms will do no wrong.

    Bob Tiernan

  • John in Oregon

    Dean you asked > * Hoover’s response was the opposite of what Roosevelt did, and what is being done today…which is massive deficit spending. Pure Keynes. Now why would Bernanke be following Keynes if he himself believes Keynes was wrong?*

    I can’t get inside the mans mind, however my guess is that Bernanke is deluding him self that he is “targeting” the spending. That he is following Milton Friedman. Specifically Keynes idea is to give money to people to spend which is different than what Bernanke is doing. However it can be said that spending is spending.

    But the more direct question is this. Bloomberg now reports credit crisis spending at between 7.4 and 8,6 Trillion. Thus the obvious question. *Why isnt it working?*

    > *Government energy policies affect the foreign car companies doing business here as much as it affects domestic companies.*

    What explains why the CAFÉ standards prohibit only the big 3 from importing high mileage vehicles? Might it be an attack by Congress on big three profits from big heavy gas guzzlers? A double win attack on evil profit and evil big cars.

    Toyota has been building the Pris for ten years with a million units on the road. Despite large Government subsidies Toyota continues to offset Pris losses from sales of conventional vehicles. Which explains why Toyota canceled the Pris factory and doesn’t explain why this is the business model Congress wishes to impose on GM, Ford, and Chrysler.

    Well it does explain it when one recognizes that Congress wants to impose its power to instruct the American public that they really do want to drive golf carts.

    > *And by the way, labor represents only about 10% of the cost of a GM or Ford car. Automation rules.*

    The answer is an oversimplification. It considers only direct assembly-line labor costs. It excludes legacy labor costs which boost per worker floor costs to approximately $75 per hour. It excludes labor costs of R&D parts, advertising, and marketing. The real labor cost of any product is the *total* cost of labor

    > *I think you are misreading Obama’s intentions based on a single interview.*

    Steven Chu, who Obama appointed Secretary of Energy, has stated he intends to shut down all Coal plants immediately.

    Dean > *You believe the mortgage crisis leading to the financial crisis was brought about primarily by government policy. Based on the evidence I’ve seen, I don’t. That doesn’t make me a liar, unless I don’t believe I am saying.*

    Repeating a falsehood while believing its true does not make one a liar, neither does it make the falsehood true.

    There is one key pivotal moment in the path to the sub-prime credit crises. That moment was the HUD / Andrew Cuomo low income lawsuit and the HUD / Andrew Cuomo low income lending requirements for Fannie and Freddie. Prior to that moment all activist law suits failed. After that moment most succeeded making sub-prime lending a requirement.

    Dean you also said > *Hoover’s response was the opposite of what Roosevelt did, and what is being done today.*

    Lets look at the facts:

    *1929 – 1933 Hover took the following steps;*

    *O* Dramatic increase of government spending for subsidy and relief schemes.

    *O* Largest boost of the national debt in history to date.

    *O* Jawboning into keeping wages artificially high even as prices fell. Labor priced out of the market.

    *O* Reconstruction Finance Corporation ladled out billions more in business subsidies.

    *O* The federal government’s share of GNP soared from 16.4 percent to 21.5 percent.

    *O* Agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers

    *O* tariffs wiped out export markets.

    *O* . The largest tax increase in peacetime history, it doubled the income tax.

    *1933 – 1941 FDR took the following steps;*

    *O* Dramatic increase of government spending for subsidy and relief schemes.

    *O* Government employment to keeping wages artificially high even as prices fell. Labor priced out of the market.

    *O* Even Larger boost of the national debt in history to date.

    *O* The NRA ladled out billions more in business subsidies and controlled business.

    *O* The federal government’s share of GNP soared further.

    *O* Agricultural Adjustment Act, which levied a new tax on agricultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle.

    *O* tariffs wiped out export markets.

    *O* Another large tax increase.

    Commenting decades later Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”

    Excuse me but I don’t see a difference.

    Since you mentioned a colonial book, I would add

    Grapes of Wrath
    John Steinbeck

    The Forgotten Man: A New History of the Great Depression
    Amity Shlaes

    Economic Facts and Fallacies
    Thomas Sowell

    The 5000 Year Leap: A Miracle That Changed the World (Paperback)
    W. Cleon Skousen

  • RickC

    I have started to write articles about job creation and ways to tackle the economic crisis of the new century. Check out one of my articles and feel free to critique, offer insights and pass it around

    https://www.associatedcontent.com/article/1300166/modern_society_threatens_the_american.html?cat=9

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