Who creates most jobs? Hint:
It’s not the government. Almost everyone seems to grasp that the private sector
is the true jobs machine. But here’s a notable exception to the consensus: the
editorial page of The New York Times. The other day, its lead editorial was “The Myth of Job Creation: The government does in fact
create jobs, important jobs, millions of them.” In 35 years, I can’t recall ever
writing a column refuting an editorial. But this one warrants special treatment
because the Times’ argument is so simplistic, the subject is so important and
the Times is such an influential institution.
Let’s examine the Times’
argument. First, it quotes both Mitt Romney and President Obama as embracing
the consensus. Obama says: “This notion that I think government creates jobs,
that that somehow is the answer. That’s not what I believe.”
Completely wrong, says the
Times. Government does create jobs, including “teachers, police officers,
firefighters, soldiers, sailors, astronauts, epidemiologists, antiterrorism
agents, park rangers, diplomats. ...” There are 22 million federal, state and
local workers, notes the Times.
Case closed, it asserts. And
it’s true that, legally, government does expand employment. But economically,
it doesn’t — and that’s what people usually mean when they say “government
doesn’t create jobs.”
What the Times omits is the
money to support all these government jobs. It must come from somewhere —
generally, taxes or loans (bonds, bills). But if the people whose money is
taken via taxation or borrowing had kept the money, they would have spent most
or all of it on something — and that spending would have boosted employment.
Job creation in the private
sector is mostly a spontaneous and circular process. People buy things they
need and want. Or businesses and private investors take risks by investing in
new products, technologies and factories. All this spending, driven by
self-interest and the profit motive, supports more jobs. In a smoothly
functioning market economy, the process feeds on itself. By contrast,
public-sector employment grows only when government claims some private-sector
income to pay its workers. Government is not creating jobs. It’s substituting
public-sector workers for private-sector workers.
Now, let me add three crucial
caveats to avoid misunderstanding.
First: I am not saying
that private-sector jobs are superior to public-sector jobs. Obviously, we need
teachers, soldiers, police officers, epidemiologists and the other workers the
Times mentioned. How many we need and what they should do are political
questions. It’s also true that many government activities — basic research,
highways, schools — can support the private sector. I am not making an argument
for or against a given size of government; that’s another debate. My aim is
merely to explain how government employment increases.
Second: The sharp lines I’ve
drawn between the public and private sectors are, in the real world, blurred.
Most businesses and industries are shaped by government’s tax, spending and
regulatory policies. Some industries (defense and health care, to name two)
depend heavily on government spending and regulations, for good or ill. Industries
that rely heavily on government contracts often resemble public agencies as
much as private enterprises. But these murky realities do not alter the broad
differences in job creation.
And third: There is one
glaring exception to the logic I’ve outlined. When the economy is in a deep
slump, government can — in theory — increase hiring by borrowing and spending
when consumers and businesses are retrenching. If the Times had confined its
argument about government job creation to this possibility, it would have been
on more solid ground. Note, however, that economists fiercely debate how much
government “stimulus” succeeds in practice. If stimulus programs inspire
offsetting private-sector behavior — suppose consumers and companies react to
larger government budget deficits by increasing their saving — then employment
gains would be muted. I don’t intend to settle this debate either.
Understanding job creation has
policy implications. If the private sector is the main source of jobs, then the
incentives, disincentives and the general climate for firms to expand do
matter. In its editorial, the Times opposed government “austerity” because the
economy remains weak. That’s a legitimately debatable policy — see my third
caveat above — but it doesn’t make government a permanent job creator.
There’s a flat-earth quality
to the Times’ argument. If government seems to create jobs, it must. We need to move beyond this primitive view.
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