The GOP Myth of 'Job-Killing' Spending

Discussion in 'Economics' started by olias, Jun 21, 2011.

  1. olias


    Wall Street Journal:

    It was the British economist John Maynard Keynes who famously wrote that ideas, "both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else." Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.

    No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.

    Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"?

    It is easy, but irrelevant, to understand how someone might object to any particular item in the federal budget—whether it is the war in Afghanistan, ethanol subsidies, Social Security benefits, or building bridges to nowhere. But even building bridges to nowhere would create jobs, not destroy them, as the congressman from nowhere knows. To be sure, that is not a valid argument for building them. Dumb public spending deserves to be rejected—but not because it kills jobs.

    The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?

    One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes.

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    Chad Crowe

    For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million.

    A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.

    There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out.

    In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs.

    Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.

    As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway.

    Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.

    Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?

    Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too.

    A package like that is not fantasy. I believe that a bipartisan group of economists, if given the authority, free of political interference, would design some version of it. But that's not how budget decisions are, or should be, made. And as long as one political party clings to the idea that government spending kills jobs, it's hard to see how we extricate ourselves from this mess. As Keynes understood, ideas, whether right or wrong, have consequences.

    Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.
  2. Max E.

    Max E.

    Sure you could make the argument that when we are running 1.5 trillion dollar deficits that the extra spending is creating jobs, but that is simply because the government is creating money out of thin air that didnt exist before, borrowing money from overseas etc, and that eventually leads to inflation, or even worse it eventually leads to bankruptcy, we can not just continue running 1.5 trilion dollar deficits forever, there is no such thing as a free lunch.

    If the government was actually running balanced budgets, and its sole source of revenue is based on the american citizens that it was taxing, then all it is doing is taking from one person and giving to another, and everyone knows that the private sector is far more efficient at creating jobs then the government is, due to the wastefulness and ineptitude of government, so in that sense government spending does infact kill jobs, because it takes from the more efficient people, and puts it in to programs which are far less efficient.

    Due to the fact that the government has to take its money from someone else in order to create jobs, the only way government can create extra jobs which would not have existed without them is through deficit spending, and printing money.
  3. Max E.

    Max E.

    The reason it works in those countries is because they all have caps on the amount doctors get paid, and none of them have the messed up legal system the U.S. has.

    If we were to move over to full on government healthcare without completely overhauling the way our system works we would be paying 5 times as much as these countries, in other words it would be completely unsustainable.
  4. he is correct. republicans are out to lunch as usual. the only way spending could kill jobs was if it caused interest rates to spike. so far it has not. in fact we are near record lows.
  5. For one, French doctors don't have salary caps.

    I don't have the graph but words are just as good(!): Malpractice a Tiny Percentage of Health Care Costs, One of the principal myths surrounding medical malpractice is its effect on overall health care costs. Medical malpractice is actually a tiny percentage of health care costs, in part because medical malpractice claims are far less frequent than many people believe. In 2004, the CBO calculated malpractice costs amounted to “less than 2 percent of overall health care spending. Thus, even a reduction of 25 percent to 30 percent in malpractice costs would lower health care costs by only about 0.4 percent to 0.5 percent, and the likely effect on health insurance premiums would be comparably small.”

    Maybe it was during Generalissimo Bush's reign of stupidity that made people believe malpractice was the cause of high healthcare costs: Malpractice: Savings Reconsidered

    Really, the reason for high healthcare costs is the private insurance.

    Why oh why can't the right wing ever accept facts and reality?
  6. bkveen3


    I'm not arguing against the idea that government spending creates jobs, but I do have one concern. So far the Fed purchased corporate bonds directly through QE1 and then government bonds directly through QE2. Both of these market operations have the effect of keeping bond rates down. My question is this. When the Fed ends purchases does government borrowing start to crowd out corporate borrowing? Has quantitative easing kept us from seeing how much of the bond market treasuries have taken over? We can keep an eye on corporate rates over the next year or so to find out.
  7. As creationists, they prefer their own reality.
  8. Eight


    Corporations don't pay taxes but small businesses do, not all but nearly all. If it's true that small businesses are the job creation engine and the small business owner can see a massive taxation event and massive inflation event on the horizon then his outlook is a lot dimmer, it's a lot harder for him to get in an expansive mood and start hiring... more likely he will be thinking of investing in hard assets and hoping the business can run the way it is...

    Also it's discouraging to note that when the USSR melted down the Communist leaders that took everything private became the owners and those that could not get their name on the title of something got high pay as Consultants for people that were grabbing stuff... So the small business owner is facing a really shitty political situation with exactly the same types of people running the US. I'd say most would be more in a mood to liquidate and go somewhere and enjoy life than to get in an expansive mood and hire people...