Why govt spending doesnt create jobs

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    Why govt spending doesnt create jobs

    While most economists and policy makers are focusing on the International Monetary Fund’s epiphany on the perils of austerity, some researchers at the IMF have offered another take on the fiscal-policy debate. They found that less is more, even when it comes to the size and scope of government.

    Such findings are hardly new. But you would never know it from the debate being waged on the op-ed pages of daily newspapers and on columnists’ blogs. The impression one gets from reading them is that fiscal austerity is ill-advised while more government spending -- timely, targeted and temporary -- is a costless way to boost economic growth.

    The authors of a June 2013 IMF working paper, “Does Public-Sector Employment Fully Crowd Out Private-Sector Employment?,” answer in the affirmative. After examining data from both developing and advanced economies, Alberto Behar and Junghwan Mok find that a public-sector job comes at the expense of a private-sector job. In other words, paying someone to dig holes and fill them up doesn’t reduce unemployment.

    Today’s proponents of increased government spending aren’t necessarily arguing for hiring more government workers, whose ranks have been diminished over the last four years. They do want the federal government to provide some extra oomph to an economy that is barely eking out 2 percent growth four years after the recession ended.

    Another dose of stimulus is both unnecessary and counterproductive in the medium and long term. There seems to be widespread agreement -- among academics and economists at the IMF, European Central Bank, World Bank and Organization for Economic Co-operation and Development, if not among the policy setters themselves -- that government spending has a sizeable negative impact on growth.

    Say What?

    What?, you say. That was my reaction, too, before I read some recent papers from those institutions referenced by Cato Institute Senior Fellow Daniel Mitchell on his blog.

    “There are lots of studies outlining the reasons government spending has a negative effect on growth,” he said in a telephone interview.

    For example, an overpaid civil service distorts the wage structure and has to be financed by higher taxes, he said. Or it bids up the price of labor in the private sector, which makes employers reluctant to hire.

    Not all government spending is created equal. An ECB working paper found that public wages, interest payments, subsidies and government consumption had a negative effect on growth, while spending on education and health was a positive, enhancing the quality of the workforce and its productivity.

    This shouldn’t be hard to understand. Simple arithmetic will suffice. If the government wants to spend money, it has three means at its disposal: taxation, borrowing and inflation. The third is the province of the central bank, so let’s deal with Nos. 1 and 2 first.

    If the government takes a dollar from A in taxes to give to B, even Keynesians can understand that it’s a wash in terms of aggregate demand. Yes, B may have a higher propensity to consume, but he also may be in no position to do it because of a prior debt binge. Viewed from the supply side -- from the disincentives they create to work, invest and save -- higher tax rates are a negative.

    What about borrowing from A to give to B? Again, it’s a wash because A would have done something else with his savings. Which brings us to what Mitchell says is the crux of the argument: What is the most efficient way to allocate labor and capital in an economy?

    Anyone who has watched the videos of Internal Revenue Service employees learning line dancing at one of their taxpayer-funded retreats should get the correct answer on first try.

    Strike Out

    That doesn’t mean government spending is never justified. Even Milton Friedman acknowledged that the Great Depression was one of those cases where it was. He stressed that, in general, the benefits accrue to the recipients of government largess, not the economy overall.

    It was refreshing to learn that other academics have come around to the view that in the intermediate and long term, a larger government inhibits growth. The short run is still up for grabs. One of the reasons is the way government spending is accounted for in gross domestic product, according to Veronique de Rugy, a senior fellow at George Mason University’s Mercatus Center in Arlington, Virginia.

    As she explains it, if a private employer hires his deadbeat nephew and pays him $40,000 a year to do nothing, there will be no effect on GDP until he produces something. Alternatively, if the government hires the same deadbeat at the same salary, that spending will add, dollar for dollar, to GDP.

    In the same way, cuts in government spending affect GDP on paper, even if there is no real-world effect. Often it takes time, but those resources are reallocated to the private sector, which uses them more efficiently.

    Before you label me heartless, I should add that this discussion has been confined to the economic impact of government spending, not its moral obligation to help the truly needy, on which I am a sap.

    Last but not least is inflation, or the creation of more money by the Federal Reserve. The Fed can do that on its own. It doesn’t need to finance new government spending to increase the money stock. What looks like stimulus from fiscal policy is really monetary accommodation, Friedman said.

    That’s strike three for government spending. It didn’t stop the IMF from advising the U.S. to adopt a more “gradual and balanced approach” to fiscal consolidation, including repealing the automatic spending cuts. Maybe the IMF pooh-bahs should take a look at the work the staff is producing.

    http://www.bloomberg.com/news/2013-06-19/why-government-spending-does-nothing-for-jobs.html

     
  2. You have chosen to ignore posts from skeeter20. Show skeeter20's posts

    Re: Why govt spending doesnt create jobs


    Nice article, t.  I wish the progressives would read it and learn something.

     
  3. You have chosen to ignore posts from UserName99. Show UserName99's posts

    Re: Why govt spending doesnt create jobs

    Malarky.

    In a depressed economy, consumers don't spend so businesses don't invest. There is no wash in aggregate demand because consumers and businesses sit on what cash they have and DO NOT spend.

    The idea tha public sector employment "crowds out" private sector employment might be the biggest lie in this screed.

    If the government initiates a public works project (stimulus) to repair our abysmal infrastructure, nobody in the private sector will be 'crowded out' because nobody is doing that work to begin with.  It would simply reduce unemployment, increase tax revenues to manage our defecit, and create demand because people are spending again. 

     

     
  4. You have chosen to ignore posts from StalkingButler. Show StalkingButler's posts

    Re: Why govt spending doesnt create jobs

     

    I wish the progressives would read it and learn something.

     

    Yeah, right.

    Progressives are not going to get it because they see the economy as a zero sum game where the (evil!) rich has too much of the pie and won't share. They don't understand that private sector investment is the key to growing an economy and that the less there is to invest by the private sector the less growth there will be. Governments cannot do the same because their operations are overhead, they do not produce wealth and their futile attempts at investment are almost always massive failures because they're not looking for a return on their investment, they're looking to promote some political or social agenda.

    If there were a glimmer of truth in what UserName99 says then we'd historically see socialist command economies be wildly successful. We don't and the reasons for that are obvious.

     

    --

    Never underestimate the power of stupid people in large groups.

     
  5. You have chosen to ignore posts from skeeter20. Show skeeter20's posts

    Re: Why govt spending doesnt create jobs

    In response to StalkingButler's comment:

     

    [QUOTE]I wish the progressives would read it and learn something.

     

     

    Yeah, right.

    Progressives are not going to get it because they see the economy as a zero sum game where the (evil!) rich has too much of the pie and won't share. They don't understand that private sector investment is the key to growing an economy and that the less there is to invest by the private sector the less growth there will be. Governments cannot do the same because their operations are overhead, they do not produce wealth and their futile attempts at investment are almost always massive failures because they're not looking for a return on their investment, they're looking to promote some political or social agenda.

    If there were a glimmer of truth in what UserName99 says then we'd historically see socialist command economies be wildly successful. We don't and the reasons for that are obvious.

     

    --

    Never underestimate the power of stupid people in large groups.

    [/QUOTE]

    You are spot on withthe zero sum game.  Progressives do not understand the principles of wealth creation.  They think Bernake writing a really big number of a yellow stickie and handing it to a data entry clerk is wealth creation.

     
  6. You have chosen to ignore posts from MrCricket. Show MrCricket's posts

    Re: Why govt spending doesnt create jobs

    ahhh more friedmanite "free-market" propaganda. 

     
  7. You have chosen to ignore posts from FortySixAndTwo. Show FortySixAndTwo's posts

    Re: Why govt spending doesnt create jobs

    Hmmmm....anyone know what happened to Airborne???

     
  8. You have chosen to ignore posts from tvoter. Show tvoter's posts

    Re: Why govt spending doesnt create jobs

    In response to UserName99's comment:

    Malarky.

    In a depressed economy, consumers don't spend so businesses don't invest. There is no wash in aggregate demand because consumers and businesses sit on what cash they have and DO NOT spend.

    The idea tha public sector employment "crowds out" private sector employment might be the biggest lie in this screed.

    If the government initiates a public works project (stimulus) to repair our abysmal infrastructure, nobody in the private sector will be 'crowded out' because nobody is doing that work to begin with.  It would simply reduce unemployment, increase tax revenues to manage our defecit, and create demand because people are spending again. 

     




    ^^^ is a band aid type temporary fix at best

     
  9. You have chosen to ignore posts from UserName99. Show UserName99's posts

    Re: Why govt spending doesnt create jobs

    In response to MrCricket's comment:

    ahhh more friedmanite "free-market" propaganda. 




    The funny part is that the author admits that stimulus type spending works, when she says that Milton Friedman acknowledged (and she appears to agree) that the great depression was a case when government spending was justified.

    Then she's not honest enough to admit  that today's economic conditions are similar to the great depression and therefore would be solved the same way....especially true in Europe.

     

     
  10. You have chosen to ignore posts from MattyScornD. Show MattyScornD's posts

    Re: Why govt spending doesnt create jobs

    Private investment is just as corruptible as public investment.

    The fallacy is in thinking that average investors have any real sway within a game that's rigged toward the wealthiest few.

     

     
  11. You have chosen to ignore posts from MattyScornD. Show MattyScornD's posts

    Re: Why govt spending doesnt create jobs

    In response to skeeter20's comment:

    They think Bernake writing a really big number of a yellow stickie and handing it to a data entry clerk is wealth creation.

    Except nobody anywhere thinks that, least of all Bernanke.

     

     

     
  12. You have chosen to ignore posts from tvoter. Show tvoter's posts

    Re: Why govt spending doesnt create jobs

    In response to MattyScornD's comment:

    Private investment is just as corruptible as public investment.

    The fallacy is in thinking that average investors have any real sway within a game that's rigged toward the wealthiest few.

     




    True but, private investment is held responsible by the free market while public investment is a history of waste and abuse with no accountibility.

     
  13. You have chosen to ignore posts from MattyScornD. Show MattyScornD's posts

    Re: Why govt spending doesnt create jobs

    In response to tvoter's comment:

    In response to MattyScornD's comment:

    [QUOTE]

     

    Private investment is just as corruptible as public investment.

    The fallacy is in thinking that average investors have any real sway within a game that's rigged toward the wealthiest few.

     

     




    True but, private investment is held responsible by the free market while public investment is a history of waste and abuse with no accountibility.

     

    [/QUOTE]

    Kind of the opposite.  We can vote out govt officials (though we often don't), but we can't vote out shady accountants and CEOs.  And the free market seldom has much concern about policing itself...hence the need for regulators and rules.

     

     

     

     
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  15. You have chosen to ignore posts from StalkingButler. Show StalkingButler's posts

    Re: Why govt spending doesnt create jobs

    China, which grows it's economy at close to double-digit rates would disagree.

    They're still a non-democratic country but they figured out a while ago that command economies don't work. They've made huge strides in opening up their economy to entrepreneurs and, thus, the economic success.

    Just think how amazing their economy would be if the had a free and open society and even more economic freedom. They'd be unstoppable, like we used to be.

     

    --

    Never underestimate the power of stupid people in large groups.

     
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  17. You have chosen to ignore posts from StalkingButler. Show StalkingButler's posts

    Re: Why govt spending doesnt create jobs

    The fallacy is in thinking that average investors have any real sway within a game that's rigged toward the wealthiest few.

    The proper role of government is to keep a level playing field so that everyone has the same opportunity to complete within the system. The failure takes place when large corporations and politicians rig the system to favor the corporations. This includes loads of regulation that the larger companies can afford to manage while acting as a barrier to entry to smaller competitors.

    Being wealthy is not the problem, being able to bend government rules to favor you is. And the larger the government the easier it is to do.

     

    --

    Never underestimate the power of stupid people in large groups.

     
  18. You have chosen to ignore posts from tvoter. Show tvoter's posts

    Re: Why govt spending doesnt create jobs

    In response to StalkingButler's comment:

     

    The proper role of government is to keep a level playing field so that everyone has the same opportunity to complete within the system. The failure takes place when large corporations and politicians rig the system to favor the corporations. This includes loads of regulation that the larger companies can afford to manage while acting as a barrier to entry to smaller competitors.

    Being wealthy is not the problem, being able to bend government rules to favor you is. And the larger the government the easier it is to do.

     Never underestimate the power of stupid people in large groups.



    BOOM!!!

     
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  20. You have chosen to ignore posts from tvoter. Show tvoter's posts

    Re: Why govt spending doesnt create jobs

    In response to MattyScornD's comment:



    Kind of the opposite.  We can vote out govt officials (though we often don't), 




    LOL, really? we have how many career criminal politicians?

    America is so divided 47% vote for the D no matter what and 47% vote for the R no matter what.

    They just run negative ads to a specific demographic and raise money!

    NO accountability whatsoever!!

     
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  22. You have chosen to ignore posts from skeeter20. Show skeeter20's posts

    Re: Why govt spending doesnt create jobs

    In response to UserName99's comment:

     

    In response to MrCricket's comment:

     

     

     

    ahhh more friedmanite "free-market" propaganda. 

     

     




     

     

    The funny part is that the author admits that stimulus type spending works, when she says that Milton Friedman acknowledged (and she appears to agree) that the great depression was a case when government spending was justified.

    Then she's not honest enough to admit  that today's economic conditions are similar to the great depression and therefore would be solved the same way....especially true in Europe.

     

     



    Six years and counting. I think we have given the Keynsians enough time.  Their theories are not fixing the economy, particularly for the non- wealthy.

    There is little similarity to the conditions of the Great Depression and now.  See any massive bank failures?  How about people selling apples on the street cornpeople he biggest difference I see is the people.  On your drive home, look around you.  Tell me how many old cars you see.  Few.

    we have become an entitlement driven society.  That was not in play in the Great Depression to the degree it is today.

     
  23. You have chosen to ignore posts from StalkingButler. Show StalkingButler's posts

    Re: Why govt spending doesnt create jobs

    China's economy is still very much a state-controlled, socialist-style entity with exceptions to that rule. Those exceptions still must be sanctioned by the central gov't and are closely monitored.

    Yeah, just wait for their massive housing bubble crash to hit. Just like ours it's an unforced government error and when it hits it's gonna be bad.

     

    --

    Never underestimate the power of stupid people in large groups.

     
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  25. You have chosen to ignore posts from skeeter20. Show skeeter20's posts

    Re: Why govt spending doesnt create jobs

    In response to A_Concerned_Citizen's comment:

    In response to StalkingButler's comment:

    [QUOTE]

     

     

     

    [QUOTE]The fallacy is in thinking that average investors have any real sway within a game that's rigged toward the wealthiest few.

     

     

    The proper role of government is to keep a level playing field so that everyone has the same opportunity to complete within the system. The failure takes place when large corporations and politicians rig the system to favor the corporations. This includes loads of regulation that the larger companies can afford to manage while acting as a barrier to entry to smaller competitors.

    Being wealthy is not the problem, being able to bend government rules to favor you is. And the larger the government the easier it is to do.

     

    --

    Never underestimate the power of stupid people in large groups.

     

    [/QUOTE]


     

    You're ignoring the obvious.... Only the wealthy can afford to buy the influence of politicians.

    Wealth, by and of itself, may not be the problem but it certainly is the tool, often the only tool, needed to get favorable legislation passed.

     

    [/QUOTE]

    The rich aren't the problem, the Democrats, and to a lesser extent the republicans, are the problem.


    Why is it that I have listened to Democrats crow how they take care of the poor and middle class, yet things always yet worse for these groups under Democrats?

     
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