How Capitalism Will Save Us (20 page)

It’s easy to see why so many people believe that government-created jobs are a solution to a down economy. Job programs sound like a swift and decisive response to high unemployment. Why not put people to work expanding and repairing the nation’s infrastructure or working on “green” projects? Aren’t these worthy undertakings that would have to be done at some point anyway?

The only problem is that in the Real World, public-works programs—contrary to what many believe—have rarely, if ever, been shown to be an effective solution to economic recession or even depression.

French economist Frédéric Bastiat explained why back in 1850. He wrote about what he called the “broken window fallacy.” This story is famously retold by economist Henry Hazlitt in
Economics in One Lesson
.
²¹
A boy throws a brick through the window of a local bakery, shattering the window and raining glass over cakes and pies. The bakery owner is enraged by this vandalism. Bystanders tell him to look on the bright side. What looks like an act of destruction will end up creating work for people.

Wait a minute. It may look like work and wealth are being created by the broken window. In fact they’re not. As Hazlitt retells Bastiat’s tale:

The broken-window fallacy is the idea that destroying wealth—the baker’s window—can produce new wealth for those who rally to replace it. What really happens is that wealth is transferred from one group of individuals (the baker and the tailor) to another (the glass maker and his suppliers). And the baker ends up with a loss—the $250 he would have spent on a new suit.

The same can be said of government job programs: People see the work and jobs that are being created. What they don’t see is the wealth that is destroyed so that this activity can take place.

Government finances its job programs through heavier taxation of people and businesses. Or, as Obama initially plans to do, through borrowing. Either way, the government takes funds that otherwise would have been used for new business investment and consumer spending. People being recruited to work in government-sector jobs would otherwise have been available to work in growth-producing private-sector businesses. In other words, money and jobs are simply transferred from one sector to another to fix the “broken window” of the economy.

ABC broadcast journalist and commentator John Stossel has a good explanation of why government job programs are ultimately useless.

Stossel points out that President Obama’s plan to put people to work in so-called green jobs, weatherizing buildings, and other public-works projects, doesn’t create growth or produce innovations that raise living standards and help society advance.

Economist Thomas Woods Jr. compares the process to using a bucket to move water in a pool from the deep end to the shallow end. Government is generally not in the business of creating innovative goods and new technologies that make the economy expand.

In those rare instances when it does, usually in the military, the application remains narrow. Job and wealth creation are limited or virtually nonexistent.

Case in point: the Defense Advanced Research Projects Agency (DARPA) invented the Internet in the late 1960s to facilitate communication among universities doing defense-related research. But the network encompassed only a handful of academic computers until the late 1980s, when it was opened to commercial Internet service providers like CompuServe and others. Only when the private sector gained access did the Web truly take off and become the revolutionary force and job creator that we know today.

Government originated the computer during World War II to help calculate the trajectory of artillery shells. Obviously, computers have wider applications than aiding artillery officers. It was the private sector that ultimately made computers into necessities we cannot live without.

In contrast, it did not take twenty years for Apple to create thousands of jobs after inventing the iPod. Researchers at UC Irvine estimate that the revolutionary device has created more than 41,000 jobs—from engineers to retailers. That’s probably a conservative estimate, as their study leaves out thousands of people who make and sell iPod accessories, as well as those who are in the business of creating and marketing pod-casts and other content.

Proponents of government job creation point to FDR’s famed public-works programs of the New Deal, which, they say, helped pull America out of the Great Depression. This is a myth. Economist Amity Shlaes is one of an increasing number of historians who make a powerful argument that the public-works programs of that era actually kept the economy from recovering.

Shlaes acknowledges that those projects “created enduring edifices,” such as New York’s Triborough Bridge, the Mountain Theater of Mount Tamalpais State Park near San Francisco, and the Texas post office murals. But they ultimately failed to fix the economy. The reason: “Public jobs
did their work inefficiently. That was because the jobs were scripted to serve political ends, not economic ones.”
²⁶

In the Real World, the economy grows and creates wealth by innovating and improving efficiency. Increased efficiency results in profits that can then be invested in growth and expansion, replacing capital destroyed elsewhere. But the government during the Depression was doing exactly the opposite: creating wasteful, make-work jobs that produced little economic benefit for anyone other than the people being paid to create them.

While researching her widely read book
The Forgotten Man: A New History of the Great Depression
, Shlaes came across the example of a government farm in Casa Grande, Arizona, that employed workers who were “poor—close to ‘Grapes of Wrath’ poor—but sophisticated.” She recounts,

What was their manager’s response to their efforts to save labor and boost the farm’s profit? He fired them. “The government man was horrified at the idea of killing the jobs he was supposed to create.”

Making matters worse, these public-works jobs were being created with capital that could have generated real jobs. Government taxation and the sale of bonds, Shlaes says, effectively sucked all the air out of the economy, appropriating capital that would have been available for growth-producing private-sector investment:

Ultimately, Shlaes writes, public jobs were a Band-Aid solution: “The New Deal’s emergency jobs were short term, lasting months, not years, so people could not settle into them. This led to further disruption.” Shlaes notes that in the best years of Roosevelt’s first two terms, unemployment remained at severe recession levels. In fact, unemployment averaged almost 15 percent before the United States entered World War II. Roosevelt’s treasury secretary, Henry Morgenthau, admitted, “[A]fter eight years of this Administration we have just as much unemployment as when we started.”

Depression-era programs are far from the only examples of government failure to stimulate a flagging economy through by spreading the work around. Over a more than decade-long recession, Japan launched at least ten stimulus programs—including public-works projects. But none delivered any lasting boost.

And then there is the question: do people
really
want all those products and services—green or otherwise—being created? John Stossel points out:

Government “stimulus” programs are supposed to deliver a quicker, more immediate boost to the economy than simply allowing the economy’s “invisible hand” to create jobs spontaneously. In fact, it can take years for government programs to work. Many policy makers in 2009 were stunned when a report from the nonpartisan Congressional Budget Office predicted that the $358 billion in proposed infrastructure projects could take as long as ten years to work its way into the economy.
³⁰
The report predicted that only about a third of the infrastructure money would be spent by the end of 2010. Most of the government’s rescue package, and jobs, would most likely be delivered after the economy recovered.