Government spending isn’t what it is made out to be.
The headlines are full of claims about the number of jobs created or saved by the stimulus package, the impact of the 
Cash for Clunkers program on U.S. output and, the latest, the reduction in the deficit from the proposed U.S. health care reform legislation.
What total rubbish!
Government spending is just that — SPENDING. It does not, can not, never has, and never will CREATE any output, economic wealth, or job. The only way — and I mean the ONLY way — that profits or wealth or a new job is created is through a business. Businesses are the only entity that can hire labor and capital and combine them in such a way as to create a product or a service that society may decide is worth more than it costs.
And that spread between the cost of production and what society is willing to pay is economic value; it is the generation of profits that then enables the taxes that the government collects to spend on the goods and services it thinks America ought to consume.
Private industry is the job creator. Not the government. And this is not wishful thinking, or a political point of view, or a theoretical model. It is an unmitigated, irrefutable fact.
By Sherry Jarrell
Learning from Dogs 
I don’t want to debate whether the recent stimulus packages have created jobs or not, since the data isn’t clear yet, but when the government hires someone, and pays them a salary, like the Homeland Security driving instructor making $67k per year in the link below, that is called a JOB.
http://jobview.usajobs.gov/GetJob.aspx?JobID=84778134&JobTitle=Law+Enforcement+Specialist+%28Driver+Instructor%29&q=immigration+customs+enforcement&AVSDM=2009-11-24+11%3a40%3a00
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Thanks for your comment. Actually, we don’t need to wait for the data on the stimulus package to come out, nor would we need to debate the data when it comes out. That data, like every article, every debate, every blog I’ve seen on the issue, miss the point. They all begin the analysis too late in the process, asking whether a dollar of government spending is better or worse than a dollar of private spending. We need to back up, to the point where that dollar of revenue began “life,” to when it was created, and that is inside a private company, when a customer chose to spend $2.00 for a good or service that cost the company $1.00 in labor and capital to produce.
Now take that dollar and trace it through two processes: one is back into the company as reinvested earnings, where it will generate at least two dollars of value if the company merely repeats the productive process that generated the dollar in profits to begin with. The other process traces the dollar of profit when it is collected as taxes instead. The dollar has to be collected by the regional revenue department, recorded, sent to Treasury, pay for Treasury Department employees, pay for studies that debate where the tax money should go, pay for Congress’ staff and politician salaries and then….once about 50 cents out of that dollar has been used up in the collection and administrative processes that get it from the private company to the point of being disbursed by the Federal government…THEN it gets paid out as the salary of the law enforcement specialist in the job notice you cite above.
The government does not generate its own income from within. It moves income from the private sector to fund spending, not production, in the public sector. Some of those expenditures are absolutely necessary — like defense and other services that we as individuals cannot and will not provide on our own — but so many others, perhaps including the very expenditure you cite — are wasteful and destroy economic wealth in the process.
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There are plenty of ways to argue that government is not the best creator of jobs, or that government jobs are bad uses of capital, or other arguments about efficiency. I would support many of these arguments. But to state flatly that government cannot create jobs is clearly false. There are millions of people who spend their lives getting salaries and benefits from the government in return for working. These are jobs.
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Perhaps it is a matter of semantics, but I do not consider the destruction of jobs a “negative creation” of jobs. And I think our disagreement really hinges on the word “creation.” My point is that for every dollar taken away from private industry by the government to spend, for example, on the salary of a government employee, TWO AND A HALF dollars of salary could have been supported by the private sector. Every short-term government “job” costs the economy at least 2.5 longer-term, economically-justified private sector jobs.
I don’t call that job creation in any sense of the word.
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This sounds all unreal to me… Call me dense, but let me use a really extreme example. Or two. Fasten the seat belt first.
The Nazis fabricate V2s using slave labor in deep caves. The slaves had jobs, and there was a clear output, as V2’s landed on London, Paris and various Belgian cities, causing terrible destruction. Speak about “incoming”.
Same with Stalin: using ten million slaves, he dug a giant canal system to the north of Moscow, which is used to this day, including by millions of tourists. That canal created wealth. You could have had all the free enterprise you wanted trapping wild beasts along the shore, free enterprise would never have given you a canal. Not that one.
The US canal system was funded with European capital, BTW. The first canal in France was built by the Roman legions, under Marius, keeping in shape while waiting for the Teutoni, and doing something useful.
It is easy to speak about “income”. But what is it? How does the “private sector” create “income”? First, by doing something somebody else wants. So X works to create what Y wants. For example, Y wants protection, so soldier X creates protection for Y.
When the people Y wants protection, government X creates protection for Y. Or maybe Y wants air traffic control, so government X creates it for Y. And so on. People want money, so the government, and its banks, create it (that the banks are privately managed, without a strict deontology, legally enforced, is a source of corruption, especially in the USA).
In civilized countries, people Y wants health care, so government X creates health care for Y. In the USA, people wants health care, and, if people are less than 65, they can go buy themselves some. If they are more than 65, the US government gives them health care.
As it is, people do not create income, they just transfer it, because they like the jobs other people are doing, and exchange it against various pieces of paper, and electronic transfers. The government can also work, and can also transfer.
Only the banks, and the Fed, the central bank, create currency (which is, I guess, what some mean by “income”). To say that private businesses create dollars is not correct. If a business does this, create dollars, it’s either a counterfeit operation, or a bank, or the Fed. (OK, the deep question is: what is the difference between those three?) Such is the fractional reserve system.
The government, as any other institution or company, public or private, can provide with services. The government, being by far the largest institution, creates more services than any other contraption, public, or private. It is actually the largest employer in the USA.
Moreover, at least 60% of the jobs in the USA are government dependent. For example, Goldman Sachs may claim it is a private company, but that’s something only the mentally challenged, and legally deficient, believes (and they will have to reside in the USA too). As far as I am concerned, it’s a national company, operated, mafia style, for the profit of a few (very) private individuals.
Verily, corruption does not create riches, that is true. But the corruption of politicians is always a private-public mix.
Patrice Ayme
http://patriceayme.wordpress.com/
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Patrice: Your comments are very thought-provoking, as usual. I feel compelled to respond although, according to your comments, I must be either mentally challenged or legally deficient, which is hardly a welcome mat for meaningful discourse. But I will try in the interest of preventing readers from drawing flawed conclusions.
The key point is that income is not money. Income is the fruit of our labor, whether it be measured in dollars or happiness or cumquats. It is the output of the real economy, the combination of labor and capital and skill and risk-taking to produce goods and services that are valued, that can be used in exchange for some other good or service of value to someone else.
We do not need “money” to run such an economy, although it makes it easier. Money is a convenience; it provides liquidity, a non-perishable store of value, and a widely accepted numeraire for contracts and exchange. It has no value in and of itself. You can’t consume it. And what lies beneath money and prices and interest rates – all “nominal” variables — is the real productivity of physical capital and labor.
I could not disagree with you more that the profit motive of private companies is tantamount to corruption. It is my well-considered view that the profit motive of a competitive society is a central tenet of economic freedom which, in turn, is integral to any meaningful realization of true freedom.
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Hi Sherry: Thank you for the kind answer you made to my rough comment , which I agree was not conducive to calm and meditation. (But I have a brand new baby, and get little sleep.) Sorry about acting as a bubbling volcano. Anyway I certainly did not mean to personally disobliging to you, and I present my apologies for such a perception. Nor did I mean to say that “that the profit motive of private companies is tantamount to corruption”.
I owe my life of continuous meditation to the profits of quite a few private companies, and I am fully aware of this most of the time. I have time for my mind because Atlas shrugs as I rest on his shoulders. Money is the branch on which I am sitting, and I show no sign of sawing through it. Differently from Ayn Rand, it did not go up to my head. I am genuinely scared and furious about what has been going on economically in the USA ever since Summers repelled the banking Act of 1933 (Glass Seagal).
I fail to understand in context the following quote of yours, because you seem to be in complete accord with me, albeit with a slightly different labeling:
“The key point is that income is not money. Income is the fruit of our labor, whether it be measured in dollars or happiness or cumquats. It is the output of the real economy, the combination of labor and capital and skill and risk-taking to produce goods and services that are valued, that can be used in exchange for some other good or service of value to someone else.”
Exactly so. In my version of economics, what you call “income” I measure in energy as AWE (Absolute Worth Energy). For example a bridge can be absolutely worthy and cost so much energy to build, while saving so much energy to society looking forward (since strolling across is more efficient than swimming across).
As I outrageously illustrated, Stalin, by using slave labor (not free enterprise, but its exact opposite), built a very valuable canal system, with a very high AWE. As I also pointed out, Marius, and his legions, by building the first canal, in France, showed that a canal could have a very high public, and thus economic utility (very high AWE). In other words, the government can be a producer of “real economy”. Once again, the best example is Stalin. His state economy outperformed the Nazi capitalist free enterprise system, by a long shot.
When the USSR got invaded, the Soviet government decided to move thousands of factories across the country, thousands of miles east to the Urals and Siberia. It was not a question of profit motive, but, more simply, life and death. Officers in the Soviet army were given the right to execute their underlings, whenever they saw fit.
So what is the lesson? Eco-nomy is house management. It does not necessarily imply either money, or private enterprise, which are important, but only conveniences.
The prime mover of the society is its government, which manages the house. By denying this, the American right and its Wall Street have been sawing through the branch on which the American eagle has been arrogantly sitting. Let’s hope it has wings. And flies better than a Thanksgiving turkey…
PA
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Hello there Patrice! No offense taken – truly – and congrats on the new baby! That’s wonderful. I am amazed you find the energy to form an original thought, but that you do, in spades! I did see that you and I appeared to be using much the same terminology about exchange and labor, but wasn’t sure if it came from the same place and thus meant the same thing. After your articulate reply, I see that we are not, and I still must disagree with the premise of your comment. You equate government and private industry as employers of labor and producers of output, but I do not, because I ask what resources they use to hire the labor and produce the output. Private industry uses it own resources; the government uses not its own but those owned and utilized and created by private industry. It is at the moment that a dollar of new income or value or “AWE” is taken from industry and used by the government that the divergence begins — for if that dollar were retained by private industry, it would lead to many more dollars, but if it were taken by government, it loses half its value before it ever has the chance to recover, if it ever does. And if it does ever recover, and never to the extent it would have had it been left with private industry in the first place, it is BECAUSE government is interacting with private industry in the building of bridges or managing the house. Government does not create value; it destroys value RELATIVE to private industry.
Now, that said, I must say again that I fully understand and agree that there are some goods and services, absolutely essential and integral to the survival and health and well-being to a nation, that would never be provided as well, if at all, by private industry that must be provided by the government. Defense and a system of laws that prevent or punish fraud and crime are two with which most of us would agree. But the role of the government should stop there, in my view, and not bleed over into the provision of private goods and services, for it is there that the losses begin, and not just losses in value but losses in the freedom to decide how much income to generate and how to use it in our personal lives.
I do so enjoy reading your comments! Thank you.
Sincerely,
Sherry
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Gosh, I do so much enjoy reading this level of discourse. As it happens, one of the guests at last night’s Thanksgiving dinner was a very senior (retired) US General who had seen a lot of active service and experienced too much politics!
More of that another time!
But I do so agree with the notion that the repeal of Glass Seagal represented the nadir of government for the people and, to me, a symbol of government being very out of balance with the needs of the people.
Fundamentally, we need to revisit (or, perhaps, just visit) the proposition of what are governments for? I could go on …. but it seems to me there is good post material there so I will save it for another day. 😉
PH.
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Paul and Patrice,
Hello gentlemen! Paul, your note reminded me that I intended to respond to Patrice’s comment on the 1999 repeal of the Glass Steagall Act of 1933, which basically separated the functions of investment banking from commercial banking in the US.
I agree that this is a very important issue. The wisdom of repealing the Act is very much an open question, and is worthy of further research, although empirically isolating a cause from an effect, and a coincidence from a side-effect, is maddeningly difficult! But well worth discussing and pursuing!
Sherry
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I think that would make an excellent article as so many that I speak to point to the repeal of that Act as some sort of (dark) turning point.
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