Government Jobs Don't Create Jobs

(originally posted on Facebook on 2/1/2009)

It's common to hear commentators and politicians talk about creating jobs in this down economy. One of the most common ideas is to create some big government project that will employ a bunch of people, and then say that the project has created a whole bunch of jobs. This sounds right on the surface, but it's just another version of the classic broken window fallacy where a mistake is made by only looking at what is obvious and not following the non-obvious reverberations.

The broken window fallacy goes like this: imagine a boy playing baseball hits a ball through a window. At first, you might think this is a bad thing, but then the owner will have to spend money on a new window. The glazer then gets that money and can spend it on something else, and that person can also spend it on something. In this way, the broken window stimulates a beneficial cascade of spending throughout the economy.

The problem in the story is that the owner is now poorer and can't spend that money somewhere else. Maybe he would have bought a new suit, but now has to spend that money on a window instead. The money not spent on the suit will ripple through the economy in the same way as the money spent on the new window. Focussing on both effects, it becomes clear that the economy as a whole is no better off. Money has just been moved from one area to another. The glazer is richer, but the tailor is poorer. In addition, with the broken window the owner is also poorer since he is now down one suit, and so as you would have originally guessed, the broken window is in fact a bad thing.

Now let's imagine a government is going to build a bridge which will require 1000 people to complete at an average cost of $50,000 per employee. What's obvious is that 1000 people will now be working on building the bridge. However, the government has to get the money from somewhere to pay these workers. Ultimately, in one way or another (taxes, borrowing, inflation, etc.) that money will come from the people. Assuming perfect government efficiency, that means the people as a whole will have had $50 million extracted from them to pay the 1000 employees. That's $50 million they will no longer be able to spend or invest, and that reduction in funds will ripple through the economy just as in the case of the broken window. Other businesses will have to reduce hiring or lay off other employees to account for the reduction in business and investment.

Once again, you've just shifted resources around with no net gain or loss. In reality though, the government isn't close to perfectly efficient, and so the long term effect will actually be a loss of jobs, since money and resources will be wasted in the transfer. This isn't to say the bridge shouldn't be built. It may serve a useful purpose in its own right. Just don't believe it when someone tries to tell you it will create jobs.

(Henry Hazlitt's great little book, Economics in One Lesson, is a great read for anyone interested in more.)