Confusing the Myth and Reality of Job Creation

Alan Binder writes in the Wall Street Journal Online, The GOP Myth of 'Job-Killing' Spending, June 21, 2011. In this article he challenges the argument that the deficit is killing job creation.

He notes that logically one could argue that the taxes needed to fund government jobs  must come from the private sector and that the taxes used would simply reduce jobs in the private sector by the same amount.  This does assume the same efficiency of spending, which is rarely the case.  But he notes that taxes are not going up  (yet) and this therefore cannot be the case today.

Binder then attacks the idea that government spending crowds out private spending and drives up interest rates thus costing private sector jobs.  But this argument, he contends,  seems spurious since interest rates are so low.

And finally he attacks the common refrain that 'uncertainty' restrains growth. The data shows increases in capital spending, thus refuting the fear of uncertainty.

His favored idea is a tax credit to those who create new jobs.  But this idea, like every other government attempt to control the market has adverse effects as well.  If you are a local businessman who has struggled for the last few years to hold onto your employees in spite of low volume and increases in health insurance costs you must now compete with a new startup competitor with a tax advantage in hiring that you do not have. You would be wiser to lay off more people today to hire them back later. This is Binder's solution to unemployment?

The bigger reality is that the capital markets were so distorted by bad monetary and fiscal policies that there are no quick fixes.  Credit contractions are painful but necessary. Keynesian stimulation may work in a short contraction, but it may be less suitable in a situation with massive public debt, huge increases in regulation, threat of pending tax increases, and a bully pulpit war on wealth creation. 

What may work in one quantity may not work in another, much larger quantity.  What seemed to work in one time period may not work in another time with many different factors in place.  The map that worked in the Andes may not work in the Pyrenees.  Adherence to ideology over current reality is dangerous.

The benefits of federal spending is somewhat offset by decreases in state level spending.  The increase in capital spending may just be a bounce after years of reduced spending caused by the financial collapse. Much of the increase in capital spending for companies such as Caterpillar is to serve strongly growing foreign markets.  It may also indicate a preference to invest in capital rather than people given the sharply higher friction costs caused by the health insurance reform, higher minimum wages, and other impediments to employment .

Binder considers federal spending in isolation. Its impact cannot be separated from the onerous legislation and regulations, both passed and pending. It cannot be separated from the expectation of higher taxes on numerous fronts. And it cannot be separated from the uncertainty of federal intrusion into every area of our economic lives.  Offering a jobs tax credit is like throwing a drowning man a life preserver right after you have thrown him a barbell. 

The deficit is just another reason that the government cannot be trusted to solve all of our problems.  If we must incur a deficit to hire more people, but we must eventually reduce that deficit,  then are we not just planning to lay off those people we hired with the deficit at a later date?

Binder's answer to a problem that is largely caused by government control and policy is more government market manipulation.  There is a word for doing the same thing and expecting different results.

Henry Oliner