Montreal, November 15, 2009 • No 272


Bradley Doucet is QL's English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.






by Bradley Doucet


          Liberty is won and preserved not primarily with guns, but with ideas. Spreading freedom requires that we spread an understanding of the benefits freedom brings, that we explain to whoever will listen how freedom is really in everyone's best interest. In making the case for a truly free society, however, we will inevitably come up against a wide array of illiberal beliefs that keep others from embracing our vision of a better world. The more we seek to understand those beliefs, the better we will be able to counter them and address the concerns that underlie them. In this ongoing series, I address some of the issues we can expect to face, along with brief outlines of the kinds of responses I think can be helpful.


BELIEF # 28: Governments Can Create Jobs

November 15, 2009

          When U.S. President Barack Obama celebrated the one-year anniversary of his election with a speech to a Wisconsin middle school earlier this month, he began by congratulating himself for a job well done in addressing the financial crisis. If he meant that it was his plan for the U.S. dollar to tank and gold to keep hitting new record highs, then he is indeed well on his way to being able to raise his very own "Mission Accomplished" banner.

          Most painful for many, though, is the administration's apparent plan to drive up the unemployment rate. Whereas it hovered below five percent two years ago, the U.S. jobless rate hit a whopping 10.2% in October, a 26-year high and only the second time in sixty years that it has topped the ten-percent mark. By another measure, which includes those no longer actively searching for a job and those unable to find full-time work and settling for part-time work, the numbers are even worse, hitting 17.5% in October.

          Of course, Obama and his crew cannot accept all of the blame for the mile high unemployment. This mess was created under Bush Jr.'s watch, and long before that, even. With central banks like the Federal Reserve free to pursue inflationary policies unrestrained by a gold standard, major boom and bust cycles are inevitable. What goes up with the help of easy money will come crashing down at some point. The only questions are when, where, and how hard—and how long it will take for the malinvestments of the boom to be liquidated.

That Which Is Deliberately Hidden

          It is on this last point that Obama and company can shoulder a lot of the blame. In pushing for and signing a near-trillion-dollar stimulus bill in February, the President explicitly accepted the notion that governments can create jobs. But every dollar government officials spend on stimulating the economy is a dollar taken away from taxpayers—more, actually, thanks to the fraction skimmed off the top to pay tax collectors, tax accountants, and the legislators and bureaucrats who decide exactly how to spend it all. This is what Bastiat explained all those years ago in That Which Is Not Seen. Left in the hands of taxpayers, those dollars would be spent on things they actually want, or saved and invested by someone else on things the public actually wants. The stimulus effect would be even stronger, as more real work would actually get done, and malinvestment would be liquidated and redirected.

          Bloomberg News columnist Caroline Baum dissected the folly of all this talk of government job creation just a few weeks ago, before the latest numbers came out. In addition to making the link to Bastiat, Baum mocks the idea of "jobs created or saved," which she calls "a made-up metric if there ever was one." She also rightly points out that for the country's small businesses, "the government's increased and changing role in the economy isn't a confidence builder. Businessmen have no idea what health-care reform will mean for their cost structure or what whimsical tax policies the government might impose when it realizes those short-term deficits are running into long-term unfunded liabilities." Uncertainty is not a recipe for renewed hiring.

          But the President is committed to trying to micromanage the economy, just as his predecessors Hoover and FDR did in the 1930s, delaying recovery and causing unemployment rates to skyrocket. In response to the October numbers, Obama signed an extension of jobless benefits, which will have the effect of further reducing the incentive for the unemployed to get back to work, especially if they can expect lower wages than they enjoyed before the current crisis. This more generous cushion interferes with the necessary adjustment process, just as the Fed's easy money policy encourages yet another round of malinvestment.

Teasing Out the Truth

          Of course, some spending on infrastructure may be long overdue, and therefore not entirely squandered—although private actors on a free market would be far more efficient at keeping infrastructure maintained in the first place. The President also said he was considering tax cuts for businesses in order to encourage employment, a step that would mitigate the negative effects of his other policies at least somewhat.

          Indeed, with so many factors at play, it is difficult to predict whether or not the unemployment rate will peak early next year, as many are hoping. And regardless of when things really do turn around, Obama's defenders will doubtless say that it would have been even worse without the stimulus, just as we free market folks will say that the adjustment would have been quicker with less interference. Such is the difficulty with counterfactuals, which plague economics and all of the social sciences in which actual laboratory experiments cannot easily be carried out.

          All the more important, then, to get the theory right, to make sure that it is internally coherent and externally helpful in explaining real world events. Austrian business cycle theory does a better job than other models of explaining booms and busts. The booms of malinvestment are caused by loose money, and the painful busts that sometimes drag on so long are caused by interference with the adjustment process, of which spurious job "creation" efforts are one example. This was the real story behind the Great Depression, and it is the real story now. If more members of Congress understood this, they would have had a better chance of saving their own jobs come next November's midterm elections.





27. Guilty until proven innocent
26. Life is a zero-sum game
25. Immigration must be restricted
24. The world is a scary place
23. We are all sinners
22. Persuasion is force
21. Bankruptcies are bad for the economy
20. War is good for the economy
19. We don't care enough

18. Capitalism caused the Great Depression
17. Democracy is a cure-all
16. Self-sacrifice is good
15. Everyone is selfish—and that's bad
14. Free markets are utopian
13. Change is bad
12. You're either with us or against us
11. The environment is steadily deteriorating
10. Resources are limited

09. It's a small world
08. Morality must be enforced
07. The truth is obvious
06. Good intentions are enough
05. Charity must be enforced
04. We are our brothers' keepers
03. Theft can be justified
02. Order comes from above
01. Government is good