Sunday, May 27, 2012

Does the Government Know What It Is Doing When It Tries to Create Jobs?

Published in The Tennessean, Sunday, May 27, 2012 and Forbes with archives.
by Richard J. Grant
Listening to the pundits debate over which presidential candidate would be best at “creating jobs” is a distraction. From a governmental perspective, job creation is at best a passive activity. Otherwise, government intervention destroys jobs and wealth.

When Republican presidential candidate Mitt Romney claimed that his business activities created up to 100,000 jobs, it was relatively easy to see what he meant. As a result of business decisions in which he was involved, the affected businesses grew such that, at some point in time, their operations employed 100,000 people.

But most business startups fail; and if they must fail, then the sooner the better. Pursuit of an unworkable idea uses up more resources than it is worth. Losses are society’s way of saying, “We would rather you not do this.” There are better ways to use your time and resources.

Among the resources that you would employ are people. Despite the losses to your company, you might want to keep them employed. But society disagrees and will eventually force you out of business by draining you of your capital. Those people are better employed elsewhere.

If government steps in with a bailout to thwart this process, then it too is thwarting the will of society. It is forcing people to pay more for a particular use of resources than that use is worth to them. The politicians might crow about the number of “jobs saved,” but they are oblivious to the net social loss of those business and employment relationships that will never be created.

In a very real sense, government bailouts of businesses destroy more jobs than they create. The only exception would be if the government agents happened to act just as an insightful private entrepreneur would have acted. Not only is this unlikely, if the best the government can do is to mimic private business, then the government adds nothing. Further, the government agents have access to a different source of capital, a source that is ultimately not voluntary. Even if the “saved” business is turned around and becomes profitable again, we are unable to say that society is better off. We are unable to say that a private solution would not have been superior.

In a free society, which implies a free market, businesses survive only by providing services of greater value than the resources they use in production. The less free a society is, the less confident we can be that a company is truly profitable. Many companies are profitable only because they receive government subsidies and regulatory protection, which means that they are not really profitable. The bailout of GM, for example, cost far more than the current value of the whole company.

In what sense can a government create jobs or, more broadly, wealth? Those who claim the government cannot create wealth are correct only to the extent that private provision of those services would have been superior. In the few cases — such as national defense, foreign relations, policing, judicial, and infrastructure-management services — where we are able to agree on collective provision, we can claim a net benefit. But it is limited. There are private aspects and competitors to all of these services.

The best president will be the one that is able to provide these basic services while destroying the fewest number of private-sector jobs. That would rule out the incumbent.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at:

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012