Want to Create Jobs? Cut Government Spending

Sometimes, the methods to produce results are counter-intuitive. For example, skillful pruning of grape vines is essential to the production of vineyards, and cutting back a rose bush promotes its growth. Based on experience, we can learn where cutting can lead to growth.

The following statement is at first just as counter-intuitive: A reduction in government spending will not slow job growth. In fact, the experience of the last two years provides compelling evidence that a reduction in government spending will lead to increased employment and output in the US economy.

Since 2008, annual federal spending less net interest has increased by $530 billion or 19%. Yet, even with February’s welcome gain of 192,000 jobs, there are 2.3 million fewer people employed today than in February 2009, the month before the Obama Administration turned on the spending spigots with the passage of its economic recovery plan. Over those 24 months, private sector employment has declined by 2.0 million. In spite of the rapid expansion of the Federal bureaucracy, government sector employment has fallen by 360,000.

Moreover, a comparison of these results to the recovery from the economic crisis of the early 1980s casts doubt on the Obama Administration’s claim that without the unprecedented increase in government spending, the recession would have been even worse and the recovery slower. In December 1984, two years after the Reagan tax rate reductions began to take effect, the equivalent of 11 million more Americans were employed, including 10.6 million in the private sector, and 460,000 in the government sector. Bottom line, two years of record spending and deficits have produced a 13 million jobs gap when compared to the recovery from the economic crisis of the early 1980s.

Why the abysmal results of the past two years?

First and foremost, it is due to a utopian view of government largesse, which considers only the benefits, and none of the costs. Such a view ignores the underlying human phenomenon that produces economic activity. A job is produced when individuals enter into exchanges that lead to mutual gains. As a consequence, they work for each other. Each individual improves his or her own economic condition; incomes rise; new opportunities for mutually advantageous exchanges are created; the number of jobs expands.

This basic economic proposition cannot be replicated by one-sided exchanges in which the government takes money from some, and gives it to others.

Advocates of government spending tout the jobs created as a direct result of the expenditures, but ignore the jobs that are lost as resources are taken from the rest of the economy, either through taxes now, or through borrowing now and higher taxes in the future. Every dollar the government spends has to come from those who would otherwise have spent or invested their money in the private sector. To the extent the money is borrowed from non-US residents, the money can no longer be spent on exports or foreign investments in the US private sector. In either case, the net cash flow and net increase in demand generated by government spending is zero.

However, the effects do not stop there. Since government spending is not based on mutually beneficial exchanges, it often is wasteful. By displacing the opportunities for wealth enhancing voluntary exchanges, wasteful spending further reduces employment and the overall wealth and income of the American people.

For example, labeling government spending as “investments” in so-called “green-jobs” is just political spin to cover money-losing investments by elite government bureaucrats with none of their own money on the line who, nonetheless, believe they have an ability to pick winners. But, squandering money on expensive energy gambits reduces our wealth, and therefore shrinks the economy and the number of jobs.

The path to more robust growth is first to stop doing what demonstrably has not worked for the past two years. As I wrote in “Toward a New Economic Consensus,” studies by professors from Harvard to the London School of Economics are providing a growing body of empirical evidence that shows the combination of spending restraint and reductions in tax rates are the best ways to stimulate economic growth and employment.

The Republican proposal to reduce 2011 spending by $61 billion is only a modest start, but at least headed in the correct direction. Such a “cut” would merely slow the estimated increase in Federal spending for 2011 to $300 billion, and represents less than 2 cents of every dollar of the $3.8 trillion the Federal government will spend this year. Given the failure of increased deficit spending to create jobs, the claim of several pundits that such a modest reduction in government spending would reduce employment by 700,000 jobs or more is simply preposterous.

A second important step would be to prohibit any new regulations, and to get rid of as many useless or counterproductive government mandates as possible. Regulations prevent economic activity that otherwise would take place. And although many are aimed at helping the middle-class and those with lower incomes, new regulations on credit and debit cards are driving up the cost of consumer credit and leading to new fees on checking accounts with less than significant balances.

The combination of lower government spending and fewer regulatory burdens would increase the space in which the American people could discover opportunities to create mutually beneficial exchanges. At the end of the day, those are the basis of economic activity, job creation, rising incomes, and an expanding tax base essential to restoring balance to federal, state and local budgets.


Charles Kadlec,
for The Daily Reckoning

The Daily Reckoning