One of the predominant promises of the trillion dollar and growing stimulus package demanded by Barack Obama and being developed by Congress is the idea that the government is going to create three million jobs through the investment of money secured by the government through borrowing. Unfortunately, this idea, like most of the rest of the idea that the government can stimulate the economy by spending money it has taken out of it or has secured by taking on debt, is untrue.
I see three basic problems with the government creating jobs premise as it is being presented in the stimulus package:
First, government created jobs that do not function to directly support government activities will eventually end and the people who work those jobs will resume being unemployed. One of the main objectives of the Obama jobs stimulus is for those jobs to be created for infrastructure upgrade projects. Jobs created by the government for the purpose of accomplishing specific projects end when the projects end. Further, such jobs can only be sustained for a short time because the jobs represent extra expenditure by the government that cannot be paid for indefinitely. Eventually, the people employed by such government jobs will resume being unemployed because the premise for the jobs, government money, ceases to exist while no more private sector jobs have been created in the interim.
The only way for the government to have any affect on creating long-term employment opportunities is for it to make it more profitable for businesses to do whatever they do. The best way for the government to help businesses to be more profitable is to reduce taxes, either on the businesses themselves so that they have more available cash or on the people who consume their products or services so that they have more money to spend. If, as an example, the government were to take the remaining $350 billion currently remaining from the original TARP authorization and invest that money into a $350 billion tax cut for–I am using Obama’s favorite demographic–the middle class, the economic effect would be an immediate increase in spending, a probable decrease in personal debt load, an increase in corporate profits, and, thereby, an improvement in the overall economy simply because that much money would effectively eliminate middle class federal taxes for a year. An improved economy would encourage businesses to invest in increased capacity, which would inevitably create the kinds of long term jobs both the economy and the government need.
Granted, both solutions require the government to accrue debt, but the latter solution eventually results in more money in the economy and, therefore, more tax revenue, which will contribute toward paying off that debt.
Second, Government created jobs paid for with tax revenue or borrowing add nothing to tax revenues. Consider this question: if the government taxes a salary paid by taxes, where does the money come from? In effect, government revenue gained by taxing income created from taxation does not really exist. This issue has always existed for government employees and people who receive government subsidies through Social Security and welfare programs. In essence, every year government tax revenue is inflated by the amount of money collected from tax generated salaries from the previous year, meaning that part of the budget never really exists. Now, imagine this same equation being applied to three million theoretically private sector jobs funded through the stimulus plan. This problem translates into potentially billions of more dollars in the budget that does not really exist, which will eventually have to be paid for through borrowing or through higher taxes.
Two solutions exist for this problem. First, income taxes on tax funded income could be eliminated by simply reducing that income to the net income after taxes. The result would be the reduction of billions of dollars caught in the fake budget loop, which would help reduce the budget and the debt load. Second, as has already been mentioned, the government could invest money already borrowed in tax cuts on people earning money in the private economy, thereby increasing cash flow, spending, and the creation of long-term, tax-paying, private sector jobs.
Finally, third, government created jobs created by borrowing compound the debt used to create them. Money taken from the economy in the form of taxes reduces the effective size of the economy. Money taken from the economy in the form of borrowing magnifies that effect because it must be paid back with interest. Because, as explained the second point, tax funded salaries contribute no real money to taxes collected, the government has effectively less money available to service the interest or the principle on the debt. The eventual result of this problem is that the government is forced to raise taxes, often on the people who can least afford to pay them, in order to inject real money into the budget.
There is already a historical analog to this problem in the events of the late 70s and early 80s. Carter was forced to raise taxes on the middle class to help pay for growing federal spending, and the economy tanked. Reagan lowered everyone’s taxes, and the economy immediately began growing. Unfortunately, in the time since the early 80s, the federal government has grown almost exponentially in size and in spending, consuming larger and larger proportions of the GDP. Nevertheless, we know that reducing taxes improves the economy, even when such tax reductions result in federal debt. From my view, it becomes clear that the solution to the current economic trouble is not government job creation, but government investment in spending through tax cuts. The fact that Obama is investing in government sponsored jobs instead of tax cuts is why Obama’s stimulus will fail and his dire predictions of years of weak economy will come true.