Saturday, May 12, 2012

A Ubiquitous Misconception


           Currently, our nation is facing a litany of looming and eminent problems.  There has been vociferous public outcry in respect to fiscal policy, social issues, and foreign affairs.  But, as witnessed by the GOP primaries, the number one problem most Americans are complaining about is jobs, or the lack thereof.  The political buzzword “job creation” has imbued a sense of entitlement and dependence in constituents, and consequently, a new political façade of provocative rhetoric has taken root.
            This new political façade is happening in our beloved state, Virginia.  Governor Bob McDonnell anointed current Lieutenant Governor Bill Bolling “Chief Jobs Creation Officer”, the month of November is now “Job Creator Appreciation Month”, and there is a jobs creation commission in the General Assembly.  This political ethos and governmental obsession with job creation is reminiscent of the Reagan era when it was believed everyone needed to own a home.  If I am not mistaken, that misguided belief led to a sub-prime mortgage crisis that rocked the financial world because bad governmental incentives were put in place.  Time and time again, history has repeatedly shown that government intervention in the marketplace produces unintended and unforeseen consequences that are usually worse than the initial problem it was trying to solve.  Although there is a preponderance of empirical and historical evidence in respect to negative government economic action, we will, for the sake of this article, treat government job creation as a stand-alone phenomenon and delineate its theoretical apparatus and real-world consequences.
            From a definitional standpoint, “job creation” can be broken down as follows: A “job” is a contractual agreement between two parties stating that one person will perform certain tasks in exchange for a wage and other agreed upon benefits.  “Creation” is when something that did not previously exist now exists.  So put two and two together and “job creation” means a set of desirable tasks need to be performed and an employer is willing and able to pay someone new for them to be done.  The keyword in the aforementioned definition is employer and I find it funny that some people tend to forget that the government is not an employer but a collective body of taxpayers.  The word “government” is just an abstract representation used to conceptualize the needed collective services such as law enforcement, adjudication, etc.  Now I want to pose a question to the reader: How is it possible for a conceptual entity that derives revenue through coercion, i.e. taxes, able to create a sustainable job outside of its necessary duties, and moreover, without the misappropriation of capital?  Let’s put it this way: Essentially we the people are pooling our money together to pay public officials to decide what is a market “need” and they then take our money to pay someone (or subsidize something) to do a job (e.g. construction).  What is lost in this governmental practice is the private sector jobs and investment that could have been created if we were able to retain the extra tax dollars that were used to “create” these public sector jobs.  For example, let’s say person A makes $100,000 annually and person B is unemployed and seeking work.  The government listens to his pleas and taxes person A at 40% to give person B a job.  On the surface, it seems the government just transferred money from one party to another, i.e. a zero sum game, but in reality the government has destroyed potential wealth creation.  This destruction is indirect but consequential because the irrevocable monetary loss for person A, one disincentivizes his productive capacity, and two disallows him from making investments and adding more value to his job.  Thus, the government in the aforementioned situation is attempting to emulate an investment bank, through the allocation of capital, except they fail miserably.  When the government decides to manipulate aggregate demand and spend money on “creating jobs”, they are essentially taking from the productive to give to the inefficient, thereby exacerbating the economics woes.  To elucidate further, as the CEO of Euro Pacific Capital said, the government does not provide demand, the government can only provide inflation, and demand can only come from supply, i.e. you cannot consume something that is not produced.  Moreover, the money they are using to fund these expenditures, since they are so reluctant to raise taxes for political reasons, is borrowed and consequently adds an interest expense to an already overburdened balance sheet.  The real question the government needs to ask in regards to jobs and reaching the natural rate of unemployment is: what are we doing to inhibit this process? 
            My next question is more specific: Why are we paying Bill Bolling, according to his new title, to take our resources and transfer them from one group to another?  Yes, he might “save” some jobs, but think of all the jobs that are destroyed to create/save those jobs! Frederic Bastiat, a renowned French economist, illustrates this fallacious thinking of only seeing specific outcomes to specific parties rather than seeing the objective picture of the direct or indirect effects to third parties as such: A kid breaks his father’s windowpane and the father will subsequently have to pay to have it replaced.  The community onlookers analyze the situation and come to the conclusion that the destruction of the windowpane has actually stimulated the economy because the father will have to pay a repairman to replace it and the repairman, upon receiving cash he would not have received without the destruction, will spend the extra income, and thus invigorate the local economy.  This logical progression, aka the Broken Window Fallacy, has captured the minds of politicians and political pundits alike.  Unfortunately, the logic is not sound because the problem with this reasoning is that it ignores the fact that the father could have used that repair money on a capital investment, e.g. finishing his basement, and thus adding more value to his home.  The money spent of finishing the basement would go to a contractor, who would then in turn spend that money on something, and the process continues.  The difference between the two scenarios is that in the latter the father has a finished basement and his window!  Thus, the destruction of capital is never a worthy pursuit and it merely stymies productivity and the creation of wealth. 
Like I have mentioned before: All the government can do is reallocate resources – it cannot create 
any real wealth and it in fact destroys possible wealth creation.  What McDonnell, the Commonwealth, 
and our federal government are doing is toying around with disingenuous rhetoric and perpetuating an 
unsavory, ubiquitous misconception.

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