Government Projects do not “Create Jobs”
Yesterday while driving I heard an ad on the radio promoting more state spending on roads. Besides being a bit overreaching (“Is my family really safe with our current roads?”) the idea of better managed and maintained roads makes some sense and I thought the ad had a decent point — especially as I rumbled over potholes and hoped not to end up in a major traffic jam like last week.
There are potential improvements that can be made to Michigan’s roads just by changing how things are run (and who runs them) without necessarily increasing road spending. Additionally, there are many ways the state could do the same things for less money. (Check out this Mackinac Center study.)
The radio ad made the point that better roads are safer — OK. Then it said better roads make it easier for businesses to operate in the state — fine. But it committed a logical and economic error when it claimed, “State spending on road projects will create jobs and boost our economy.” That’s only half of the story.
State projects may create jobs, but the proper question is, do they create wealth? The state could easily reduce Michigan’s unemployment to 0% by mandating that every unemployed citizen shovel dirt on some state project without pay. Employment alone is not a good indicator of economic success; overall wealth is. Even if state spending can “create jobs,” creating jobs alone does nothing for our state’s overall prosperity or standard of living.
The question then becomes, do state projects, as the ad claimed, “boost our economy”? The answer is no.
Let’s say the state spends $1 billion on road projects. It is easy to see all the laborers and machinery employed to complete the $1 billion worth of projects. It seems all those laborers and the manufacture of all that machinery signify new growth in the economy. But where did that $1 billion come from?
It came from taxpayers. What use would that $1 billion have been put to had it not been taken by the state and spent on roads?
One billion dollars divided by the state’s population of 10 million people equals $100 per citizen. What would all of those citizens have done with an extra $100? Perhaps some would spend it at the movies, some at the hardware store, some on food, some on clothing, and some may have saved or invested the money. If every citizen had that money to save or spend, then every movie theatre, retailer, grocer, or investment portfolio would have received more revenue and produced more goods — and hired more people to make and sell them. How much more? $1 billion.
But that is not all. When left in private individuals’ hands, that $1 billion will be spent and allocated on the things that are the highest priority for those people. This will send a series of signals through the market of what things to produce more of and what things to invest more in. It will produce fierce competition among the suppliers of the various items being purchased, pushing them to find better and better ways to create better and better products for less. This is how wealth is created. Competition spurs innovation, which increases productivity.
When government spends money, it simply takes that money from one place (taxpayers) and moves it to another (state employees, roads, etc.). When private individuals spend money, that money always has the potential to create wealth as they choose the best use between competing businesses or banks.
Whatever your feeling on the need to improve state roads, do not let the myth of “job creation” and a “boost to the economy” be the rationale.
Andrew Slominski
Alicia O.
Sean Liebel
smacaskill
jeffreylevy
wethepeoplerochester
Ethan Faryna
wendybird77
Really, all those state workers don’t use their income to buy things from private industry? Well they do and the same multiplier effect happens. Roads are one way businesses socialize their costs. Without the public paying for roads, then the cost of transportation goes up for businesses. So roads are in one respect a give away from the public to business. Additionally, public expenditures tells businesses what the public deems important and creates a known place for business customers. Much wealth has been produced by businesses serving the government from roads to military equipment (and now soldiers) to computer systems.
By: shaferfinancial on August 31, 2008
at 11:36 am
David, not to be rude, but I’m wondering if you actually read any more than the title of the article. Since you have a Ph.D. and I am just a student you probably wouldn’t take my word for it, but this article is from mises.org – the most heavily visited economics website. Sure, government spending on roads may create jobs and put money in workers pockets, but that money came from the taxpayers’ pockets. Have we not forgotten that for every $1 in taxes you pay, the government gives back $0.30 in services?
By: Andrew Slominski on August 31, 2008
at 11:55 am
Your not being rude. I would take your word for it over “mises.org” any time if you were right. But you are not. That article is more ideology than economics. For the record, I am not for large government, think there are some real problems with various state governments. Most of my critique is centered on pensions that will bankrupt municipalities and states going ahead. Having said that, government is a critical partner to business, of which I am in. The 1970′s and 80′s were dominated by heath care technology sectors which were and still are benefiting from government research and development. The 1980′s through now is dominated by computer and internet technology which was developed by the use of government grants and actual government agencies surrounding the Pentagon and the military. Going back in history, roads (where we started), or more specifically the interstate highway system was built by the government and led to what we now know as suburbs. Automobiles, oil, real estate, fast-food, etc. were the beneficiaries of this government program.
You see as much as I believe in capitalism and business a true accounting of the history points to a partnership between the two being the best way to push forward economically.
Does government mess up? Yes. Does it get bloated? Yes. But so do businesses.
And if you really wanted to talk about economics, then you have to go no further than econ 101 textbooks when they discuss the macroeconomic guns/butter curves. I believe this is much more important to discuss/understand than some contra-factual ideological article against government!
By the way, don’t hide behind your student role, we are all students for life!
As for your “reminder” that government takes from tax payers pockets; yes and then it employs people who buy things, employs businesses that create wealth, and provide services that generally are not provided by or going to be done by private enterprise. If you had to pay out of your pocket for a private road in front of your house to get anywhere and had to pay for the full cost of any college or university (even private colleges get government grants to help with the costs) then you have to ask yourself could you afford to do so? Or is it a good thing that somewhere in history folks thought driving cars and going to college were important enough to subsidize and socialize the costs?
By: shaferfinancial on August 31, 2008
at 3:58 pm