Image by AFP/Getty Images via @daylife
In the present crisis, government is not the solution to our problem, government is the problem. Ronald Reagan, Inaugural Address, January 20, 1981
Last August, we were told the Republican fight over increasing the debt limit was hurting the economy. Then, in September, President Barack Obama called a joint session of Congress and insisted Congress pass his “jobs bill now.” Apologists for big government warned failure to approve another $400 billion in stimulus spending threatened a double dip recession. But the Senate and the House refused to approve any more stimulus spending.
Finally, the Federal Reserve’s efforts to boost the economy through “Quantitative Easing” ended in June, and the dollar strengthened in the last half of the year.
The result produced by this lack of fiscal and monetary stimulus? The best job growth since employment bottomed in February 2010.
Total non-farm employment increased by 200,000 in December, bringing the six month increase to 853,000. That is 66,000 more jobs than were created in the first half of the year. In addition, the average 142,000 monthly jobs growth in the last half of this year was 40% greater that during the last 10 months of 2010, when the economy should have been rebounding strongly and federal stimulus spending was in full swing.
As a consequence, the unemployment rate -- which had remained above 9% in the face of record peace time increases in federal spending, funded by record deficits and two rounds of “Quantitative Easing” by the Fed -- has finally started to fall. During the first half, the unemployment rate declined to 9.1% from 9.4%. But since the August “debt crisis” which saw an oh so modest pivot toward reduced spending, the unemployment rate has fallen 0.6 percentage points to 8.5%, its lowest level since the stimulus spending began in March, 2009.
In other words, the results are exactly the opposite of what advocates of government spending and easy money say should have happened. However, they are consistent with a growing body of academic research that shows reducing government spending leads to more, not less economic growth and a greater number of jobs.
Here’s why.
When government is limited and the expenditures are on vital services, such as providing a legal system, local police forces, a sound currency, safe highways, the common defense and other services that secure our life, liberty and property, these expenditures increase the opportunity for voluntary exchanges in the private sector, and the economy grows.
However, when government exceeds these boundaries and attempts to stimulate the economy by spending money, it fails. The reason is as simple as double entry book keeping. For every dollar the government spends, a dollar has to be taken from the private sector, either in the form of taxes now, or government debt and taxes later. Therefore, the net increase in demand nets out to zero.
At first, this may seem hard to believe. After all, we can see the money that government spends, and immediately grasp that without that spending, the jobs its produced would not exist. What we do not see is that if those resources had been left in the private sector, the money still would have been spent or invested. But the expenditures and investments would be so diffuse as to be invisible. There are no Presidential photo ops at companies like Solyndra when thousands of small companies go about adding jobs as they find new ways to satisfy customers.
How, then, does an increase in government spending reduce employment? Even when government expenditures are on goods and services, public employees seldom spend the money as wisely or as prudently as someone spending their own money. The resulting waste is just that -- waste -- and waste reduces our wealth and aggregate income and destroys jobs.
When government expenditures take the form of bailouts and transfer payments, the results are even worse. In these cases, the government takes money rightfully earned from some individuals, and hands it over to their neighbors to either cover their losses or to provide assistance on the condition they do not work or do not grow agricultural products. Once again, cash flows net to zero. But now, losses and non-work are rewarded, while prudence and productive work are penalized. Although such payments may be justified as part of a social safety net, rewarding non-work and penalizing productive effort reduces jobs and economic activity.
The sudden increase in jobs also underline the failure of easy money to stimulate growth. Between November 2010 and June 2011, the Fed purchased $600 billion of securities in the open market, flooding the banking system with reserves. The dollar sank, inflation picked up, and unemployment rate barely budged. To believe the government can produce prosperity simply by printing money is to believe that governments can produce economic activity out of thin air. Instead, the inflation pick-up and weak dollar reduced what our pay checks could purchase at the store, confiscated a portion of everyone’s savings, and increased job killing uncertainty. Destroying the wealth of those who save and manipulating the value of the dollar have also been shown to be counterproductive.
As stunning as these results are, they are matched by the silence on the part of the Republican leadership and Presidential candidates to take credit for the economic benefits of doing nothing. As a consequence, the Obama Administration can claim that its economic policies are starting to work, when it is the lack of those policies that is associated with the improvement in the jobs market.
Such political irony would be laughable were it not symptomatic of a underlying consensus among politicians and pundits that government is the solution, and not the problem. Faith in government is seductive in its appeal to the governing class who gain legitimacy and power with their promises of increased economic security and to those in the Washington media who share their limelight. By contrast, politicians who claim shrinking government increases prosperity are explicitly renouncing the power to spend other people’s money and the majesty of their office. No wonder they are scorned by the media as well.
Nonetheless, the Republican efforts to reduce federal spending and to kill the President’s “American Jobs Act” turns out to be the best thing they could have done to increase employment. By choosing to “do nothing,” the Republican House and Federal Reserve actually did exactly the right thing -- even if they don’t know it and won’t take credit for the wisdom of their “non-stimulus” policies.
