Governments cannot create jobs --- Part 3

In Governments cannot create jobs Part 1 it was discussed how any jobs created by government spending are more than offset by the jobs lost or prevented from coming into being elsewhere in the economy. The citizenry has less money (equal exactly to the amount of the tax) to spend on goods and services than they otherwise would.

Because raising taxes is politically unpalatable, borrowing is often used as a preferred method. It was shown in Part 2 how this solves nothing. The result is no net jobs after the stimulus is over and an additional pile of debt that needs to be serviced. The debt needs to be paid back, with interest. This is simply deferring the pain to another day.

The third most insidious method governments use to raise money is to simply create it out of thin air. That will be the topic of this weeks post.

It should be noted that there is a qualitative difference in the government jobs that are created at the expense of the free market jobs. The free market jobs provide the proper signal to the entrepreneurs in the economy, whereas government jobs encourage a cycle of dependence for more future government jobs.

For example compare and contrast the two following scenarios.

First, a government financed work project such as doubling the pace of highway resurfacing. The new workers would have to be trained in the unique skill sets required. Suppliers of asphalt and machinery would have to double their productive capacity. They in turn would increase their orders for their own factors of production and so on down the line. When the project is completed all this excess capacity is unnecessary and the cries come out for government spending to continue.

Second, consider what signals the market would be given without the government interference. Without a portion of their income coercively taken to finance these projects, the consumers would have spent this money in thousands of ways as they see fit in tune with their wants and desires. The production of all those items would be increased or decreased to match actual sustainable demand and would continue without disruption.

Government jobs financed by the creation of new money have a similar outcome as jobs created by borrowing, except the cost is borne in a different fashion. Instead of debt and interest that needs to be paid by the public, newly created money is paid though higher prices. The new money that is created out of thin air simply dilutes the value of every dollar currently in existence. The resulting higher prices paid for the same products are the same as a tax on the populace, but they are cleverly disguised as to their cause.

The process of money creation is itself designed to deceive. If it were not so, the public uproar would have put a stop to it long ago as the cause and effect would be clear to all. There are other considerations that will be dealt with on future posts such as fractional reserve banking and credit defaults causing deflationary pressures, but regardless of the circumstances in which it is used, money creation always is an added cost compared to what prices would have been in their absence.

Here us the process in short. The U.S. government issues bonds to borrow money to finance its operations and roll over maturing bonds. Typically these are bought by Wall Street or foreign banks for their clients and trading books. When you hear the terms monetization of debt or quantitative easing what it means is that the Federal Reserve buys some of those bonds with dollars that it simply creates with a bookkeeping entry. This is no different from counterfeiting in its effect on the value of the dollar. If it creates a billion dollars out of thin air to buy the bonds, the value of the dollar is corresponding lowered by whatever fraction a billion is relative to all the dollars in existence.

As can be seen there is no free lunch. Government spending to create jobs or for any other reason has to be financed. There are only three ways to finance it: taxation, borrowing, or creating money. Each of these has costs. The costs are larger than the benefits. Any jobs created by government projects are #1 unsustainable, and #2 less than the jobs lost in the absence of such projects from goods that would have been produced and consumed had the public been able to keep their funds to use as they see fit.

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