“Governments Don’t Create Jobs; Only the Private Sector Creates Jobs”

I hear variations of the quote above almost every day, which usually go unchallenged. How can that be since it is so obviously wrong? It reminds me of the old Richard Pryor line: “Who are you going to believe: me or your own lying eyes?

Local governments hire policemen, fire fighters, and school teachers. State governments hire the employees that drive us crazy down at the Division of Motor Vehicles. The Federal government hires employees to work for the Social Security Administration and TSA employees who drive us crazy at the airport, but not as much so lately. All these jobs are created by government, and everybody knows it.

The eminent scholar, Thomas Sowell, appeared on CNBC’s Kudlow Report recently. He also agreed with the title statement, but, as usual, he spoke more clearly than most. He clarified that the title quote referred to net jobs rather than gross jobs. In other words—in my recollection of his words—he was saying that had government workers not been hired by government they would likely have a job in the private sector.

Sowell’s clarification didn’t take much time, even in the context of TV interviews where you must have your say quickly or not at all. Non-economist viewers—i.e. normal people—hearing him could get his point, understand it to be reasonable, and go away without wondering what planet that economist is from.

Many of the more strident proponents of the governments-can’t-create jobs view, however, use it to argue against monetary and fiscal stimulus as unnecessary even during a deep recession since the private sector is likely to absorb the unemployed anyway. The Classical or pre-Keynesian economists generally agreed with that view, and the mechanism they expected to facilitate the employment of the unemployed was declining wages during a recession. At some wage rate, all willing and able workers could be absorbed into private employment. Thus, by definition, those that remained unemployed must be unemployed voluntary since they have the option of working for less pay.

While it may be possible to deflate our way out of a recession, the painful experience of the Great Depression and the publication in 1936, of Keynes’s General Theory of Employment, Interest, and Money, shifted the emphasis away from letting nature run its course toward more government responsibility for maintaining full employment. This shift was codified by the Employment Act of 1946 and, later, the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978.

The unequivocal denials that governments can create jobs no doubt stems in part from distaste for “Keynesian” economics, which is associated, rightly or wrongly, with large and activist governments. To me, the “fear of Keynes” is overdone. It makes sense to me to rely on Classical prescriptions most of the time, but to treat Keynes as a guidebook for policy during occasional deep recessions.

My main point, however, has to do with economic rhetoric. Public pronouncements that governments can’t create jobs are so obviously incorrect, as usually stated, that they undermine confidence in economics and economists. Economists know the difference between gross and net; so, they should say so out loud. They could all do worse than to use Thomas Sowell as their inspiration in that regard. He’s a master.

Comments (2)

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  1. Corey Cagle says:

    Mr. McTeer,

    Don’t you think that Thomas Sowell was probably relying on Bastiat’s “That which is seen and that which is unseen” in making his comments about net jobs vs. gross jobs? In other words, the visible or seen effect of police and fire departments or public schools is to add a few jobs to the overall economy; the unseen effect is the (arguably greater) number of jobs lost by taxing away the private sector’s capital. Stated differently, to create 50 public sector jobs, the government must destroy 75 private sector jobs. The specific numbers aren’t important, but you can see the principle.

    This is a far different analysis than your (mis)characterization of “government workers could have gotten a job in the private sector,” which assumes a roughly 1:1 ratio of public-to-private jobs. You may also notice that, if you assume public-sector jobs result in a net job loss, the old Keynesian prescription of “spend, spend, spend without end” makes even less sense.

  2. Bob Reich says:

    Agree, Corey. About the only thing right with Bob’s argument is that Thomas Sowell is, indeed, a master.

    Bob, the government may be able to create jobs, but that isn’t the point. The point is that they are now creating jobs that have no basis in the Constitution and are being paid for by dollars that don’t exist. Because, well, we are broke.

    The individuals that work for the government (I should say it that way every time, it’s not as if there is a living/breathing “government”) would better serve our country by putting policies in place that encourage private citizens and private corporations to do the work rather than create new bureaucracies like the TSA.

    A bigger point can be made that we are simply way over the tipping point when it comes to the relationship between the public sector and big business. Our once great country will end up no differently than Rome.

    Nobody knows who wrote the following. You have no doubt seen it in your email box at various times over the years. But please read it again and tell me it doesn’t ring true.

    “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

    The average age of the worlds greatest civilizations from the beginning of history, has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

    From bondage to spiritual faith;
    From spiritual faith to great courage;
    From courage to liberty;
    From liberty to abundance;
    From abundance to complacency;
    From complacency to apathy;
    From apathy to dependence;
    From dependence back into bondage.”

    Think of all those poor souls in New Orleans after Katrina who weren’t smart enough to leave town when they had a week’s notice and then tell me we aren’t at the “apathy to dependence” stage….