Government Spending Jobs Myth; Facts Show Keynesian Model Is Wrong

Article excerpt


Do increases in government spending increase or decrease the number of jobs? Conventional wisdom is they will increase jobs, and a few left-wing economists, such as Paul Krugman of the New York Times, frequently are trotted out by reckless politicians and some in the news media to argue that we need more government spending in order to create jobs. If this were true, we should be able to see it in the historical evidence, so let's look at the numbers.

Government spending grows each year, but what is relevant is whether it is increasing or decreasing as a percentage of gross domestic product (GDP) and how it relates to the percentage of the adult labor force at work. As can be seen in the accompanying chart, there is an inverse relationship between increasing the size of government and job creation. This empirical evidence, along with much other evidence, is contrary to the argument made by those calling for more government spending to create jobs. Some who argue for more government spending, such as economist Mark Zandi of Merrill Lynch, use neo-Keynesian models to justify their conclusions - conveniently ignoring the fact that such models almost always have been wrong.

What also typically is ignored by the neo-Keynesians is that there is an enormous tax extraction cost for the government to obtain each additional dollar. Estimates of this extraction cost typically run from $1.40 to well over $2.50 of lost output for each dollar the government obtains. In addition, there is vast literature showing how specific government spending programs have little or even negative benefit and, as a result, are actually wealth and job destroyers. Thus, the real deadweight loss of additional government taxing and spending is estimated to be in the $3 to $4 range.

If additional government spending could create more jobs, it would be expected that over the long run, the socialist or semisocialist economies would have full employment and the smaller-government, developed economies would have higher unemployment. Again, the empirical evidence shows just the opposite. Sweden and Canada are examples of countries that reduced government spending as a percentage of GDP 15 years ago, and as a result, both countries saw increased economic growth and employment.

The length of the periods in the chart was determined by the number of years in which the government trended relatively larger or smaller. The World War II and Korean War years were left out because of the necessary jumps in government spending as a percentage of GDP. Even during those wartime periods, there was almost no change in civilian employment as a percentage of GDP. …