Saturday, October 24, 2009

Creating Government Jobs Through Stimulus

The problem with government job creation is that most are hired on a permanent basis. Union rules either prevent layoffs or make it extremely costly due to buyout provisions and similar measures. Since government jobs are not downwardly elastic, over-hiring beyond the optimal level required to provide services would represent a persistent burden long after the stimulative effects are no longer needed. That would hamper recovery and stifle economic growth.

Why? Because these jobs have to be paid for and so eventually higher taxes will have to be levied to pay for the extra government employees. Most state governments must run a balanced budget and can't run long term deficits, and the federal government which can, must eventually pay back the debt with interest. Even assuming some debt never has to be paid back, the federal government still has a market imposed debt ceiling beyond which it becomes increasingly more difficult and costly to finance.

It's the stickiness of government jobs that has to be taken into consideration. An increase in taxes has a negative effect on the economy, and because the outlook for the budget looks so bad already with total debt increasing faster than GDP (thus an increasing debt/GDP ratio) for the foreseeable future, there simply isn't any room for more.

As with any spending, the issue of value is important. Excess government jobs provide very little value, some of the worst bang for the buck available. Mish, I think, has a very credible analysis on the issue of "wasteful" stimulus, though the quote below is from HB.

"In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.

Fiscal stimulus may temporarily give the impression of a recovery, but it is not a genuine recovery. It makes things worse. The moment the pumping is abandoned, the true state of affairs is simply unmasked. That is what happened in 37/38 - a slight tightening of monetary policy revealed the fact that the mini-boomlet was as unsound as its predecessor boom in the years prior to the '29 crash."

In theory, these recessions and depressions happen because of mis-allocated resources. Mis-allocating more resources will only prolong the recession, not make it better. We need to allocate resources to productive uses, in other words, hiring people to dig holes and fill them up again just to create jobs isn't going to get us out of recession. As soon as the spending stops and the workers are laid off, we end up back where we started, but on even worse terms because of the added debt required to pay for those workers in the first place. Value seems to be the most important aspect missing from the discussion.

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