By contrast, government is less a job creator than a job changer. It supports jobs (soldiers, teachers, scientists) by taxing, borrowing and regulating. If government taxed, borrowed or regulated less, that money would stay with households and businesses, which would spend it on something else and, thereby, create other jobs. Politics determines how much private income we devote to public services.
To this observation, there’s one glaring exception. In a slump, government can create jobs by borrowing when the private economy isn’t spending. But the effect is temporary and isn’t automatic.
Obama’s controversial $825 billion “stimulus” program in 2009 conformed to this logic. He claims it created or saved jobs. I think he’s right. At the time, consumers and companies — terrified by the financial crisis — had gone into lockdown. The new government outlays and tax breaks induced spending that otherwise wouldn’t have occurred. How many jobs were saved or generated is harder to say. The Congressional Budget Office estimates a peak total somewhere between 1.4 million and 3.6 million.
By similar logic, the new package might also raise employment. Macroeconomic Advisers, a well-known forecasting firm, estimates the program could add 1.3 million payroll jobs by the end of 2012. However, it also notes the effect would be temporary unless Congress renewed the program.
Unfortunately, the story of the original stimulus is more complex. It was only a partial success, because it failed in its main mission: triggering a strong, self-sustaining economic recovery. Typically, this happens when pent-up demand for cars, appliances and housing boosts spending and hiring, which support more spending and hiring. This process has been weak. Even with the stimulus, we lost 8.75 million payroll jobs in the slump; so far, we’ve regained only 1.9 million.
This weakness has many possible explanations. One is the severity of the housing collapse. Potential buyers are waiting until prices reach bottom. Another is Americans’ eroded financial position. Since 2007, households have lost $7 trillion in wealth, mostly from lower home and stock prices. To restore that wealth, many Americans are saving more, spending less and repaying debt.
Exactly, say advocates of more stimulus. Condition One for private-sector job creation isn’t met: Demand is insufficient. Slowdowns in the United States and Europe confirm this. Governments need to “borrow and spend” to bolster demand, writes Martin Wolf, the Financial Times’ economic commentator. Deficit reduction should be long-term.