Who creates most jobs? Hint: It’s not the government. Almost everyone seems to grasp that the private sector is the true jobs machine. But here’s a notable exception to the consensus: the editorial page of The New York Times. The other day, its lead editorial was “The Myth of Job Creation: The government does in fact create jobs, important jobs, millions of them.” In 35 years, I can’t recall ever writing a column refuting an editorial. But this one warrants special treatment because the Times’ argument is so simplistic, the subject is so important and the Times is such an influential institution.
Let’s examine the Times’ argument. First, it quotes both Mitt Romney and President Obama as embracing the consensus. Obama says: “This notion that I think government creates jobs, that that somehow is the answer. That’s not what I believe.”
Completely wrong, says the Times. Government does create jobs, including “teachers, police officers, firefighters, soldiers, sailors, astronauts, epidemiologists, antiterrorism agents, park rangers, diplomats. ...” There are 22 million federal, state and local workers, notes the Times.
Case closed, it asserts. And it’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say “government doesn’t create jobs.”
What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment.
Job creation in the private sector is mostly a spontaneous and circular process. People buy things they need and want. Or businesses and private investors take risks by investing in new products, technologies and factories. All this spending, driven by self-interest and the profit motive, supports more jobs. In a smoothly functioning market economy, the process feeds on itself. By contrast, public-sector employment grows only when government claims some private-sector income to pay its workers. Government is not creating jobs. It’s substituting public-sector workers for private-sector workers.
Now, let me add three crucial caveats to avoid misunderstanding.
First: I am not saying that private-sector jobs are superior to public-sector jobs. Obviously, we need teachers, soldiers, police officers, epidemiologists and the other workers the Times mentioned. How many we need and what they should do are political questions. It’s also true that many government activities — basic research, highways, schools — can support the private sector. I am not making an argument for or against a given size of government; that’s another debate. My aim is merely to explain how government employment increases.
Second: The sharp lines I’ve drawn between the public and private sectors are, in the real world, blurred. Most businesses and industries are shaped by government’s tax, spending and regulatory policies. Some industries (defense and health care, to name two) depend heavily on government spending and regulations, for good or ill. Industries that rely heavily on government contracts often resemble public agencies as much as private enterprises. But these murky realities do not alter the broad differences in job creation.
And third: There is one glaring exception to the logic I’ve outlined. When the economy is in a deep slump, government can — in theory — increase hiring by borrowing and spending when consumers and businesses are retrenching. If the Times had confined its argument about government job creation to this possibility, it would have been on more solid ground. Note, however, that economists fiercely debate how much government “stimulus” succeeds in practice. If stimulus programs inspire offsetting private-sector behavior — suppose consumers and companies react to larger government budget deficits by increasing their saving — then employment gains would be muted. I don’t intend to settle this debate either.
Understanding job creation has policy implications. If the private sector is the main source of jobs, then the incentives, disincentives and the general climate for firms to expand do matter. In its editorial, the Times opposed government “austerity” because the economy remains weak. That’s a legitimately debatable policy — see my third caveat above — but it doesn’t make government a permanent job creator.
There’s a flat-earth quality to the Times’ argument. If government seems to create jobs, it must. We need to move beyond this primitive view.