 | | Kip Beckman
Principal Research Associate
Economic Services |
The great economist John Maynard Keynes argued that during depressed economic times when consumers and businesses are reluctant to spend, the government should step in and fill the void and help create jobs via, for instance, infrastructure spending. While most economists accept this view, an element of the Republican Party contends that just the opposite occurs: government spending actually destroys jobs. In fact, Republican House Speaker John Boehner regularly complains about “job-killing spending.” The view that employment actually drops when federal spending increases raises an interesting question about the current debate in Washington: Would job creation soar if the government made huge cuts to public spending?
Princeton’s Economics professor Alan Blinder believes that the current view amongst conservative Republicans that public spending is somehow bad for the economy stems from the general belief that government is simply “too big.” Yet he wonders how government spending can eliminate positions if it either hires people directly or purchases goods and services from private sector companies.1 How, for instance, does government purchases of computers destroy jobs while private sector purchases create them?
It is possible that the taxes implemented to pay for the extra government spending could lead to a net loss of jobs if the additional taxes result in weaker economic growth and subsequent job losses in sectors of the economy not directly affected by the initial injection of government spending. However, the current debate in Congress is not about financing higher government spending with more taxes. Rather the issue is that higher government spending kills jobs even without higher taxes. Some Republicans claim that the huge fiscal stimulus implemented in 2009 to fight the recession didn’t create one single new job. Yet this would seem to be an outlandish claim given that spending under the Recovery Act was in excess of $600 billion and also included $200 billion in tax cuts. The Congressional Budget Office estimates that the stimulus created 1.3 million net new jobs in 2010.
Another possible reason why higher government spending could eliminate jobs is a result of the “crowding-out” argument. When the government borrows money to finance higher expenditures, interest rates increase due to the additional competition for funds in global financial markets. The resulting higher borrowing costs result in less investment by the private sector and fewer new jobs. If the “crowding out” effect is significant, it is possible that the jobs lost in the private sector attributable to weaker investment could offset the jobs generated by the higher government spending. Yet, the Federal Reserve has kept interest rates close to zero for the past couple of years and plans to maintain low interest rates at least through the middle of 2013. It is, therefore, hard to argue that government spending is somehow crowding out private sector investment in an environment of ultra low interest rates.
The final argument used by the Republicans to make the case that government spending destroys jobs is based on the idea that large deficits lead to tremendous uncertainty and this restrains business investment spending and job gains in the private sector. This argument may have some merit but is certainly not backed up by the evidence. Presently, spending on equipment is helping to prevent the economy from slipping back into recession. With consumer spending expanding at a weak pace, the close to 10 per cent gain in spending on equipment is keeping the economy from tipping over the edge. It is true that the private sector does not like huge deficits and would like the government to find viable solutions to the problem because plus trillion dollar deficits are not sustainable over the long term, especially with an aging population and rising healthcare costs. However, there is little evidence at the present time suggesting that this distaste for deficits has resulted in a pullback in investment spending.
There is little doubt that government spending can be incredibly wasteful and inefficient especially the “pork-barrel” spending politicians engage in to bring money into their districts for projects of very dubious economic benefit. However, if the spending isn’t accompanied by higher taxes, rising interest rates or a drop in business confidence due to heightened anxiety, it is hard to make the argument that government spending destroys jobs. In fact, the ongoing weakness in the US economy implies that it would be dangerous to make drastic cuts in spending in the misguided belief that less government spending could actually generate new jobs.