Job Creation and Other Economic Myths

Economics

There is a belief, common to economists, that government intervention is necessary to assist economic growth. The current belief that the reason that the economy is faltering is that job growth has faltered, has not altered this perception, even though it probably should have. Recently both the Bush and Obama administrations have tried many different means of stimulating the economy (much as Franklin Delano Roosevelt did during the "Great Depression"), and these means have had varying levels if success. However, despite some small amount of relief and a stronger stock market, job growth remains stagnant and the economy slugs along with it. The efforts of the current administration toward job growth and creation, whether that be in State of the Union speeches or actually policies, have not produced the desired effects. Why is this? Could it be that the Keynesian methods of economic growth and job production are faulty? This paper looks at the problem from the point-of-view of some of the greatest economic thinkers of the past, examines the fallacies that have been foisted on the public in the past century, and attempts to inject reason in the place of myths.

Keynesian Economics: A Conservative Perspective

One of the acknowledged, by some, economic mind of the twentieth century was John Maynard Keynes. He devised a system of economics that is still one of the most prominently used among Western societies. Although his theory of economics was controversial to many, it is still followed, almost religiously, by others. It is the Keynesian system of economics though that is seen as one of the largest problems by many who believe that the people, and not government, should be the driving force behind a stable economy. As a matter of fact, the author of the article "Job Creation and Other Economic Myths," Fred Buzzeo, seems to believe that adherence to Keynes principles of economics is what has caused capitalism to steadily lose ground in the last century. Buzzeo says that;

"As with most of the pitfalls in economic thinking, John Maynard Keynes is the person responsible for sidetracking most of the generally sound logic of the early profession. It is amazing to see that, with all empirical evidence to the contrary, mainstream economists and government policy makers still cling to the timeworn postulates of the General Theory."

This is a strong statement against someone whom many of the most influential policy makers of today follow. The problem with this assertion is not that Buzzeo is overstepping his bounds, but that so many others agree with him. It seems that despite having fans among the modern elite such as Paul Krugman, who won the Nobel Prize in economics (Buzzeo), Keynes may have even more detractors.

Buzzeo seems to believe that all of the problems with the current economic system stem from Keynes, but that is not entirely true. Keynes may have been a respected economist in England, but he could not make policy. The fault lies not as much with the progenitor of the idea, as with the people with authority who used it to set policy. First the British believed that they saw the merit in Keynes plan and used it to fund the socialist revolution that was invading European economics at the time. Then the United States began going through difficult times of its own and turned to the Keynesian principles of governmental control of the job market and pricing. Hazlitt, in his book Economics in One Lesson, said that "There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills" (17). People who are going through hard times want a way to get out of them. Governmental leaders see this despair and want to, for some reason of their own or due to altruism, fix the issue. Thus, government starts making policy that will supposedly mend the economic rift. The issue here is that the fix generally causes a greater issue.

As Buzzeo mentioned, the fixes that Keynes proposed have been shown to have caused more issues than they fixed. When Roosevelt was trying to determine methods for ending the Great Depression he told his cabinet members and other influential people throughout the U.S. To give him any idea that they had. The result was termed the New Deal. Roosevelt and his administration tried a plethora of different ideas, many of which were scrapped quickly or never left the oval office, hoping that some of them would offer some relief to the country. Unfortunately the fact that government created jobs and fixed wages led to an increase in the amount of suffering. According to Buzzeo "if wages were allowed to drop during the Great Depression, we would not have seen unemployment rates of 25%." His point is, basically, that government meddling in the natural cycle of economics allowed the Depression to carry on longer, and grow deeper, than it would have otherwise. The real end to the Depression only came when production increased due to the Second World War. But, Roosevelt's and other administrations cannot be wholly blamed because they are servants of the people; meaning that they serve at the whim of the people. If Roosevelt, in his time, and other leaders in theirs, had not developed some immediate means of fixing the issue, he would not have seen a second term, let alone a fourth.

Thus, the crux of the issue is that Keynes developed a system whereby people would believe that the government was trying to solve the problem, but it does not work. There are too many historic studies that prove the ineffectiveness of Keynes methods to doubt that it has any efficacy (Buzzeo). It may be true that the initial suffering would be greater if business people are allowed to grow the economy through means of greater production, but it also ends the cycle sooner and leads to a healthier economy afterword.

Three Problematic Myths

Any science, pseudo or otherwise, has some amount of faith attached. Physicists may say that they know that Boer's model of the atom is logically and empirically correct, but they have no hard data to prove that (which is why it is still called a theory). The same is true in economics. Myths pervade science because people are always trying to make sense of that which they do not understand. Following are three economic myths that have become so pervasive in economics that they are often taken as fact.

Public Works

Modern Western nations have a great deal of infrastructure that needs constant upkeep. It is true that the various state and local governments have to a lot a great deal of capital each year to make sure that the roads, bridges, schools, etc. In their region are kept in working order to preserve the safety and well-being of the populace. However, these governments and the federal one often believe that they can use these projects to stimulate the economy. The issue here is that the money to fund these projects still has to come from somewhere.

Keynes was a big proponent of using public works projects to control the economy. In most democratic economies, the government does not control large blocks of businesses that they can use as hiring machines when there is an economic downturn. But, government entities do control the dollars used to repair infrastructure. With these dollars the government is able to help people get back to work and create jobs where there were none before. Unfortunately, the government does not generate money by selling a product or by any other means that adds something, independently, to the general economy. The money making method for government is to extract tax dollars from the citizens of the country which use services that would not otherwise be provided. Whereas taxation of the citizenry is needed to generate income to provide services such as the military, the fact is that taxes take from production rather than adding to it (Hazlitt 19). These tax dollars can be appropriated in any way that the representatives of the people see fit, but these representatives who are often supposed to have the people's best interests in mind often use tax money unwisely. They dole out public works jobs which are both temporary and increase the taxes of other citizens.

This premise can be called redistribution of wealth because it is taking tax dollars from people who are already working and giving that money to provide a job for someone who is not. It is true that most people would gladly give others help when they are hurting financially, but this is a case of the government deciding that they no better what to do with the money than the person who earned it. These public works programs are another way that the government creates a panacea to woo people into a temporary complacency that all will be well. As Hazlitt puts it "all government expenditures must eventually be paid out of the proceeds of taxation; that to put off the evil day merely increases the problem, and that inflation itself is merely a form, and a particularly vicious form, of taxation" (18).

Phillips Curve

Theories offer possible solutions to problems that do not have sufficient hard evidence to make one solution likely. In the case of economies, the process through which they are controlled is not known, and the interactions between elements within them are often not completely realized. The Phillips Curve was an attempt to understand the relationship between inflation and employment. Basically, Phillips said that as employment increased inflation would decrease. The reason for this seemed logical. He said that increased employment meant that people would receive higher wages because there would be less talent for employers to draw from. As this pool decreased, employers would have to pay higher wages to make sure that the people they employed did not leave for a job that offered higher wages for the same type of work. Because wages increased, he also believed that inflation would decrease as any rise in the cost of goods would be matched by an increase in wages. Unfortunately, this was proven to be a false premise during the 1970's. In Buzzeo's words, "it leads to the illusion that jobs can be magically created by simply increasing the price level. It is the economic concept that led to the supposed tradeoff between inflation and jobs that nearly wrecked the U.S. economy in the 1970s"

The myth perpetrated here is that because there seemed to be an inverse relationship between employment and inflation, the government could increase prices and wages would follow that curve. This proved to be false as people saw their wages decrease even as prices increased. Buzzeo talks about the creation of a new word, "stagflation," which incorporates the words stagnation (as in low or no economic growth and no growth in wages) and inflation. Buzzeo says that;

"As prices increase and public expectations are factored in, we find the economy in an inflationary environment with stagnant job growth & #8230; Productive capacity is diminished because entrepreneurs -- those individuals whose actions actually create jobs -- are uncertain about the future. And uncertainty is the greatest deterrent to productive investment. Without productive investment there is no economic expansion and no job growth & #8230; Jobs, in the long run, cannot be created by bringing the economy to a higher price level, which discourages productive investment and keeps relative incomes and activity at the same level."

The people who are responsible for actually creating the jobs in an economy see prices rising and they are forced to decide between hiring more people, or watching to make sure that the increased prices affect the viability of their company. Because business is built around making money, the decision is usually to let the workforce remain stable until the price of goods stabilizes. Buzzeo's point is that this myth is countered by simple logic. People are not going to lower their own capital when the price of production is increasing because they may not be able to afford the raw materials they need if they are spending too much on wages.

Deflation is Always Bad

As mentioned before, an economy goes through normal ups and downs. This natural cycle cannot be stopped by artificial means, but must be managed with production to the greatest extent possible. Of course the people who have control of the economy believe that they can flatten out the cycle and make the highs and lows easier on the people of the nation. This is usually not the case. Government does have a role in the economy, but it is generally best if that role is minimized and people who can actually aid in a recovery are given the ability to do so.

The highs and lows, for this argument inflation and deflation, are seen as evil entities that government must control at all costs. In actuality, both are natural consequences of the economic cycle that will eventually allow the system to run smoothly. In his article, Buzzeo discusses deflation and how it has been labeled as a bad outcome for the economy by many governmental economic leaders. In the early 1990's Greenspan lowered the federal rate more than it had been in decades and continued to increase the amount of capital released to the nation. The problem here is that it was a bubble of sorts, a false hike of the economy that did not allow for a natural flow. Deflation should actually allow the economy, and the people dependent on it, it to recover. As deflation happened, prices would drop, and less would be paid for goods which would stimulate buying activity (Buzzeo). Instead, costs for goods rose as money flooded the market, but this did not mean that producers were better able to buy what they needed. In many cases, the increased costs of materials meant that certain industries, such as manufacturing, stagnated.