Make-Work Won't Work

Mr. Semmens is an economist for the Arizona Department of Transportation. The views expressed here are those of the author and do not necessarily reflect Departmental policy.

More and more the fate of public policy has been determined by the stampeding sacred cows. The mere mention of sacrosanct beneficiaries like the “poor,” or “elderly,” or “unemployed,” is deemed sufficient to justify any policy, no matter how ill conceived. Objective analysis goes out the window whenever the announced intent of a government pro gram is to feed a sacred cow.

The big spenders of Congress are rushing to bloat the federal deficit with “job creation” programs. Persons questioning this precipitous profligacy are characterized as heartless haters of the unemployed. With unemployment in double digits, how dare anyone delay the expenditure of funds to make work?

Tragic as an individual case of unemployment may be, sound policy cannot be made by this kind of demagogic manipulation of our emotions. We need facts about the nature of the phenomenon, its magnitude, and its causes. Without these facts no real solutions to social problems can be devised. Instead, the creation of a “crisis” atmosphere will serve as another opportunity for those holding the power to exploit productive, taxpaying businesses and individuals.

To begin with, the concept of the “unemployed” is not well defined.

Implicit in the decision of an individual whether to accept a given job is the issue of compensation. If a person turns down a job because the pay is too low he is expressing a preference for leisure at that price. Is the economy failing because it does not provide a job at the desired wage? Or is the individual to be castigated for withholding his labor?

Defining unemployment is not merely an esoteric exercise. For example, high rates of unemployment among auto workers may have a lotto do with the comparative wage costs in auto production between Japan and America. If unemployed U.S. auto workers did not insist on wages 50 per cent higher than their Japanese counterparts, there would be more jobs available in American auto factories.

Rising Expectations

Whose fault is it that some workers cannot gain the amount of compensation they desire? It is quite a common circumstance for people to be paid less than they think they are worth. If taxpayers are to be required to make up the difference between desired wage and offered wage, the destruction of productive output will be the end result.

A partial explanation for the increasing incidence of withheld labor (or unemployment) is the rising level of expectations. Legislation attempting to dictate unreasonably high wage levels has had both a direct and an indirect effect on unemployment. Decreed minimum wage laws directly prevent individuals from accepting employment at wages that would be satisfactory. The indirect effect of these decreed wages is to create unreasonable prejudices and expectations among some individuals, causing them to disdain certain kinds of employment.

The availability of alternative sources of income also supports the willingness and ability to withhold labor. The payment of unemployment compensation abets the preference for leisure among those eligible for benefits. Despite all the rhetoric about the impoverishment of the unemployed, Department of Labor statistics reveal that the average income of a family that includes at least one person drawing unemployment benefits is over $19,000. This is not pre-unemployment income. It is post-unemployment income. That is, even with one family member unemployed, the family is still bringing in income in “livable” amounts. While averages do not tell the complete story, it is clear that the so-called unemployed are not universally suffering the extraordinary deprivation that some would have us believe.

Even with the family income figure of $19,000, unemployment benefits are routinely denigrated as insufficient. First, the benefits are portrayed as inadequate to sustain life. Second, the idea that the provision of such inadequate benefits could actually deter someone from accepting a job is ridiculed. Despite claims of the inadequacy of unemployment benefits, research on the subject indicates that the availability of benefits does seem to affect the willingness and ability of individuals to withhold their labor from the market. In a paper presented to a “Conference on the Incentive Effects of Government Spending,” Princeton Professor Gary Solon disclosed that the taxation of benefits had the apparent effect of reducing the duration of unemployment by over 20 per cent.

The reference point one uses to observe the national unemployment situation can influence the interpretation of the phenomenon. On the one hand, reported unemployment hovers in the double digit range. This is the worst it has been since World War II. On the other hand, 57 per cent of the adults in America have jobs. This is virtually unchanged from 15 years ago when the reported rate of unemployment was less than 4 per cent (the reputed “full” employment rate). The long term problem has not been a decline in the number of job opportunities. Rather, the problem has been that the growth of job opportunities has not kept pace with the increase in the number of persons desiring employment.

To some extent the divergence of the supply and demand for labor has been created by government intervention in the economy to fix the prices of labor above the market-clearing prices. The establishment of minimum wage laws was discussed earlier. In addition to this meddling on the lower end of the wage scale, government has raised the price of labor at the upper ends of the wage scale as well.

For blue collar occupations, governmental intervention has sanctioned the use of coercion and threats of violence as a means of extorting higher wages for union members. Intimidation of would-be labor competition is a “normal” part of the government-sanctioned collective bargaining process.

In the Professional Field, Entry Denied

For those in the professional field, the government at local, state and national levels has authorized various anticompetitive practices aimed at denying certain persons the opportunity to enter licensed or regulated professions. This has both a direct and an indirect impact on unemployment. Some individuals are directly excluded from pursuing a profession. Others, using the artificially high pay in the protected professions as a standard or reference are encouraged to withhold their labor because of unreasonably high wage expectations in general.

It should be obvious that the touted cures for unemployment being considered by Congress are totally inappropriate. Congress does not propose to deal with the issue of withheld labor. Congress does not propose to eliminate government programs that contribute to unemployment. Congress does not offer any encouragement for the economic growth that could supply many more job opportunities.

Instead, Congress pledges itself to actions based on coercion that are sure to aggravate the problem. To keep foreign firms from “stealing” U.S. jobs, Congress is considering legislation to prevent consumers from exercising free choice in their purchases. Import restrictions and domestic content laws would deny consumers the right to freely select the products most suitable to their needs. Not only will consumer satisfaction be reduced, but both the purchasing power of the dollar and eventual output per unit of input will be lowered.

To assist U.S. firms in gaining markets abroad, Congress is warm to the idea of bribing foreigners to buy American made goods. The bribes come in the form of subsidies either to lower the price of the goods or to lower the cost of borrowing to purchase the goods. Though Secretary of State George Schultz concedes that such a policy is insane, we are, nevertheless, headed toward its widespread adoption. The fundamental outcome of this procedure is to sell our output for less than the cost of the input. This is the road to bankruptcy, not full employment.

To prevent foreigners from entering the U.S. and “taking away” American jobs, Congress is considering enacting repressive alien employment penalties. Under this policy, employers would be punished for hiring illegal aliens. Aside from making things tougher for all Hispanics seeking employment, the program would require an elaborate and ultimately expensive enforcement effort. All legal residents would be issued official working papers. Government agents would patrol places of employment checking documents. Courts would receive the added load of prosecutions for the victimless crime of hiring a person. Counterfeiting of official papers would provide another avenue of profit for organized crime. This prospective trampling of liberties will place a further drag on the economy, as taxes to support bureaucrats, judges, and prisons draw more resources from the productive sectors of the economy.

To stimulate the U.S. economy Congress proposes to expend prodigious sums on public works. Men are to be put to work building roads, dams, waterways, sewers, public buildings of every sort. Of course, there is no information on how valuable these presumed public assets might be. The public sector has no means of evaluating the return-on-investment from the construction of these types of facilities.

Malinvestment of Resources

In an abstract sense there may well be a need for roads, dams, and the like. Unfortunately, we do not know how much of these products is needed. It is possible, even likely, that many, if not most, of these public works will return only pennies on each dollar expended. The probable consequence of a massive public works program is the malinvestment of scarce capital resources. Since it requires capital to sustain employment opportunities, the real-investment of billions of capital will inexorably reduce future employment.

To alleviate the plight of displaced workers and the “hard core” unemployed, Congress is wont to enact job-training programs. On a theoretical basis, we’d be led to predict that this would be an inefficient means of preparing people for jobs. Bureaucracies lack the economic incentive structure to effectively provide appropriate training. The past experience of the government in this area bears out the theoretical prediction.

The Comprehensive Employment and Training Act (CETA) was notoriously ineffective in training the unemployed for work. A majority of the participants in CETA never obtained productive employment as a result of their job training. Government job-training programs are a waste of time and money. Human talent that might otherwise be constructively employed will be wasted in misguided and futile efforts. Money to fund this activity will be diverted from the productive sector. This will decrease employment and output in this sector.

Since the government is already operating in the red, any programs to combat unemployment will likely be financed with borrowed money. Government borrowing crowds out the private sector. Because the federal government has the sovereign power to seize wealth with which to pay its debts, it goes to the head of the line of borrowers.

In the financial world, creditors would prefer to make loans to the government, since it can seize resources, than to private firms which might go bankrupt if consumers don’t buy their products. As a result, private firms must offer to pay higher interest rates to obtain funds. This raises the cost of capital for successful borrowers. Such firms will have less money available to expend on labor. Firms unable to pay the higher interest expense must cut back their plans for future output. Lower future output will mean fewer job opportunities. In either case, government borrowing will reduce private sector employment.

Higher Taxes Afford No Effective Solution

In order to avoid this crowding out of private borrowers, some members of Congress urge an increase in taxes. With more tax revenue the government wouldn’t have to borrow as much, thereby lowering interest rates. While this may appeal to simplistic analysts, it is a ludicrous alternative. A hike in taxes will still remove resources from the private sector. Faced with a higher tax burden, firms may resort to borrowing in order to finance their operations. Again, this will put upward pressure on interest rates. Firms not choosing to borrow resources to re place taxed capital will be forced to cut back their plans for future output. The results would be fundamentally the same as if the government borrowed the money.

At this point it is often suggested that a consumption tax, rather than an income tax, would solve the problem of draining private sector capital. How this magic is to be performed remains unexplained. Taxes on consumption will reduce consumption. Consumers will be able to purchase fewer units of output at a higher cost per unit. Firms will sell fewer units and experience lower revenues. The net result of this consumption tax will be lower private sector income. Thus, while not taxed directly, firms will still be forced to either borrow more money or cut back output.

Of course, the federal government has granted itself the authority to create money. Perhaps there will be neither increased borrowing nor taxing by the government. However, the creation of money does nothing to augment the quantity of real goods and services. The government will use this newly created money to claim real resources without having to produce an equivalent real output. As long as the money creation process is unanticipated by the market, the effect of this policy is a transfer of resources from producers to the government. This will tend to have a negative effect on the overall output of the economy, as resources are shifted from more to less productive uses.

If the money creation process is anticipated, holders of existing stocks of money will insist on higher interest rates to compensate for the loss of purchasing power that results. This leads to higher costs for borrowers, with all the attendant reductions in output and employment. Another consequence of money creation is the destruction of the value of the dollar. This discourages the holding of liquid assets. Not only is there a precipitate rush to accumulate tangible assets like gold or silver, but commerce becomes more cumbersome as the monetary unit fluctuates in value. Time, effort and resources must be diverted to methods of forecasting currency depreciation and developing strategies to deal with it.

A by-product of the depreciation of the value of money is the erroneous overstatement of income that results in lifting firms and individuals into higher tax brackets. This increased tax burden diverts resources from the productive sector, leading to lower output and employment.

It would appear that none of the schemes being contemplated by Congress affords any hope of improving the employment situation. All of the schemes rely upon the forcible transfer of resources from the productive environment of voluntary exchange to an environment of politically determined uses. This type of policy sends the wrong signals to human actors in the economy. Instead of devoting energies to production, individuals are encouraged to act defensively or predaciously. Can there be anyone who does not recognize the enormous drag that the necessity for defensive action places on an economy?

It is bad enough that international lawlessness leads to enormous weapons expenditures. However, we should not overlook the enormous devotion of resources to pay for lobbying to get or prevent legislation aimed at enlisting the government to seize resources that cannot be obtained by voluntary exchange. Armies of tax experts, lawyers, and influence peddlers repre sent a sad waste of talent and resources on nonproductive activities.

The magnitude of the loss suffered by the American people as a result of the government’s pillage approach to economic policy is huge. The standard of living we enjoy today is dependent upon the accumulation of capital over time. Policies that provide the incentive to create and accumulate capital improve the standard of living. Policies that provide the incentive to consume and destroy capital lower the standard of living.

Excessive Spending

Government programs to create jobs by seizing and spending more resources are precisely the wrong cure for unemployment. Government spending has been increasing at a faster rate than inflation. Since the 1975 recession, federal spending has risen 50 per cent faster than inflation. If government spending really stimulates the economy, shouldn’t unemployment be getting lower? The fact that government spending has not had this effect points out the precarious predicament of the predatory society.

In contrast, even the slightest moderation of government rapacity would pay big dividends. For example, let us suppose that the rate of growth of government spending had been held to match the rate of inflation over some recent time period. What would have been the employment impact of such a policy? What if the government had responded to the 1975 recession by moderating its consumption of private sector resources in this fashion?

The cumulative effect of such a policy could have been quite dramatic. The compound creation of capital invested at an average rate of return could have enabled our economy to accumulate over $600 billion more resources than presently exists. This additional capital could support an additional 51/2 mil lion job opportunities. (See table below).

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Long Term Opportunity Cost of Excessive Federal
Expenditures
($ in Billions)

Inflation Cumulative Cumulative
Federal Proof Opportunity Permanent
Year Outlays^[1] Budge^[2] Excess^[3] Cost^[4] Jobs Lost^[5]

1976 $ 366 $ 346 $ 20 $ 21 300,000
1977 403 368 35 60 900,000
1978 451 398 53 121 1,700,000
1979 494 440 54 188 2,400,000
1980 580 502 78 284 3,100,000
1981 663 551 112 424 4,200,000
1982 730 590 140 603 5,500,000

Notes:

(1) Does not include off-budget expenditures.

(2) Expenditures necessary to keep pace with inflation as measured by the Consumer Price Index.

(3) Excess of federal outlays over and above what was necessary to keep pace with inflation.

(4) Capital accumulation sacrificed to pay for excessive government spending. Assumes a 7% average annual return on investment—the after-tax, after-dividend reinvestment rate for the Dow Jones Industrials.

(5) Estimated number jobs that could have been created if capital had been allowed to accumulate in the private sector instead of being taxed away to finance federal spending.

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This estimate of the impact of the government’s spending would seem a modest portrayal of the total cost of government meddling in the economy. What if expenditures had actually been cut, rather than merely held constant? What if the morass of government red tape and regulation had been reduced? What if positive trends in these policy areas were to kindle a greater optimism among creative and productive people?

The Reagan Administration originally had some promising proposals. Red tape and regulation were to be reduced. Taxes were to be cut. Government spending was to come down. Some positive actions were taken. Oil prices were decontrolled. Phased income tax reductions were enacted.

Not much headway has been made, though. Early on, the Administration decided merely to slow the rate of growth in government spending. Despite much anguish and travail, the rate of growth in government spending still exceeds the rate of inflation. Real expenditures under the Reagan Administration are increasing at virtually the same pace as under the Carter Administration. Now, proposals for revenue enhancement abound. Make-work jobs bills are the order of the day.

What America needs is a simple program to promote economic growth. The role of government in this program is to stop interfering with voluntary productive activity. Regulations like minimum wages should be removed. Sanction of coercive collective bargaining should be repealed. Restraints on trade should be abolished. Subsidies to the inefficient should cease. Grants of monopoly must be rescinded. Laws against victimless crimes in voluntary exchange between consenting adults must be dispensed with. Finally, the bloated budgets of government at all levels have to be trimmed.

Returning resources to the private, productive sector will do more to alleviate unemployment and poverty than any other policy available to government. The wealth and well-being of ourselves and future generations hang in the balance.