Saturday, September 17, 2011

The economy needs jobs.

There is no doubt that for the economy to recover, we need more jobs.

While unemployment remains at an official 9% or so, and unofficially at 20% or so, it is no wonder that the economy is mired in the mud.

There are two schools of thought about what to do about this:-

- leftists believe the government should step in and create legislation and inducements to encourage employment
- conservatives believe the government should step back, stop regulating the workforce and get out of the way so that the private sector can create jobs

So who is right? Or more importantly, which group has the better understanding of basic economics? (This is not a question of who is right or wrong, it is a question of fundamental economic facts.)

The whole economic philosophy comes down to whether you believe that all jobs are equal. (Clearly not all jobs pay the same, so what I am referring to is whether a $60k salary paid to a government worker is the same as a $60k salary paid to someone in the private sector?)

On the face of it, the short answer is yes, it is the same. John who works for the government gets his paycheck every two weeks and is able to buy food, pay his mortgage, run his car, educate his kids and maybe even buy a Blu-ray video or two to watch on his new 65 inch big screen TV. Oh, and he also pays federal taxes just like everybody else.

Paul, who works as a junior engineer in a private company, also gets paid a $60k salary. After paying his taxes he can also pay his mortgage, buy food, make his car payment educate his kids and even buy a Blu-ray to watch on HIS 65" TV.

On the face of it, both jobs pay the same, and both employees have the same money to spend on the same sort of things. So, economically, both jobs are the same, right?

If you agreed with that statement you could not be more wrong.

They are NOT the same economically. Not even close.

Paul works in the private sector. His efforts at work create a product that his employer sells into a market that, with free will, determines whether that product is good value or not. If Paul's employer gets it right (and it appears they have because Paul has a job), then there is value being created by Paul, and that value eventually translates into additional wealth that has been created. The additional wealth is shared by Paul's employer and his co-workers and indeed everybody who is along the productivity chain, from the providers of the raw material through to the salesman's commission. Not only is value and wealth created along that production chain, but because of Paul's ability to spend, it also occurs in every value chain that Paul spends his money on. This includes farmers, petroleum workers, car manufacturers and everywhere throughout the economy.

Now, that all makes sense and is very logical but this is the key point that you MUST understand.

Paul's salary gets paid BECAUSE the accumulated wealth of the world has increased in value. His salary does not get paid because someone else gets paid nothing, or less than they were getting. The ability to pay Paul's salary is 100% dependent on the ability of his employer to create wealth where it was not existing before. By the way, that wealth is usually called PROFIT. Profit is not a bad word, it does not steal from the worker, or take from someone is simply the creation of wealth.

Let's contrast this with John who holds a government job as a technician in a computer center. John works just as hard as Paul, and actually does a valuable job, keeping the Department of Energy computers safe from viruses. He doesn't actually create anything, and he is not part of a chain that produces a product that is sold to the private sector, but he does keep the Department of Energy computers running smoothly.

His employer, the Department of Energy, does not create any products that can be sold to the private sector either, but they DO create regulations and employ an awful lot of people to support those regualtions. There are LOTS of John's, thus keeping unemployment down as far as possible. After all, without the Department of Energy creating regulations, John would not have a job...but here he is earning his $60k salary, and not collecting unemployment.

And of course, he takes his salary and spends it and that keeps entire value chains creating new wealth, so it is all good!

Not quite.

Since John has to get paid, the government has no revenues or profits, so where does the money for John's salary come from? It comes from one of three places:-
- taxation
- printing money
- borrowing money

There is no other way that John can get paid.

So let's take a look at these three sources of John's salary:-
1. Taxation

I am going to keep this very simple. If John did not have his job at the Department of Energy, we would not have to pay $60k in taxes. If we did not have to pay a further $60k in taxes, it would be available to be spent on the value chain (food, cars etc) that creates additional wealth.

So...the fact that John spends his salary on the value chain is not an argument since if John did not have that job, you and I could spend that exact same amount of money on the value chain that creates wealth.

John's salary as a government worker is nothing more than a "circulation of capital"....the government takes it from us and gives it to John so he can spend is the same money, just circulated in a different way.

If John's job is paid for through taxation, it has ZERO effect on the economy. Sorry John, your job makes no difference!!

2. Printing Money

Let's make a simple assumption. The government was unable to tax us $60k more to pay for John's job. The government knew that if it did that we would revolt and throw the bums out of office. We were not willing to pay any more tax so that John could have a job.

The government still thinks they need John to keep the computers at the Department of Energy safe, so they give him a job, and, since they are the government, simply print an extra $60k in notes that they can use for his salary. No harm, no fact, that is an even better deal for the economy because the Government is no longer simply circulating capital, but is increasing cash going into the economy because of the value that John's job provides in building wealth.

Well, this sounds good except for two things. The first is that John's job does not create any wealth. And the second is that money that is simply printed and put into the economy does not change the world's accumulated neither increases it nor decreases it. Because the world's wealth has not increased by the extra $60k the government has put into the economy, we have to ask what happened to it? That answer is simple. Everybody who holds dollars finds out that their dollars are not worth as much as yesterday. John's salary has come from the INFLATION of the dollar. This inflation means that everybody has LESS purchasing power...and cannot spend as much in the value chain of wealth creation.

Hang on...didn't we see that before when John was paid by taxation? Yes we did. In this case John gets paid by reducing how much YOU can buy with your money. This is the effect of inflation, which is used to pay John's salary.

John has created no new wealth, and John's salary has contributed no more to economic wealth than if he did not have the job at all.

This again, is simply circulation of capital and cannot in any way create wealth and grow the economy.

Sorry John...your job is not looking real good right now...maybe if the government borrowed?

3. Government Borrowing

So, the government can't increase taxation or simply print money to pay for John's salary....the voters are onto those two tricks and simply won't accept them any more.

Their final option is to borrow some money from another country and use that to pay John. So the American bankers jump on a plane and fly to China and tell the Chinese...lend us $60k to pay John, and next year we will you back $65k, ok? The Chinese like this deal....after all, with the full faith and credit of the UNited States Government, a mere $60k loan is very easy to do.

So, the Bankers come back with $60k in fresh US $100 bills stuffing their pockets and give that to John for his valuable work at the Department of Energy.

John spends that money in exactly the same way as Paul. But the economy doesn't change...why? Because the mere borrowing of money does not create new wealth. The inflow of the $60k from China has created exactly the same inflation as if the money had simply been printed in the first place.

So...the initial problem is that this is no different than the impact of printing money.Simply a circulation of capital!

But it gets worse.

America has to pay China back...and since the government has no money of its own, it has three choices....

- raise taxes
- print money
- borrow money

Does anybody see a pattern developing here? When we borrow money to pay John...we find ourselves in a never ending cycle of  higher taxes, inflation and growing debt. This house of cards will eventually come tumbling down...and the whole economy will collapse.

Yes John, it IS your fault, along with the Department of Energy and all the politicians who believed that government jobs were the same as private sector jobs!!

Liberals today have chosen to simply ignore economic reality and continue wanting to believe it all works the way they wished it would work.

Obama comes out with a jobs plan that is intended to create even more jobs for John . I don't blame John because he may not understand the reality....but I do blame the politicians and economists who know better.

The saddest part about this insane President we have, and his stimulus packages and his claims to "pay your fair share" and all that shows his absolute ignorance of simple economic reality.

If he actually believes that a government job adds to economic growth, he is truly insane.

But then we have idiots stating that the dole is an economic stimulus too...and we have something like 47% of the population that agrees with these idiots.

Has our education system collapsed so far that so few can use logic to understand economic reality? Or is it just that we live in a fantasy world where everyone should own their own unicorn and rainbow...and the government should give it to us?

Harry Belafonte did a song..."There's a Hole in the Bucket" which shows the absolute futility of getting caught in circular thinking....the exact same circular thinking that says government jobs are good for the economy...

Take a few minutes and listen....if you don't know the song, make sure you listen all the way through...

The elections in 2012 are an opportunity for us to fix the hole in the bucket....

Don't miss your chance to get this moron out of the White House....if we do not get him out, we won't have a bucket to piss in, with or without a hole!



  1. I only disagree with you on one point. Even though John gets paid 60k the government , bless their little inefficiency, would have to tax us at perhaps $80k or even $100k to pay his salary. Not to mention the levels upon levels of oversight required (by them) to even buy one little network cable. I have seen it many times. =(

  2. Hi Archeleon,

    I totally agree with you. The actual cost of employing someone is significantly higher than their actual salary, but the same additional costs apply in both the public and private sector, so in order to keep things simple, I chose to ignore this aspect.

    Also, the inefficiencies that are known to exist in government with multiple layers of bureaucracy add to the costs of employment, but that would also add layers of confusion to my attempt to keep things simple so that it can be easily understood.


  3. Thanks for breaking down such an important topic in simplistic terms that will no doubt assist me in my never ending journey to show the light to my well-meaning liberal friends and family. However, Archeleon did in a roundabout way hit on an additional postscript that you may have prematurely dismissed. The chance that Paul contributes the same as John for his health and retirement benefits is quite remote, thereby further injuring our economic well-being. Granted, a minor point though in the overall discourse.

  4. Hi Nonknower,

    you are correct. When there is no financial impediment to employment costs (ie. it makes no difference to the employer what the cost is - as in a government job) there is nothing to prevent "employment cost creep".

    Every year the cost of employment will increase. Every year, more and more benefits will be provided. Every year fewer and fewer results will be obtained. The end result, over time, is that MORE employees will be required to get the same results of the first employee, and the cost of each employee will go up.

    This inefficiency is rampant throughout all government agencies. Not so much by the agents in the street but more so in the government infrastructure that is supporting them.

    Even our armed forces are not immune to this disease, but hide it through the use of civilian contractors, who as a result of their customer being the government, fall into the exact same thought processes as the government agencies.

    Waste and higher taxes, borrowing and printing of dollars surely follows as day follows night.