THE CREATION OF VALUE IS
Although the role of government would appear to be a controversial topic in the political sphere, there’s one role commentators on both the left and the right seem to agree on: Government should provide jobs. It’s hard to avoid political rhetoric underpinned by the assumption that government should create jobs, and virtually all politicians in the U.S. are judged on their “jobs record.” In national politics, unemployment levels are closely tied to voters’ perception of presidents, and here in South Carolina we are governed by an executive who proudly calls herself “the Jobs Governor.” The obsession can be seen in both the frequent job-creation announcements by government agencies and officials, and by the tax favors and subsidy policies perpetuated by state government in the name of creating jobs. The fact that, according to any relevant measurement, these policies have failed – employment actually dropped from 1999 to 2010, a period during which the overall population increased – doesn’t seem to matter.
One sector that did grow during that period was, of course, government – at the federal, state, and local levels. Why is this? One reason, clearly, is that government jobs are the easiest to create, and in fact the only jobs politicians actually have the power to create. Another reason is that increasing government management of the economy in the name of stable growth and jobs has the side effect of creating new government jobs to do the managing. In fact, South Carolina spends at least $12 million annually on employees hired for the specific purposes of purchasing from the private sector, managing economic development, and administering grants.
Why have these “jobs policies” failed so miserably to achieve their stated end of creating jobs? The answer is simple: Jobs are not the point of economic activity. Policies that attempt to promote them as such are setting themselves up for failure. The real goal of economic activity is value creation.
People don’t go into business to create jobs or go to work for the mere pleasure of working. People do these things because they want money they can use to acquire the goods and services they value. They obtain these resources, in turn, by receiving payment for providing goods and services valued by others. A job is not an end in itself, but only a method for obtaining things that increase quality of life. Every government program aimed at job creation, from the New Deal to the 2009 stimulus bill, has made the mistake of assuming jobs themselves to be the point of economic activity. The consequences have been predictable.
A story about Milton Freidman illustrates the point. Once, while traveling in a foreign country, Friedman came across construction workers using shovels rather than modern construction equipment. Dr. Friedman asked his host why the workers weren’t using more modern equipment, to which his host replied that the program was intended to create jobs. Friedman responded by suggesting that, instead of shovels, the workers should be using spoons.
By valuing jobs over value-creation, the program was actually retarding value creation: the final structure would be created slowly and poorly rather than quickly and well. The principle is the same in South Carolina. When state government uses its resources to favor certain industries and companies for the purpose of “creating jobs,” it arbitrarily redirects resources from where they would naturally go in the market.
In the market, resources tend to gravitate towards enterprises that are seen as being high value producers. When this process is disturbed by government favoritism, however, resources are often moved from enterprises that produce high levels of value to those that produce less. The result is a rate of economic growth slower than what could have been. Job creation as a byproduct of economic growth (as companies expand when they are rewarded for creating value through profits) will necessarily be slowed as well.
In fact, this is true not just for special grants or tax favors designed to create jobs, but for almost all government activity. Every dollar government spends, remember, must first be extracted from the private sector.
Frederic Bastiat referred to the fact that keeps most from recognizing the folly of redirecting private funds as the “seen and unseen.” While it’s easy to see the jobs that are created or the structure that’s built with government assistance, it is harder to imagine what could have been done with the funds had government not intervened. An existing business would have expanded with these funds, but government redirected them for its own “jobs”-related purposes. The loss of this expansion can’t be seen, but it’s not less real and consequential for that.
While private-sector investors won’t always pick winning enterprises, they’ll pick them more often than government because private-sector investors are highly susceptible to the ill effects of a bad investment. If South Carolina government officials truly want to see job growth, they will abandon economic development policies while simultaneously shrinking taxation and expenditures, thereby allowing the market to deliver resources to enterprises best suited to creating value.
The only trouble: Politicians won’t get much credit for “creating jobs” this way.