The mystery of job creation

by Russ Roberts on February 10, 2009

in Stimulus

Eric Boehlert wonders:

Does CNN's John King think construction work is done pro bono?

Apparently. Because asking questions about the stimulus bill, King,
perfectly echoing GOP talking points, wonders if a construction project
one mayor is proposing (a community wave pool) will actually create
jobs.

The only real question is how does hiring a construction firm to build a community pool not create jobs? Seriously, we'd love to hear King's explanation.

Brad DeLong links to Boehlert and asks, as he often does:

Why oh why can't we have a better press corps?

I didn't get the talking points memo from the Republicans, and I too wish we had a better press corps. But I actually somehow think that John King just might have a decent question.

The idea isn't just to employ people. The idea is to employ more people than we're employing now. That's the claim of stimulus. It's not enough to spend money. It's not enough to hire people. The claim of President Obama and Brad DeLong and others is that by spending money, other things that wouldn't otherwise have happened, will happen.

Yes, constructing a pool requires workers. But if workers who know how to build a swimming pool are already fully employed or close to it, then building a community wave pool is just going to drive up the wages of construction workers. Those higher wages discourage people from building a pool in their back yard or paving their driveway. If that's the case, then NO JOBS GET CREATED. Jobs get moved around from the private sector to the public sector. But there's no net job creation. The word "net" in the previous phrase is really redundant. Job creation really is about net jobs not gross jobs.

Of course there isn't full employment in the construction business. I assume some people who know how to build houses can also build swimming pools. And a lot of people are holding off on that backyard pool or the new driveway. So maybe a lot of the people who are good at building pools are unemployed. In that case, jobs will be created by the public spending. But you would never want to count the number of workers working to build the pool as a measure of the number of jobs created. And it isn't ridiculous to wonder if jobs will be created by building more community swimming pools. It's a good question, not a stupid one. The answer depends on the unemployment rate among the people with the skills to do the job. The answer depends on the location of the public project and the local unemployment rate of the people with the necessary skills. The answer depends on the ability of people who aren't but who have the relevant skills to find out about the new opportunity.

The answer also depnds on whether the mayor puts the project out to bid to the lowest bidder or uses his friend's firm.

Once all those community wave pools get built, maybe the people who built them will want a nicer house and they'll hire even more of those unemployed construction workers. That's another way that the spending might create jobs. (This is the so-called multiplier effect which presumes that taxpayers don't reduce spending in anticipation of higher taxes in the future.)  But ignoring that possibility isn't the mistake that John King is supposedly making. He's supposedly missing the obvious undeniable so-called fact that spending and stimulus are the same thing by definition. But they're not.

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{ 36 comments }

Lee Kelly February 10, 2009 at 1:51 am

It's all so stupid.

When people save or pay off debts, they exert a downward pressure on prices. Resources that were being used to produce consumable goods are then made available to invest. Although the amount of money available for banks to lend does not change, the buying power of borrowed money increases i.e. resources are directed away from consumption and toward investment, even if money is not.

But this fiscal stimulus has the potential to thwart the reallocation of resources enabled by falling prices. If they insist on paying pre-recession prices for goods and services (like labour), then borrowed money will not accrue much, if any, purchasing power.

Many of these projects will take a long time to complete. Even if they do not immediately crowd out private investment, they will slow its re-emergence. Once officials are committed to building a swimming pool, for example, wages must be held above the market clearing price until it is completed. This will also slow the learning process by which private investors rediscover better ways to invest money.

There is so much about this "stimulus" to find objectionable. I have only scratched the surface here.

Jason February 10, 2009 at 2:32 am

This article is disappointing. I'm tired of hearing about what will or what won't lead to "job creation." It has been said many times on this blog, but creating jobs is rather trivial — the old digging and filling in holes routine.

The debate is actually about the allocation of resources. Should the federal government take resources from taxpayers to placate those that made poor decisions (and help political allies)? That's really all the federal government can do since the only way to "solve" the economic crisis would be to go back in time a decade and reverse trillions of dollars in poor real estate investment decisions. All the talk of job creation, stimulus, and credit freezing is handwaving.

vikingvista February 10, 2009 at 2:38 am

Once again the stimulus advocate acts as though there is no cost. It is as though some alien race flew down in flying saucers and dropped $800 billion in diamonds on the Capitol lawn. It's all good.

It couldn't possibly be the case that borrowing $800 billion diverts investment away from job creation elsewhere. Or that the jobs being "created" are merely jobs being diverted away from producing things people really want. There couldn't possibly be any job losses from resultant rent-seeking, moral hazard, increased interest rates, anticipated future tax hikes, or increased investment risk from the fouled-up signals the government creates with its haphazard resource reallocation.

Yep, none of that could be true. That's the nice thing about deficit spending–it's a free lunch.

Martin Brock February 10, 2009 at 7:40 am

It is as though some alien race flew down in flying saucers and dropped $800 billion in diamonds on the Capitol lawn.

What would we do with $800 billion in diamonds?

If a million aliens flew down with advanced technology to double our productivity and added their labor to ours, operating the technology and transferring their knowledge to us, that could help, but I'm not sure how $800 billion in diamonds would accomplish anything. Too bad the Obamatrons aren't really aliens with advanced technology.

Martin Brock February 10, 2009 at 8:11 am

Once all those community wave pools get built, maybe the people who built them will want a nicer house and they'll hire even more of those unemployed construction workers.

People building the pool buying houses isn't a sustainable cycle of development. The pool must yield its cost.

If other productive people pay to use the pool and thus sustainably employ workers at the pool who then buy houses to employ the construction workers, while some construction workers also buy houses, this sequence of events could create more permanent jobs, but it seems unlikely.

More likely, some public authority in charge of the pool will show up at the next city council meeting with his hand out for more funds to operate the pool, claiming that it serves the public, even though the public won't freely pay enough admission charges to operate it.

The state can employ as many people as it wants, producing "goods" that it declares "good for the people", and we might not starve to death in this scenario, but we won't be producing "goods" that we choose more freely, and we won't value them ourselves. Statesmen will value them for us. That's the problem.

Instead of damning the "stimulus" without proposing any alternative, maybe we should discuss alternatives. "Doing nothing" is not an alternative. It's advocating that we go on doing what we're doing now and assuming that the economy will generate sustainable employment spontaneously.

Will it? That's the question, and we aren't addressing the question very effectively here. Sure, we're suffering the malinvestment of past state policies. That's not the issue for me. Has this malinvestment left capital generating sufficient profits to finance growth reemploying all of this idle labor? That's the question, and no law of economics implies that the answer is "yes".

Superheater February 10, 2009 at 8:25 am

I too wish we had a better press corps.

What press corps? Journalism is a joke-they're too busy getting tingly feelings
in their legs.

Marcus February 10, 2009 at 9:00 am

There are many things about the stimulus I don't get but one of the key things is this. If people are saving because they are unsure about the future, how does building a swimming pool somewhere help reassure people?

I get that it might (maybe) create a few jobs for a short while but how does that reassure people? How does building a swimming pool somewhere help reassure YOU that you'll have the income you need to pay your bills in the future? How does building a swimming pool somewhere change YOUR incentives to relax YOUR saving and start spending?

Wouldn't it be better if they beefed up unemployment benefits? If people had confidence they'd still be able to pay their bills if they got laid off then maybe they'd relax on their saving.

Of course, if the economy continued spiraling down the government could not keep doing that for ever. But it can't keep doing what it's doing now either and I don't see how what it's doing now helps many people at all.

DAVE February 10, 2009 at 9:01 am

question:

even if there is a real rise in job numbers, whos to say that that rise wouldnt have happened anyway sooner or later by leaving the money in the private sector?

we either need (want) a pool or we dont. and if we dont, then we probably want something else that would require employment. no?

C. Lord February 10, 2009 at 9:11 am

At MB's diamond question:

Would it not create value by virtue of the fact that diamonds have intrinsic value, like gold or real estate, unlike newly printed money, which just deflates the existing currency?

I'm not an economist, but it seems to me that it would be stimulative for the government to spend the alien diamonds — wouldn't it put upward pressure on prices without taking from elsewhere in the economy?

(this is totally ignoring the fact that I have zero confidence in the government's ability to spend the money well in the alien diamond scenario)

Marcus February 10, 2009 at 9:16 am

"Instead of damning the "stimulus" without proposing any alternative, maybe we should discuss alternatives. "Doing nothing" is not an alternative."
– Martin Brock

I agree.

In my previous post I question how the stimulus helps assure you and I will have an income in the future. I don't see how it does so. I don't see how it does anything to change my incentive to save right now.

I've suggested that maybe all they need to do is beef up unemployment benefits. If people can relax a little bit about being able to pay their bills then maybe they'll relax on their saving a little bit.

Marcus February 10, 2009 at 9:22 am

"Would it not create value by virtue of the fact that diamonds have intrinsic value"
– C. Lord

I disagree that anything has intrinsic value. Value is a property of the VALUER and not of the thing being valued.

I'm sure there are things aliens could give us that we value, like the technology to dirt cheap, portable, unlimited energy. Just a thought.

Randy February 10, 2009 at 10:07 am

Martin,

""Doing nothing" is not an alternative. It's advocating that we go on doing what we're doing now and assuming that the economy will generate sustainable employment spontaneously."

Actually, its an assumption that when the price mechanism starts working again that investors who want to invest and workers who want to work will once again generate sustainable economic activity. There's nothing "spontaneous" about it. Its just that with the price mechanism out of action, it is difficult to evaluate risk.

Chris O'Leary February 10, 2009 at 10:07 am

If you really want to create jobs, do something that will spur residential construction, not municipal construction.

The residential construction market has totally fallen apart.

DAVE February 10, 2009 at 10:36 am

""Doing nothing" is not an alternative"

at risk of sounding seinfeldesque "doing nothing" is a pretty big something.

Martin Brock February 10, 2009 at 10:39 am

Would it not create value by virtue of the fact that diamonds have intrinsic value, like gold or real estate, unlike newly printed money, which just deflates the existing currency?

I don't know how much intrinsic value diamond's have, but I can't eat them. They do have productive uses, but the economy couldn't put many of them to much use in a short time; however, diamonds also have the sort of value that newly printed money has. People perceive them as valuable, so holders effectively are entitled either to consume or to reorganize resources. The effect of his reorganization depends on how productive it is compared with the former organization.

I'm not an economist, but it seems to me that it would be stimulative for the government to spend the alien diamonds — wouldn't it put upward pressure on prices without taking from elsewhere in the economy?

It would put downward pressure on diamond prices, and it might also put upward pressure on other prices, because diamond prices wouldn't adjust immediately. Creditors might extend monetary credit against the new diamonds, increasing the money in circulation.

K Foster February 10, 2009 at 10:59 am

Would it not create value by virtue of the fact that diamonds have intrinsic value, like gold or real estate, unlike newly printed money, which just deflates the existing currency?

I'm not an economist, but it seems to me that it would be simulative for the government to spend the alien diamonds — wouldn't it put upward pressure on prices without taking from elsewhere in the economy?
- C Lord

Printing new money is a recipe for inflation. A greater quantity of money chases after the same quantity of goods, and prices rise. This is not wealth creation, its wealth transfer. The introduction of your alien diamonds might have similar consequences; these new diamonds may diminish the value of the diamonds already held. The subsequent price drop might be good for manufactures using diamonds as Raw materials, but it’s certainly not a boon for parties currently holding diamonds.

Value is both relative and subjective, but it’s certainly not innate or fixed.

K Foster February 10, 2009 at 11:01 am

Would it not create value by virtue of the fact that diamonds have intrinsic value, like gold or real estate, unlike newly printed money, which just deflates the existing currency?

I'm not an economist, but it seems to me that it would be simulative for the government to spend the alien diamonds — wouldn't it put upward pressure on prices without taking from elsewhere in the economy?
- C Lord

Printing new money is a recipe for inflation. A greater quantity of money chases after the same quantity of goods, and prices rise. This is not wealth creation, its wealth transfer. The introduction of your alien diamonds might have similar consequences; these new diamonds may diminish the value of the diamonds already held. The subsequent price drop might be good for manufactures using diamonds as Raw materials, but it’s certainly not a boon for parties currently holding diamonds.

Value is both relative and subjective, but it’s certainly not innate or fixed.

Dave February 10, 2009 at 11:28 am

There's an easy solution to the "crowding out" problem as it applies to labor: pay stimulus workers below minimum wage.

Note, I only favor such a provision given a stimulus plan and given the minimum wage laws.

Kevin S. February 10, 2009 at 11:43 am

Since it hasn't been mentioned I'll point that if there were sufficient demand for a profitable (or at least sustainable) wave pool in this community, it seems that it would have already been built.

If there is an existing private wave pool, then we must subtract the jobs lost when the public pool takes their customers. The owner and employees of which, I'm sure, would be none to happy to see themselves having to compete with a subsidized project…and to add some irony, their taxes are used to provide the subsidy to put his business/job at risk.

vidyohs February 10, 2009 at 11:53 am

Oh well jobs come and jobs go.

Forever is composed of nows." – Emily Dickinson

Some employees are simply irreplaceable. Take Michelle Obama: The University of Chicago Medical center hired her in 2002 to run "programs for community relations, neighborhood outreach, volunteer recruitment, staff diversity and minority contracting."

In 2005 the hospital raised her salary from $120,000 to $317,000 – nearly twice what her husband made as a Senator.

Oh, did we mention that her husband had just become a US Senator? He sure had. Requested a $1 Million earmark for the UC Medical Center, in fact. Way to network Michelle!

But now that Mrs. Obama has resigned, the hospital says her position will remain unfilled. How can that be, if the work she did was vital enough to be worth $317,000?

We can think of only one explanation: Senator Roland Burris's wife wasn't interested.

Wow! Just think of that! A prestimulus job destroyed by a stimulus creating president!

Oh, the sweet iorny of it all.

Oil Shock February 10, 2009 at 12:04 pm

I think Russ got the titles mixed up. "Creepy" would be an appropriate title for any posts refering to delong.

C. Lord February 10, 2009 at 12:13 pm

Fair enough. My thought was more centered around government having something at its disposal without taking it either via taxation or inflation, but you're right, there would be myriad market distortions from the deployment of those resources.

Instead of intrinsic value, scarcity value is more appropriate, and upon entering the market, their scarcity value would diminish accordingly.

Ike February 10, 2009 at 12:22 pm

Okay Martin, how about this:

I propose a $1.00 stimulus package.

That's something. Now we're only quibbling about the amount.

Marcus February 10, 2009 at 12:27 pm

"Instead of intrinsic value, scarcity value is more appropriate, and upon entering the market, their scarcity value would diminish accordingly."
– C. Lord

To paraphrase something Martin once wrote, Martin Brock's poop is scarce but that doesn't make it valuable. :)

TrUmPiT February 10, 2009 at 2:39 pm

One solution to the unemployment problem is to encourage the unemployed and their dependent family members to take their own lives and save us all the grief of rising unemployment figures. I'm basically Libertarian (i.e., selfish) when it comes to other people's problems; I want them to whine to someone else; I have my own problems. Government is NOT the solution to the unemployment problem/crisis, but perhaps Dr. Kevorkian is. Would Jack, a medical doctor, qualify for a Nobel in economics if he succeeded in ending the problem of unemployment where Keynes and Hayek had failed miserably? Economics should produce practical as well as theoretical results. Who knew that Doctor Death was economic's savior?

Mezzanine February 10, 2009 at 2:40 pm

All this "stimulus" is just more round-and-round dig a hole, fill it. There is no net job creation. But that's too complicated for our "better press corp".

Mezzanine February 10, 2009 at 2:42 pm

Trumpit – why don't you try Dr. Kervorkian's services and let us know how it went?

C. Lord February 10, 2009 at 2:47 pm

Regarding money holes, this is hilarious if you haven't already seen it:

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

http://www.theonion.com/content/video/in_the_know_should_the_government

BoscoH February 10, 2009 at 11:10 pm

Whenever I read TrUmPiT, I thank Obama that we have George (muirgeo, not Bush) to kick around.

Gil February 11, 2009 at 1:12 am

Actually once the word was out that '800 billion dollars worth' of diamonds had been delivered the price of diamonds would plummet because of more diamonds chasing the same amount of goods. Or, to put it another way, diamonds are only valuable when not many people have them, when everyone has diamonds they're bordering on worthless. A real life analogy was the U.S. Government building of the Washington Monument in 1884 and creating the capstone from a certain precious metal more valuable than silver. It turns out that the precious metal used was aluminium! Oopsies!

Talking of unemployment is not the problem of unemployment that of Westerners pricing themselves out of the market and making Indian and Chinese workers look good by comparison? If so, then all you have to do is get rid of unions and minimum wage laws so that Western labour is as cheap as Chinese labour. It's just the same as the way children are considerably more expensive to raise than in times past such that children have priced themselves out of the market and most people would rather raise kittens, puppies and chicks.

Brad Eleven February 11, 2009 at 8:09 am

Randy responded to the "aliens dropping $800B in diamonds on the White House lawn" discussion with:

"I'm sure there are things aliens could give us that we value, like the technology to dirt cheap, portable, unlimited energy. Just a thought."

I agree, but in that case, the oil corporations would demand federal assistance because the products of their labor and investment would be worthless. The oil industry, of course, is too big to fail.

In general, government assistance to private industry has become a serious problem. I understand its roots, e.g., some industries are seen as too important to large civilization to fail.

Review the discussions on industries that spend time and money ensuring that their federal money will keep flowing instead of producing goods.

The root of the problem, it seems, is the avoidance of failure. What is so awful about failure? It is required for success, i.e., progress. Without failure, we have no mistakes from which to learn. Without learning, we can only repeat the same mistakes.

Meanwhile, the world is changing, and may very well have already changed while we were busy arguing about whether our old economic models may have failed.

Marcus February 11, 2009 at 9:39 am

Talking of unemployment is not the problem of unemployment that of Westerners pricing themselves out of the market and making Indian and Chinese workers look good by comparison? If so, then all you have to do is get rid of unions and minimum wage laws so that Western labour is as cheap as Chinese labour.
– Gil

That's only half the story Gil. What happens as the price of something goes down? Demand for it goes up.

So while it might be true that sellers (workers) compete with one another to bid prices down, demand for workers will go up. At some point, you reach full employment.

What happens then?

As the economy continues to expand more and more employers (buyers) begin competing with one another to bid prices up.

Mezzanine February 11, 2009 at 3:39 pm

Brad Eleven – because allowing failure is not politically correct. Of course failure is happening all around us, but politicians who want to get reelected better not be caught doing anything but "let's prop up the failures". Just go around to any random neighborhood and ask them if "creative destruction" is a good thing. Chances are 90-10 against the idea.

Thomas Jackson February 12, 2009 at 1:17 am

The whole premise of a bailout of those who made poor choices is horrible. Our economic system will be badly impacted by compounding the error of rescuing those who made bad decisons by penalizing those who were industrious and prudent.

By keeping zombie banks around we guarantee future problems in other industries. Finally, where in the Constitution is any of this authorized. Is nothing prohibited to the poliburo now?

Michael Bird February 12, 2009 at 4:21 pm

Constitution?

What Constitution?

True_Liberal February 13, 2009 at 9:16 am

"If you really want to create jobs, do something that will spur residential construction, not municipal construction."

The housing market is FLOODED with new and older homes – and you want to build MORE???

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