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Government Projects do not "Create Jobs"

Tags Free MarketsInterventionismProduction Theory

08/19/2008Isaac M. Morehouse

Yesterday while driving I heard an ad on the radio promoting more state spending on roads. Besides being a bit overreaching ("Is my family really safe with our current roads?") the idea of better managed and maintained roads makes some sense and I thought the ad had a decent point — especially as I rumbled over potholes and hoped not to end up in a major traffic jam like last week.

There are potential improvements that can be made to Michigan's roads just by changing how things are run (and who runs them) without necessarily increasing road spending. Additionally, there are many ways the state could do the same things for less money. (Check out this Mackinac Center study.)

The radio ad made the point that better roads are safer — OK. Then it said better roads make it easier for businesses to operate in the state — fine. But it committed a logical and economic error when it claimed, "State spending on road projects will create jobs and boost our economy." That's only half of the story.

State projects may create jobs, but the proper question is, do they create wealth? The state could easily reduce Michigan's unemployment to 0% by mandating that every unemployed citizen shovel dirt on some state project without pay. Employment alone is not a good indicator of economic success; overall wealth is. Even if state spending can "create jobs," creating jobs alone does nothing for our state's overall prosperity or standard of living.

The question then becomes, do state projects, as the ad claimed, "boost our economy"? The answer is no.

Let's say the state spends $1 billion on road projects. It is easy to see all the laborers and machinery employed to complete the $1 billion worth of projects. It seems all those laborers and the manufacture of all that machinery signify new growth in the economy. But where did that $1 billion come from?

It came from taxpayers. What use would that $1 billion have been put to had it not been taken by the state and spent on roads?

One billion dollars divided by the state's population of 10 million people equals $100 per citizen. What would all of those citizens have done with an extra $100? Perhaps some would spend it at the movies, some at the hardware store, some on food, some on clothing, and some may have saved or invested the money. If every citizen had that money to save or spend, then every movie theatre, retailer, grocer, or investment portfolio would have received more revenue and produced more goods — and hired more people to make and sell them. How much more? $1 billion.

But that is not all. When left in private individuals' hands, that $1 billion will be spent and allocated on the things that are the highest priority for those people. This will send a series of signals through the market of what things to produce more of and what things to invest more in. It will produce fierce competition among the suppliers of the various items being purchased, pushing them to find better and better ways to create better and better products for less. This is how wealth is created. Competition spurs innovation, which increases productivity.

When government spends money, it simply takes that money from one place (taxpayers) and moves it to another (state employees, roads, etc.). When private individuals spend money, that money always has the potential to create wealth as they choose the best use between competing businesses or banks.

Whatever your feeling on the need to improve state roads, do not let the myth of "job creation" and a "boost to the economy" be the rationale.

Author's Note

It is well worth your time to read the essay "What is Seen and What is Not Seen" by Frederic Bastiat, which discusses this topic much better and more clearly than I do. It's a quick and excellent read.



Contact Isaac M. Morehouse

Isaac Morehouse works for the Institute for Humane Studies where he helps raise support for the Institute's programs.