When Biden "Creates Jobs" Look for the Hidden CostsTags Taxes and SpendingU.S. History
Biden’s Government Jobs Are the "Seen" the Lost Market Jobs Are the "Unseen"
In the near future, anyone reading up on news is likely to find an article titled "Jobs Created under Biden" or a report on how many jobs were added through Biden’s programs. These jobs the news reader will see, but the jobs that workers would have been doing had the government not hired them will be invisible to this reader.
What Are the Seen and Unseen Jobs?
In Bastiat’s "The Broken Window" Bastiat describes two scenarios, one in which a shopkeeper's son destroys his father’s window and the shopkeeper has to pay to repair the window, and a second scenario in which the boy doesn’t shatter the window and the father can spend his money elsewhere, i.e., the tailor to buy a new suit. The effects of the first scenario are best explained by Hazlitt, who in Economics in One Lesson commented that
Because he has had to replace the window, he will have to go without the suit…
Or as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit….The glazier’s gain of business, in short, is merely the tailor’s loss of business
In the world of politics, the reality of lost wealth due to broken windows is thoroughly ignored.
On his campaign website, Biden promises to create the "jobs we need to build a modern, sustainable infrastructure now and deliver an equitable clean energy future" (the entire phrase is bolded in the original). But what is sacrificed in the name of "creating" these new jobs?
Think about Net Jobs Created, Not the Seen Jobs
The workers who are being paid to, say, create electric automobiles as part of Biden’s $2 trillion investment to create 1 million jobs in the auto industry are 1 million workers who could have been creating jets, managing the supply chain of a delivery company, or doing private consultancy. So even if we take the 1 million–job figure to be true, it does not mean a net gain in jobs over the private industry. Just as in the broken window example, a job was created for the glazier but destroyed for the tailor.
How Many Windows Must Be Broken to "Create Jobs"?
A supporter of Biden’s plan might point out that all of Biden’s government spending is not like the broken glass example because the effect of the jobs plan will be to create value in some way—rebuilding infrastructure will create some value, unlike breaking and fixing glass. But who determines what the value of this is? And could it be zero?
The Answer Is We Have No Way of Calculating This
In the private market the individuals in the market value the product according to their own subjective valuations.
By contrast, when measuring the value of a government’s regulatory or spending scheme, government bureaucrats simply guess how much value is provided by the new items or services being offered. Often, the value is even calculated to a large extent using the cost of producing the product, even though the cost of production does not in any way dictate how consumers value it.
Moreover, the resources now being devoted to a new government priority or project are resources taken away from other goods and services like schooling, health insurance, food, shelter, and countless other products and services that consumers demand.
The real value of a government-created product could be anywhere from zero dollars to a number far higher than what was necessary to produce the product.
This means the real value of a government product or service is really being arbitrarily dictated by the preferences of policymakers. It’s not at all set by what consumers actually want.
Crowding out Savings
All this government spending will have a "crowding out" effect on saving, which will raise interest rates for private businesses and consumers trying to spend. This is because, as Jeff Madura explains in chapter 2, section 1 of Financial Markets and Institutions, in the loanable funds model, interest rates are determined by "factors controlling the supply and demand for loanable funds."
Government is on the demand side whenever it runs a deficit. To explain how this increases interest rates, we can use imagery from Menger’s Principles of Economics. Menger explains that the demanders (i.e., government) must bid up the price of the good they want (i.e., money) in order to purchase it, as the sellers of that good will try to sell to the highest possible bidder. This has the effect of the "unseen" consequence that when consumers or firms try to borrow money, they must outbid government, which is seen as the lowest-risk borrower on the market. As a result of this, another "unseen" effect is that because the price of borrowing is higher, consumers and investors might buy less. This leads the additional "unseen" that all the products firms would have created if they had had access to lower interest rates do not appear on the market.
Crowding out Labor
A further "unseen" effect of government expenditure to hire workers, or government subsidizing specific companies to hire them is that now our news reader cannot see companies that are not being subsidized to hire workers. These companies must "outbid" government and other companies to hire laborers. In this auction, especially since government demand is relatively inelastic (meaning it does not react much to a change in price) these companies will pay a higher cost to do business and as a result they might put their money in factors of production that will give them a higher return, but not one as high as hiring workers at the original price (as in before government’s involvement in the marketplace).
However, some economists might point out that we shouldn’t worry about crowding out because, as Paul Krugman and Robin Wells put it in their book, "Expansionary fiscal policy during [recessions] puts unemployed resources to work…and generates higher income."
Economist Robert Murphy writes of this argument in favor of stimulus that "it is absurd to think the government can come up with spending programs that would draw only on unemployed resources." Stimulus would also draw on "skilled workers who were still gainfully employed even amidst the recession, and therefore will not be able to work on as many private-sector projects as they otherwise would have." To link this back to our broken window example this would be like the government coming up with a program to fund fixing broken windows—all the tailors would become glaziers rather than just unemployed glaziers repairing the damage.
A second criticism to be raised of Krugman and Wells's critique is that the workers may generate higher income. Say’s law is that each of us can purchase the productions of others with our own production." Krugman and Wells's "higher income" statement assumes that what these previously unemployed workers will produce is higher than what they would have produced in a free market.
In conclusion, the "seen" effects of Biden’s jobs plan will be all the jobs he creates via subsidy and hiring them to work for the government, as well as the products these workers make. The "unseen" effects will be the jobs the private market would have created had Biden’s plan not gone through and the products that would have been created in this market. When people read up on the statistics of jobs created by these programs, they should ask, Is this a net gain of employment or would the market have hired these workers instead of government? And is the product that the government has used the workers to make of a value higher value than what the private market would have used employed this resource to do or is the investment an inefficient use of the factor of production?