# Economics 101 - The federal government cannot create jobs



## pj2105 (26 August 2009)

Hello

I'm writing this because I heard in a lecture on economics, and a couple of things that i took for granted is now dispelled and wanted to write here to see what people thought.

The first one is that 'government cannot create jobs'.  

What got me when this was mentioned is that I thought, I always hear government officials saying 'if we put money towards this we will create X amount of jobs in Australia'.  But what I heard has now dispelled this myth.

In short it was said that the government (either federal or state) makes their money via taxation.  So if they raise a million dollars via taxation and use that money, then a million dollars of 'purchasing power' has moved from those that were taxed,  to the government.

No jobs nett get created, as the government now has that million dollars to spend but those that were taxed now do not have a million dollars to spend.

With that money let us say the government will use it towards infrustructer, lets us say they build a bridge, to help traffic flow.  They will say 'we created 100 jobs in building the bridge'.
But, the people that paid that million dollars to the government as taxation, would have used it themselves on other items, they must therefore have lost 100 jobs through what they would have bought.
The nett effect is zero job have been created.

Only the purchasing power of what you can buy with that million dollars has moved from the individual to the government.  Not the ability to create jobs.

It is immaterial to say that those individuals that first had that million dollars might have not spent that money but only saved it, let us say through a bank.  This is not valid as the bank lends that money back into the system as loans and the money is used via the lender.

The other excuse sometimes mentioned is that if the government uses money it doesn't own to build the bridge but has not taxed anyone, then 100 jobs has been created.  This is not valid because the government will still own the debt until it is paid off, the longer it doesn't pay it off the higher the interest payments.  Untimatley, the government will have to pay it off, and the only way this can be done is via taxation, somewhere in the future, maybe the children of whom those that benefited from it.

So, think of it this way, a robber steals your wallet and spends your $100.  When he is caught he tells the police he has done the country a service because when he spent the $100 he created a job.  His statement is not correct as you would have spent that $100 anyway, the robber never created a new job.  
It is the same with the government spending taxed money, the money has moved from the publics pocket to theirs.


----------



## Zaij (26 August 2009)

There are other benefits than just that of the 100 dudes building the bridge. Let's say 10,000 people would end up using the bridge shaving off 5 minutes of their commute time. That's an additional 50,000 minutes that could be spent on shopping/working/whatever. Maybe the plumber or electrician can fit in an extra two appointments a day just because of that.


----------



## doctorj (27 August 2009)

pj2105 said:


> The first one is that 'government cannot create jobs'.



I would disagree – for three reasons (but there are probably more).

1) External Debt
Taxes are not the only source of funding for governments in the short term. Most governments are readily able to raise money through bonds. This is money over and above taxation that they government is able to put to use in a country’s economy and therefore increase employment. In the short run, governments can increase employment through rolling debt (rather than paying down principal) or new debt which then can go into direct employment, subsidies, capital projects etc.

2) Directing production
This could be done in many ways, but for example, it could be done through the use of subsidies. The government is able to promote labour intensive industries in favour of capital intensive industries to bolster employment in the short run.

3) Savings
In times of economic hardship, those that are still employed are less confident which tends to result in increased savings rates (see the US). Taxation reduces consumer’s disposable income, which may otherwise have been saved. Funds that are taxed (as opposed to saved) could be redeployed in the economy through government spending to temporarily boost employment in times of hardship in the short run.


----------



## beerwm (27 August 2009)

- Abolishing/Reducing minimum wage laws AND
- Abolishing/Reducing unemployment benefits 

would create jobs. [in theory]

The government can also raise consumer/business confidence [so people spend more];

- by talking up the economy

- need to remember that the stimulus payments filter through after being spent, multiple times - returns as taxation.


----------



## So_Cynical (27 August 2009)

pj2105 said:


> lets us say they build a bridge, to help traffic flow.  They will say 'we created 100 jobs in building the bridge'.
> But, the people that paid that million dollars to the government as taxation, would have used it themselves on other items, they must therefore have lost 100 jobs through what they would have bought.
> The nett effect is zero job have been created.




And if those 100 people went on holidays to Thailand and spent the 1 million on massages and Mekong whiskey...how many jobs are created?


----------



## GumbyLearner (27 August 2009)

Mmm! Keynes springs to mind.
We know what's best for you, when the entrepeneurs and innovators don't.


----------



## pj2105 (27 August 2009)

Zaij said:


> There are other benefits than just that of the 100 dudes building the bridge. Let's say 10,000 people would end up using the bridge shaving off 5 minutes of their commute time. That's an additional 50,000 minutes that could be spent on shopping/working/whatever. Maybe the plumber or electrician can fit in an extra two appointments a day just because of that.




Thanks Zaij you are absolutely right, what they do with the funds is all important, the building of the bridge for instance is paramount.  The tax payers would not have made a bridge if they had kepted their money.  It was covered in the lecture, but I didn't mention it above because I thought what I had wrote was too long anyway.
Same too as the payments to police/fire brigade/ambulance.


----------



## pj2105 (27 August 2009)

doctorj said:


> I would disagree – for three reasons (but there are probably more).
> 
> 1) External Debt via bonds



Bonds are loans.  The same as we going to the bank and getting a loan, it has to be repaid.  If the government issues bonds it has to pay back principal and interest.  I've covered this above, it can only raise the funds to repay via taxation.
There are no free lunches, nobody is going to buy bonds if they don't think they can redeem them in the future.  This is a timing issue only.  Issue bonds, get money, spend it.  Repay interest as we go, sometime in the future the redeemable date must be honored.  The government uses taxation to get the funds to honor the bond.



doctorj said:


> 2) Directing production - subsidies



This is a double problem.  Problem 1: Subsidies are direct payments to help a fledging industry.  So the Australian people get taxed so that (for example) the government gets money to give to the car industry in extra funding.  
Problem 2.  The car industry is in trouble because it can't compete with external car companies, this is because external car companies make cars better and cheaper than we do.  So the question has to be asked wouldn't our labour and capital be put to better use if it was invested in another area?  And why is the Australian taxpayer getting taxed to pay for an industry that is failing?  Investing in failure promotes failure.




doctorj said:


> 3) Savings



This statement is completely wrong and is covered in the first post.
What do banks do with the money that is deposited?  They have to do something with it otherwise, how can they pay the depositor interest?  They can't just leave it in draws.
They lend the money lets say to a business and they go about their business, thus the funds re-enter the economy.
Even in your own argument, if that money can not be saved but is taken by the government, then less money gets saved, therefore, less money can be given out as loans to business', that leads to less investments as the price of business increases because loan repayments would rise.
The laws of supply and demand say that if there is less of something the price rises.  Less money in deposits leads to less money loaned out to business' so the price of lending rises.  Making matters worse for the economy not better.


----------



## pj2105 (27 August 2009)

beerwm said:


> - Abolishing/Reducing minimum wage laws AND
> - Abolishing/Reducing unemployment benefits
> 
> would create jobs. [in theory]
> ...




Regarding the stimulus package returns as taxation.  Because if the Australian public isn't taxed to pay for the stimulus package, they either spend their money - which is taxed or save their money, which is loaned out to business and then spent - which is taxed.
What I'm saying is it is taxed either way, so it doesn't matter.
'Nothing is certain but death and taxes'

Your first point is more interesting comment, thanks for bringing it up.
Ronald Regan did this in the 80's where for the first time in like 15-20 years he LOWERED the minimum wage.  This did of course lead to higher employment.
However, I personally think there is a social problem being created.
Lets say there are 2 neigbours one is a millionaire the other is now working on the new minimum wage, lets say $2 an hour.  The social problem created is that the working on $2 an hour gets jealous of the millionaire.  Why does he have so much money?  Is it fair?  He has 10 tv's I have none, is it not fair that I take one?
The society starts to rip apart as the difference between wealth increases between Australians with the lowing of minimum wage.
So yes I agree with you, a lower minimum wage leads to greater employment, but on the same coin too is that society strains when wealth greatly differs between Australians.


----------



## pj2105 (27 August 2009)

So_Cynical said:


> And if those 100 people went on holidays to Thailand and spent the 1 million on massages and Mekong whiskey...how many jobs are created?




Excellent point, which is valid.  Let us say the total value of this is 100 million a year, spent overseas.
That means Australian currency is floating around in other countries.  What do these business' do with that money?
Take it to the bank convert it, the bank in Thailand trades it to a German bank they trade it to a China bank they sell it to a business in China, that business in China buys Australian goods.

How many jobs are created, you ask?  I say exactly the same as if it was spent in Australia by Australians, only the timing is the issue, not the number of jobs.

The problem you have fallen for is the 'short sitedness'  You stop once the money is spent overseas.  Keep going what happens to the money then?  It can be traded around the world a million times, but untimately you only get value for it once it is SPENT in Australia!  Creating the same number of jobs as if it was spent in Australia by Australians.


----------



## doctorj (27 August 2009)

I don't know everything, but I'll make an effort to counter your points.



pj2105 said:


> 1) External Debt via bonds
> Bonds are loans.  The same as we going to the bank and getting a loan, it has to be repaid.



Notice I said short term.  Yes they eventually have to be repaid - but the issue is the ability of the government to stimulate the economy and create jobs in a down term (ie. short run).



pj2105 said:


> 2) Directing production - subsidies
> This is a double problem.  Problem 1: Subsidies are direct payments to help a fledging industry.  So the Australian people get taxed so that (for example) the government gets money to give to the car industry in extra funding.
> Problem 2.  The car industry is in trouble because it can't compete with external car companies, this is because external car companies make cars better and cheaper than we do.  So the question has to be asked wouldn't our labour and capital be put to better use if it was invested in another area?  And why is the Australian taxpayer getting taxed to pay for an industry that is failing?  Investing in failure promotes failure.



I don't disagree with anything you've said - but note we're talking EMPLOYMENT and SHORT RUN.   Look at it this way - if you have an economy that can and does only two items - widgets and whatsits, both of which are in high demand. The country is the world's most efficient widget producer, but the process is entirely automated and it employs very few people.  The country can also produce whatsits, but its much more labour intensive and the country isn't that efficient at it.  Without subsidies, the country will employ few people, but produce a lot.  With subsidies....



pj2105 said:


> 3) Savings
> This statement is completely wrong and is covered in the first post.
> What do banks do with the money that is deposited?  They have to do something with it otherwise, how can they pay the depositor interest?  They can't just leave it in draws.
> They lend the money lets say to a business and they go about their business, thus the funds re-enter the economy.
> ...



Again, I agree with much of what you say, but the time frame is important (by the way, banks can and do earn money lending to other banks).  Also, banks don't lend out 100% of deposits - its sometimes more and often less.  Banks lend less when the economy isn't as good and loan-to-deposit ratios fall.  So if the ratio falls to less than 100%, then savings aren't being redeployed in the economy.


----------



## pj2105 (27 August 2009)

GumbyLearner said:


> Mmm! Keynes springs to mind.
> We know what's best for you, when the entrepeneurs and innovators don't.





lol...yes I know Maynard Keynes would roll in his grave.

He says go into debt in recessions, which I don't disagree with.  I just think the long term impact needs to be fully accounted for.

You know, our kids end up paying for it through taxation, at a even greater price as interest kicks in. 

Look at the USA as an extreme example.  Their great great grandchildren will never be able to pay off the debt that they are racking up today...but that is another thread.


----------



## wayneL (27 August 2009)

pj2105 said:


> lol...yes I know Maynard Keynes would roll in his grave.
> 
> He says go into debt in recessions, which I don't disagree with.




What our muppet governments forget when invoking Keynes, is building a war chest in good times for the purpose.

No western governemnt did that. This is not Keynesianism, it's just jacking up tax and spend.


----------



## ducati916 (27 August 2009)

*pj2105*

So far you have covered some of the basic questions. Here are some somewhat more challenging questions for you to apply economic theory to.

1.

_The big lesson from past bubbles is that recovery is export-led, which is not helpful “unless we can find another planet to export to”. _

2.

_Keynes said three things in the General Theory. First: the labour market is not cleared by demand and supply and, as a consequence, very high unemployment can persist forever. 

Second: the beliefs of market participants independently influence the unemployment rate. Third: It is the responsibility of government to maintain full employment.

_

3. From Keynes: The General Theory....

_In given circumstances a definite ratio, to be called the Multiplier, can be established between income and investment and subject to certain simplifications, between the total employment and the employment directly employed on investment…This further step is an integral part of our theory of employment, since it establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment._

4. Also from The General Theory....

_The ultimate object of our analysis is to discover what determines the volume of employment. So far as we have established the preliminary conclusion that the volume of employment is determined by the point of intersection of the aggregate supply function with the aggregate demand function

Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = ~[N], which can be called the Aggregate Supply Function.

Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f[N] which can be called the Aggregate Demand Function



_

5. From The Federal Reserve;

_Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.

_


I'll come back with more if you ace these ones.

jog on
duc


----------



## gooner (27 August 2009)

And the most important lesson, of course, identified by someone apart from me in an earlier thread, is to work out whether your lecturer is a lefty (most likely) or a rabid right winger (unlikely, these concentrate on ASF).

You can then slant any essay response to the lecturers preferred political persuasion and guarantee yourself at least a distinction. HD if you reference the lecturers work.

If your lecturer is a lefty and you go with the simplistic answer that borrowing to spend has net nil impact in the short term, you are looking at a pass at best. You will also be wrong, objectively.


----------



## jono1887 (27 August 2009)

pj2105 said:


> Hello
> 
> I'm writing this because I heard in a lecture on economics, and a couple of things that i took for granted is now dispelled and wanted to write here to see what people thought.
> 
> ...




Slight mistake here. Alot of the money that the government has obtained is quite simply from issuing govt bonds... that money can from from overseas, outside of the circular flow of money, hence there in an injection into the economy and more jobs can be formed.

However, as this is debt... the other side of the argument is also correct, taxes must later be used to pay back this debt. So there will be leakages from Australia flow later on - hopefully after the economy has recovered to some degree...


----------



## Temjin (27 August 2009)

Why bother arguing?

Keynesianism's General Theories are completely flawed. Enough said.  

A central planning government WILL NEVER be able to manage the economy BETTER THAN the FREE MARKET.

By manipulating the supply of money and price of credit (through official interest rates), you effectively prevent the FREE MARKET from discovering the true value of "things/investments". Artifical low interest rates would always lead to an irrational increase in speculations. 

Economic propersity comes from capital investment and efficient productions, not from increasing money supply and spending beyond your mean. 

But of course, Keynes would dispute that with his "flawed" theories that never really work in practice. Too much vested interest in the industry now for the majority of the mainstream economists to "change" their view on whether the theories were correct or not. 

i.e. As if you could force an economist, who has been in the industry for many years and relied on the job to feed his family/lifestyle, to immediately recognise his "knowledge" COULD BE flawed and does not deserve to be in his job. Impossible right?


----------



## ducati916 (27 August 2009)

Temjin said:


> Why bother arguing?
> 
> Keynesianism's General Theories are completely flawed. Enough said.
> 
> ...




I agree that Keynesianism is deeply flawed. 

However simply asserting that it is flawed, while neglecting to prove that it is flawed, simply is not enough. How would you respond to this?

_The economics is clear: The world needs all the advanced industrial countries to commit to another big round of real stimulus spending. This should be one of the central themes of the next G20 meeting in Pittsburgh next month.

Joseph E. Stiglitz is a professor of economics at Columbia University and chairs a Commission of Experts, appointed by the president of the UN General Assembly, on reforms of the international monetary and financial system.

_

Or how about sitting down with Krugman to refute this?

_The paradox of thrift is one of those Keynesian insights that largely dropped out of economic discourse as economists grew increasingly (and wrongly) confident that central bankers could always stabilize the economy. Now it’s back as a concept. But is it actually visible in the data? The answer is, and how! 

The story behind the paradox of thrift goes like this. Suppose a large group of people decides to save more. You might think that this would necessarily mean a rise in national savings. But if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings, other things equal. This induced fall in savings can largely or completely offset the initial rise. 

Which way it goes depends on what happens to investment, since savings are always equal to investment. If the central bank can cut interest rates, investment and hence savings may rise. But if the central bank can’t cut rates — say, because they’re already zero — investment is likely to fall, not rise, because of lower capacity utilization. And this means that GDP and hence incomes have to fall so much that when people try to save more, the nation actually ends up saving less

_

Until you can categorically, logically, refute each and every point, we're going to be stuck with the bill for their fallacies.

jog on
duc


----------



## Buckeroo (27 August 2009)

jono1887 said:


> hopefully after the economy has recovered to some degree...




Afraid there won't be any recovery that will save us jono - we are in a death spiral & only history will know the answers on how to fix it.

The future liabilities in the current form are just not affordable. You have the cost of carbon, mass retirement, increasing energy costs, rising personnel debt levels & rising taxes.

So, where in all this is a recovery?

Cheers


----------



## pj2105 (27 August 2009)

Buckeroo said:


> Afraid there won't be any recovery that will save us jono - we are in a death spiral & only history will know the answers on how to fix it.
> 
> The future liabilities in the current form are just not affordable. You have the cost of carbon, mass retirement, increasing energy costs, rising personnel debt levels & rising taxes.
> 
> ...




Each one of those points is another stone around the neck of recovery.


----------



## ducati916 (28 August 2009)

I can see that my challenge has been roundly ignored. However, here is another economic argument to be refuted.



> One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. [However] An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.
> 
> The link between Fed actions and the economy is far more indirect and complex than the simple conclusion that Federal asset growth equals inflation. The price level and, in fact, real GDP are determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Or, in economic parlance, for an increase in the Fed’s balance sheet to boost the price level, the following conditions must be met:
> 
> ...




jog on
duc


----------



## wayneL (28 August 2009)

ducati916 said:


> I can see that my challenge has been roundly ignored. However, here is another economic argument to be refuted.
> 
> 
> 
> ...




Academic refutations require academics versed in theories contrary to Keynesianism and its derivatives. The vast majority of academics are indoctrinated into the Keynesian mindset.

We're all just bush economists here.

We need someone like Krassimir Petrov or the guys at Von Mises blog to argue these points properly.


----------



## ducati916 (28 August 2009)

wayneL said:


> Academic refutations require academics versed in theories contrary to Keynesianism and its derivatives. The vast majority of academics are indoctrinated into the Keynesian mindset.
> 
> We're all just bush economists here.
> 
> We need someone like Krassimir Petrov or the guys at Von Mises blog to argue these points properly.




Indeud.

The macro-picture is however currently driving markets. Unless you come to grips with it, you're fumbling in the dark.

jog on
duc


----------



## wayneL (28 August 2009)

ducati916 said:


> Indeud.
> 
> The macro-picture is however currently driving markets. Unless you come to grips with it, you're fumbling in the dark.
> 
> ...




I think many have a reasonable abstract grasp, but cannot argue on academic terms.


----------



## Temjin (1 September 2009)

wayneL said:


> Academic refutations require academics versed in theories contrary to Keynesianism and its derivatives. The vast majority of academics are indoctrinated into the Keynesian mindset.
> 
> We're all just bush economists here.
> 
> We need someone like Krassimir Petrov or the guys at Von Mises blog to argue these points properly.




Nicely put.

Except that the vast majority of the same academics would completely ignore the validity of the theories put out by those alternative economists and make the whole "academic debate" like little kids shouting each other to satisfy their ego. 

I've seen a lot of these "debates" on the net and I come to the conclusion that it's pointless to argue.  Might as well accept for what you know and act on that knowledge for your own benefit instead of trying to fight over the seemly overpowering confirmation bias of those who don't agree with you.


----------

