25 September 2011

Creating Barriers, Not Jobs

In 1897 the State of New York passed what was known as the Bakeshop Act (more properly known as section 110, article 8, chapter 415 of the Laws of 1897, or the labor law of the State of New York). It said that "no employee shall be ... permitted to work in a biscuit, bread, or cake bakery or confectionery establishment more than sixty hours in any one week." So even if an employee were willing and able to work 61 or 65 hours in a given week and the employer was willing and able to pay the employee for said work on previously agreed upon terms, and both the employee and employer were to honor those terms, the employer could be held criminally liable.

Joseph Lochner owned a bakery in Utica, NY, Lochner's Home Bakery. In 1899 he was fined $25 for violating the act; in 1901 he drew a second fine for $50. He contested the fee in court as a denial of (substantive*) due process, the freedom to contract with anyone to do anything so long as the activity wasn't proscribed by the legitimate authority exercised under the state's "police power" (e.g., prostitution). He lost in appellate court and the New York Court of Appeals (the highest court in the state). He then appealed to the United States Supreme Court and in one of the greatest decisions ever handed down by that fine tribunal, good ole Mr. Lochner won and the Progressives of the time lost. See here and here for an overview of the case (overviews that do not share my enthusiasm for the decision, by the way) and here for a nice article by George Will about a new book regarding the decision. The full decision of the court, including a famous (and awful) dissent penned by Justice Oliver Wendell Holmes, is here. Holmes explicitly expresses hostility to the concept of laissez-faire (which certainly didn't exist at the time), to Herbert Spencer and to the notion that individuals and firms know what is better for themselves than the government does (it is important to note well that there was no allegation of coercion on the part of Mr. Lochner nor any claim that he did not remunerate his employees for their labor above and beyond the capricious and arbitrary limit of 60 hours).

This is all a very long preface to address the notion that the government can "create jobs."

First there is the idea that the government can invest where private capital fears to tread, leading to new products and services that, for whatever reason, the market would not create of its own accord. The Solyndra Scandal show rather well how nonsensical this idea is (see previous post). But let's just imagine that solar energy panels are indeed the way to the future; that our dear leaders, shoveling money that they take great care in garnishing from the people who create and earn it to firms that had the vision to support the candidate who ended up winning, have some sort of prescience as to what will "work;" that the scam, er investment, pays off. "Success" will be cried from the hills. Yes, but, as the Great Bastiat pointed out all too well, that is what is seen. What of the investment that didn't or couldn't happen due to the fact that there was less capital in the private market to fund it? What invention or innovation was denied existence because money was taken away from those whose job it is is to fund exactly these sorts of things? The new technology will more than pay for itself, the true believer will claim. Now that we will have houses and cars and factories that will run from the power of sunlight and remove us from the yoke of "foreign" oil and "dirty" coal there will be more capital free to fund any investment that anyone can think of, right?
Maybe. But maybe not. Again, you have the wishes of the few pretending to know not only what is best for everyone else, but to know better than the market how to allocate scare resources most efficiently.

How about the argument that government generally creates jobs?

"Not exactly" would be putting it mildly. A "job" in its most basic form is simply an agreement entered into between two parties to accomplish a certain task. What can the government do to facilitate such agreements? Precious little. What can the government do to act as an obstacle to such agreements? A lot.
Think of stimulus funds to a community to build a prison. The community needs the new prison (for whatever reason). The federal government has the money (thanks to current and future taxpayers). Keynesian analysis says that the feds giving the money to the locals to contract the prison to be built will inject "liquidity" into the economy. The individuals put to work (who were presumably unemployed, but this is generally not the case) will spend the money that they earn and, through the magic of the multiplier effect, the net gain in GDP will more than offset the drain on GDP through less consumption due to taxes paid and less investment due to crowding out. Thus $100 million taken from federal coffers (our pockets) will lead to, say, $130 million in future spending meaning a net gain of $30 of GDP that didn't exist before (the negative effects of less investment and dead-weight loss of the current and future taxes is much tougher to quantify so economists, especially Keynesians, simply ignore these negative externalities or quip that in the long run we are all dead, so no worries...and I am not bullshitting about that).
For sake of argument, let's pretend that this is true. $100 million from the feds to the locals will lead to about $30 million in net gain in consumption, focused in a particular area. Now does the government create any new jobs?


The local are not free to hire whomever they want to build the prison. Bids must be accepted by a certain number of firms, a fixed quantity of those bids must come from businesses owned and/or operated by "minorities." The materials must usually be obtained from specific firms or through certain bureaucratic channels. And the workers must be paid what the government deems "prevailing wages." Every step of the process must be reviewed and approved by overseers from the various federal agencies involved in the appropriations procedures.

So the locals cannot farm out the work to the firm that will build the prison in the least amount of time, for the least amount of money using materials that cost the least to procure. In fact, the prison, if it is ever completed, will be built in the exact way that no sensible person would ever go about having something built. Certainly not how somebody who is responsible for the cost of the project would act. It will take longer to build than originally projected. It will cost more than originally projected. It will not last as long or be as functional as originally projected. And the people responsible for the mess that is created will put this as exhibit "a" as to why they should be re-elected. The costs are that which is unseen.

Bear in mind that the president himself laughed at the notion that a "shovel-ready" job meant that the job was "shovel-ready" or that there was ever such an animal.

Mind also that the work performed will usually be required to be done by union employees. Unions maintain wages higher than the market price by political (& coercive) manipulation and restricting membership. If the supply is held below what is required for demand to be met, the cost is increased; the market is not allowed to function properly by allowing the supply of the labor (for example, the unemployed) and the demand for the labor (the local government) to figure out what the locals are willing and able to pay to get the job done and what the workers are willing and able to accept to do the work. Everyone's freedom is curtailed and the taxpayer loses more money to boot: lose, lose, lose. Oh, and nary a single job was either created or saved.

This is a hypothetical based loosely on an actual event that happened in Montgomery County, PA. I can't find the links, but think seriously about what I wrote and think seriously about what is more plausible: my account of what happened or the Obama/Krugman/Keynes version of "reality?"

Government does not create jobs. It gets in the way of the processes that create jobs. And even when a job is created by the government, like making a new position for a bureaucrat, the gain created by that "new job" is more than offset by the loss in productivity in the economy and the dead-weight loss of the current and future taxes necessary to pay for that job.

*As a matter of course, I find the notion of the judicially created notion of "substantive" due process troublesome. It doesn't exist in the constitution and has no antecedent in the common law. It means, basically, whatever the judge(s) want it to mean at any particular time. As a libertarian, I like it when it is used to expand the notion of individual liberty and curb the power and authority of any level of government and I dislike it when it is used to expand the power and authority of any state actor or agency at the expense of individual liberty.

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