Monday, November 23, 2009

When "jobs" are toxic assets

I've been in a lengthy (and ongoing) discussion with a friend who argues that "job creation" should be the first economic priority of the U.S. government at this juncture. So long as "job creation" is left undefined, it's hard to disagree. But in his view, "job creation" means stimulus spending, paid for by borrowing abroad (he has no illusions about the federal government being a font of wealth waiting to be distributed).

One problem (among many) with government "job creation" is the entire concept of what constitutes a "job." Is it any activity? Or is it any activity that creates sufficient value to warrant it being done. If it's the former, well, there's little doubt that government can drive people into activity for activity's sake. And it can then "pay" them with funds borrowed from China, or with newly created fiat money. But if net value isn't being created, this is a losing proposition. It's just the thing that brought down the Soviet Union: "We pretend to work, they pretend to pay us." Either we get stuck with additional debt burden (but no new means to pay the addition) or China gets stuck with non-performing debt. And the alternative of monetizing the debt is even more destructive, since the resulting price inflation generates additional distortions.

It's hard to see how "stimulus" spending is creating value on net, as if the government had some special ability or incentive to identify good projects that private entrepreneurs don't have. When stimulus spending is specifically devoted to "job creation" it's no different. If we continue to incur debt or create dollars to pay for projects that don't create value, we consume our capital and further jeopardize our future.

President Obama is planning a Jobs Summit in December. The danger is that job creation will become an excuse for further fiscal irresponsibility and capital consumption.

Of course, not everyone agrees with this analysis. So my question for them: "just how much additional debt to China do you you think we should incur to clean up streambeds?"

It's simply crazy. Why is it so hard to understand that prosperity can't result from borrowing to finance unproductive activities?

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