ECONOMIC MISCONCEPTION #5 -- GOVERNMENT AND CONSUMER SPENDING CREATE JOBS

Jobs are created when resources (capital) are applied to productive activity (i.e., making stuff of value and providing services that help people make stuff of value). Productive activity is like the engine in this motorcycle, government and consumer spending, on the other hand, are like the wheels. The engine makes the economy go and creates jobs and the wheels sustain momentum (and jobs) but only to the degree that the engine powers them.

 

The number of jobs created depends on the strength of the engine, not the size of the wheels. When scarce resources are directed away from the engine to the wheels (mainly through taxes), the engine necessarily gets smaller (like the motorbike below). Large wheels (consumption) don't make for a strong economy and plentiful jobs--its all about the engine (productive activity).

  

 

It is the engine that powers the wheels--productive activity powers spending--not the other way around. Without the engine creating jobs and income there would be NO government NOR any consumer spending. When capital is diverted from the engine to the wheels (through taxes) the economy slows. Only a return of capital resources from the wheels back to the engine can get the economy racing once again. And this can be accomplished ONLY by downsizing government and reducing taxes.

 

Conclusion: We need another sequester--no, we need a sequester times 10--no, times 100. The most productive single move toward downsizing government could be accomplished by reforming social security via creating private savings accounts. These funds would go directly to the economic engine rather than to the wheels (which is where social security payments go under the present system). Any downsizing of government will ultimately lead to more jobs, even if that means fewer government jobs. (In a future blog post I will explain why government jobs are not nearly as beneficial as are private sector jobs.)

 

Have a nice day.

 

DWD