Government "Production"

[Schtank]

I was reading my economics book and it says that production can be done by the government. Which got me thinking that the claim is often made that government can stimulate the economy by creating jobs (that is, producing something). More specifically, I often hear people say/argue that if the government builds roads, it both produces something and creates jobs. Why are these claims false? Or are they true, but just immoral?

Thanks

[aequalsa]

I was reading my economics book and it says that production can be done by the government. Which got me thinking that the claim is often made that government can stimulate the economy by creating jobs (that is, producing something). More specifically, I often hear people say/argue that if the government builds roads, it both produces something and creates jobs. Why are these claims false? Or are they true, but just immoral?

Thanks

That's certainly true technically, but there is an opportunity cost that is always, always ignored. If the government "creates" a job they do so by taking money from tax payers or by borrowing money which they then take from taxpayers to pay back with interest.

For example, FDR's work programs are estimated to have destroyed 7 free market jobs for each that was created. More recently with Obama's stimulus program I heard estimates that each would cost $240k dollars to create. Keep in mind that the median income in the US is around $33k.

There is probably some net gain.(mail gets delivered, tax returns examined, etc) but the cost makes the net value to society negligible.

[softwareNerd]

... if the government builds roads, it both produces something and creates jobs. Why are these claims false?

The government can fund productive activities. The police and so on are productive. Also, the government can fund (say) a factory manufacturing electric cars, or a doctor treating a patient, or scientists doing research. However, in the simplest case, the government gets its funds from taxation. So, while the government can fund something, the person who was taxed cannot. If the person was going to spend his marginal dollars on an addition to his house, but the government takes it and spends it on a doctor treating the fellow's next door neighbor, there's no new net funding taking place. In nominal dollar terms, the governments spending is some taxpayer's "non-spending". Also, since the government is less efficient (on average) than private people watching their dollars, "real" production is lower. [Of course, there's the moral issue that this lower product goes to someone other than the person who earned it.]

If the government borrows money, instead of getting it via taxes, the situation (in terms of nominal flows) is similar. Just imagine that the government takes the tax and everything else happens just as above, but -- in addition -- the government gives the taxed person an I.O.U.

[The situation is slightly different if the money is borrowed from foreigners. It is also slightly different when newly-minted money is used. However, in the long-run, those too equate to the same problem of "no free lunch"; so I'll stop this post at the simpler cases above.]

P.S.: If you haven't read "Economics in One Lesson" by Henry Hazlitt, give it a shot (online version here).

Added: Ch-4 of the linked book addresses your question.

Edited January 21, 2010 by softwareNerd

[C.W.]

I was reading my economics book and it says that production can be done by the government. Which got me thinking that the claim is often made that government can stimulate the economy by creating jobs (that is, producing something). More specifically, I often hear people say/argue that if the government builds roads, it both produces something and creates jobs. Why are these claims false? Or are they true, but just immoral?

Thanks

Whenever the government does "produce" something, the reason is that it believes that the market will not, and that the government's judgment is better in some respect. But when resources are diverted, necessarily, the consumer's interests are ignored and negated, and thus the standard of living declines. The government has no capability to make better decisions than the market. That is why, for all of the pretense, building roads, bridges, etc., is not production but consumption, maybe distruction. If the economy was free, roads would be built, and bridges, too, but the ones that were built would be chosen because they were meeting consumer interests, not what the government, and ultimately the politician chose. The politician made his choice based on his own political or personal interest.

A good source for the history of all of this is How Capitalism Saved America by Thomas J. DiLorenzo.

[Robert J. Kolker]

Government Production is an Oxymoron. Like Military Intelligence.

Bob Kolker

[JMeganSnow]

The police and so on are productive.

Eh? In what way? How are you defining "productive" here? I think you're using such a broad definition in this statement that the concept is rendered useless. The police are not productive, they exist to put a brake on the *destructive* activities of law-breakers. Refraining from or preventing destruction is not, in itself, a productive activity.

It's inadequate definitions of production like this that lead to misunderstandings and why Bastiat wrote about the "Broken Window" fallacy in economics, where smashing a window is considered a productive activity because it "stimulates" the economy--the owner of the window has to now go out and spend money to have it replaced. But, as was mentioned elsewhere in this thread, there is an opportunity cost not being accounted for here. Yes, the glaziers may be "stimulated", but the man is NOT spending money on something else he would have gotten if he retained a whole window--instead of being in possession of, say, two theater tickets AND a window, now he ONLY owns a window. So smashing the window is simply an act of destruction.

The case is similar with gov't "stimulus" or "funding" of anything. The people who created the wealth the government is spending would STILL be spending (or investing) that money in something. Instead, they're forced to pay for an enormous and unproductive government bureaucracy that takes that money from them and redirects it elsewhere. Since the bureaucracy adds NOTHING to this process, simply siphons off part of the wealth, this is NOT a productive activity any way you slice it.

Oh, and hell yes it's immoral.

[softwareNerd]

Refraining from or preventing destruction is not, in itself, a productive activity.

There's a difference between refraining from destruction and preventing it. Men have to act in various ways to prevent destruction caused by nature and by other human beings. Such activity is productive in the philosophical sense (i.e. being productive is a virtue) and in the broad economic sense (creating or defending a value). [Of course, one can distinguish between creation and defense, if it suits a particular purpose.]

Bastiat's parable is saying: if you destroy, you might create jobs for someone, but that productiveness comes out of some alternative.In other words, creating and defending values is good and productive. Destroying them is not, even if it leads to more creation and defense.

Edited January 21, 2010 by softwareNerd

[JMeganSnow]

Again, I'm not seeing how defending a value that already exists is synonymous with creating new value. There's a significant difference in that, if no one is trying to destroy the value, the defense/security effort is basically wasted effort (a sunk cost, like insurance), whereas the new value is new value. I think it's important to make this distinction precisely because I've run across cases where people think (wrongly) that, in essence, paying the danegeld is a valid and valuable use of resources.

It's the same with insurance. If you have health insurance and never use it, you're throwing money away just the same as if you took it to Vegas and lost it at the craps table. This is why some young and healthy people decide to bet they'll stay well and not get insurance even though they could "afford" it. Buying insurance isn't a productive investment.

[DerekN]

What I thought:

The goverment doesn't produce anything. Production has the purpose of earning money. When a business builds a factory, it does so to earn money. The government does not have this incentive. It just consumes by taking money from producers.

The fact that that the government has to tax producers, or borrow or print money, proofs that the government just consumes. The things they build or the labor they employ is not self-sustaining. Without producers to tax, all that they physically "produce" eventually just dissapears, like a sandwich or a car or a windmill or a pyramid.

What te government does may have some physical production as a consequence, but without the purpose of making money and replacing what is consumed, it's just consumption.

The police is consumers' labor. They don't produce any goods and they aren't self-sustaining. They are productive from their own point of view (they earn money by working), but you should look at it from the employers perspective. A guard or bouncer in the service of a business, for example, is producers' labor. Soldier, consumption. Secretary employed by business, production; secretary employed by government, consumption.

[JMeganSnow]

Production has the purpose of earning money.

I'd use the much more general phrasing "creating value". If I plant tomatoes in my back yard, eat half of them, and give the rest away to my neighbors, I haven't earned any money but I've certainly created value--the tomatoes. Money is an *equivalent* of values, not value in and of itself.

[DerekN]

I'd use the much more general phrasing "creating value". If I plant tomatoes in my back yard, eat half of them, and give the rest away to my neighbors, I haven't earned any money but I've certainly created value--the tomatoes. Money is an *equivalent* of values, not value in and of itself.

I can see that. But in a division-of-labor society, money is essential for buying things. Eventually you'll have to replace the tomatoes by buying seeds with money. The earth, the garden, a shovel, also need to be replaced and cost money. So, in this context, growing tomatoes, eating them and giving them away, is consumption.

I think it's called either productive consumption or consumptive production. The things are use up.

Edited January 23, 2010 by DerekN

[Eiuol]

I can see that. But in a division-of-labor society, money is essential for buying things.

You still, of course, could harvest your own tomato seeds, make your own shovels, use soil from your own property, etc. Money is not required for production (and a rational person wouldn't say money is their primary goal of productive action), but it certainly helps with production.

Edited January 23, 2010 by Eiuol