For anyone seeking to affect or even evaluate public policy options, economic thinking is crucial. It helps us to avoid some of the worst, and yet most common, errors in the public policy arena. Economic thinking emphasizes the role of incentives and the importance of comparing each potentially favored option with other real and available options, not with perfection. Let’s look first at today’s discussion of “green jobs” on the one hand, and next time turn to reform of the medical care system in the United States.
Jobs are typically used to produce goods and services that we value. But let’s not forget that it is the value of the goods produced that is important, and the jobs are merely a means to that end. If people don’t keep their eyes on this basic fact, they can be misled to support projects that destroy wealth rather than create it.
Politicians like to talk about the jobs created by their spending programs. Suppose the government spends $50 billion employing one million workers to install photovoltaic cells to generate electricity for electric utility firms to distribute to customers. Supporters of projects like th is often argue that they should be undertaken because they will create a huge number of jobs. Is this a sound argument? To answer this question, consider the following two points. First, the government will have to us e either taxes or borrowing to finance the project. Taxes of $50 billion will reduce consumer spending and private savings by this amount, and this will diminish employment in other sectors by a magnitude similar to the employment created by the spending on the project. Alternatively, if the project is financed by debt, the additional borrowing will lead to higher interest rates and future taxes to cover interest payments. This will also divert funds away from other projects, both private and public. Thus, the net impact will be primarily a reshuffling of jobs rather than job creation.
Second, what really matters is the value of what is produced, not jobs. If jobs were the key to high incomes, we could easily create as many as we wanted. For example, the government could pay attractive wages hiring the unemployed to dig holes one day and fill them up the next. The program would create jobs, but as a nation, we would also be poorer because such jobs would not generate goods and services that people value. Job creation, either real or imagined, is not a sound reason to support a program. Instead, the proper test is opportunity cost—the value of what is produced relative to the value of what is given up. If people value the output generated by the government spending program more than the production it crowds out, it will increase our incomes and living standards. If the opposite is the case, then the additional spending will make us worse off. Economic thinking helps a careful analyst see how to advise allies and to expose the errors of opponents, when policy errors like this become real threats.
Next time, we will discuss health care as an example.
James D. Gwartney holds the Gus A. Stavros Eminent Scholar Chair at Florida State University, where he directs the Stavros Center for the Advancement of Free Enterprise and Economic Education. This is an excerpt from the Institute for Humane Studies Policy Career Guide.
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