Beware of government projects to create jobs

Sunday, Dec 22, 2002,Page 8 Political leaders in Taipei have announced a plan to fight recessionary conditions gripping Taiwan's economy. With unemployment rates at a record level and low growth becoming the norm, an emergency jobs package has been proposed.

Aiming to boost the economy and lower unemployment, Premier Yu Shyi-kun announced two projects that could create 115,000 more jobs over the next three years. To provide the NT$300 billion to fund these projects, he asked the Legislative Yuan to support a change in the Public Debt Law (¤½¶Åªk) so that the expenses could be excluded from calculations of public debt. As it is, the law places a ceiling for public debt at 15 percent of the government's annual budget. Although the Cabinet proposed draft amendments to lower the cap on public debt from 15 percent to 12 percent, new bonds issued to pay off outstanding debt on the government's balance sheet would be excluded from the calculation. These changes are estimated to allow the government to issue additional public debt of NT$65 billion each year.

Despite the good intention to lessen the burden on the unemployed, a belief that governments can create jobs is misguided. While public spending to create new jobs has failed everywhere it has been tried, one certain outcome from this approach will be to allow for mushrooming public debt. This is evident in another proposal that would allow debt used to finance the building or improvement of public infrastructure from being used in the calculations of the debt ratio.

It is a fact of life that bad economic policies never seem to die or fade away. It would appear that policy makers tend to have selective amnesia or short memories. They have apparently forgotten that schemes involving deficit spending by governments to promote employment growth fell into disrepute during the 1970s because of the devastating effects of stagflation.

Governments cannot create jobs since they cannot create wealth. This is because adding a worker to the public payroll is offset by new tax obligations.

Indeed, governments are not even very good at redistributing wealth or income. However, governments can take actions that retard economic and employment growth by introducing policies that distort incentives.

The motivation behind such flawed policy choices reflects the nature of economic decisions that are guided by political expediencies. Elected officials and bureaucrats tend to prefer policies that generate short-term benefits while shifting the associated costs to the future. Similarly, they avoid policies that create short-term costs while yielding benefits in the future. Proposing quick results and reinforcing an impression of active engagement in problem-solving increases the likelihood of being re-elected or re-appointed even when the result is that net costs are heaped on the community.

Furthermore, government spending schemes that involve an expansion in public-sector debt impose various burdens on future generations. First, there is an additional tax burden to repay the additional debt. Second, if government spending is not efficient or invested, there will be less employment growth in the future. Employment growth requires fundamental changes in the economic decision-making process.

New government spending usually distorts the incentive structures on entrepreneurial choices, especially when accompanied by new taxes or regulations. Taiwan's taxpayers should realize that their leaders should adhere to economic rationality rather than give in to temptation.

Christopher Lingle is Professor of Economics at Universidad Francisco Marroqu in Guatemala and Global Strategist for eConoLytics.com.

As it is, the law places a ceiling for public debt at 15 percent of the government's annual budget.

Here's something we could learn a lesson from!

Governments cannot create jobs since they cannot create wealth. This is because adding a worker to the public payroll is offset by new tax obligations.

While this is generally true in a broad perspective, there are some exceptions.

The most valid tool that government has available for creating jobs (and wealth) is through the construction of public infrastructure: roads, highways, bridges, tunnels, hydroelectric dams, water supply /wastewater treatment systems, airports, locks and dams on rivers, flood control projects, railway system. All of these provide immediate employment opportunities for their construction and long term tangible benefits for the public who financed them.

Public debt may or may not be necessary for such projects. Issuance of tax-free bonds would be just one way of attracting private capital for such projects. Additionally the jobs created need not be directly on the government payroll, private construction firms would do the actual hiring. Yet, for projects of this nature, there is no doubt that government "primed the pump" and created jobs through the public investment in infrastructure.

a belief that governments can create jobs is misguided.

Here is why this statement is true. If the public deems something worthwhile at a given cost and it can be done at that cost plus a reasonable profit, the private sector will move in and do it for profit. All other things the govt. will try to do, will be done at a price higher than the public deems worthwhile. The best way to create jobs is for govt. to reduce the cost of doing business and that is with fewer regulations and lower taxes. When the govt. does this, more things will be done and that is when the economy gets moving.

If the public deems something worthwhile at a given cost and it can be done at that cost plus a reasonable profit, the private sector will move in and do it for profit.

There are some projects that are simply too large in scope for the private sector to finance on its own. Hoover Dam is one such example, the Interstate Highway system is another. Such "privatization" extremism also begins to violate individual freedoms in other respects. For instance, private ownership of our transportation infrastructure establishes natual, local monopolies and violates individual's rights to move about freely.

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