It follows, then, according to Krugman, that “we should have a lot of job‐creating spending on the part of the federal government, largely in the form of much‐needed spending to repair and upgrade the nation’s infrastructure. Oh, and we need more aid to state and local governments, so that they can stop laying off schoolteachers.” Krugman also wants a further extension of unemployment benefits and other increases in social‐welfare spending to put money in people’s pockets and increase demand. Those individuals who receive government payments are able to purchase goods and services that they would not otherwise be able to. The sellers of those goods and services receive income that they would not otherwise receive, and are therefore, in turn, able to purchase additional goods and services. This cycle multiplies through the economy, generating growth. Krugman, for example, estimates that “a dollar of public spending raises GDP by around $1.50.”
And tomorrow night we can expect President Obama to give a full‐throated endorsement of Krugmanomics.
The details of the president’s job program are being kept under wraps, but the broad details are pretty well known. The president wants more federal infrastructure spending, including an “infrastructure bank.” He wants to give states and localities more money to repair and rebuild schools, on the condition that those localities stop laying off employees. He wants to extend unemployment benefits again. And as a sop to those who want tax cuts, he will call for an extension of the payroll‐tax cut passed last December, exactly the sort of Keynesian tax cut designed not to spur investment but to put more spending money in people’s pockets.
But natural disasters do not create economic growth. Hurricanes, earthquakes, and space invasions destroy wealth. The money that people have to spend rebuilding their houses, drying their basements, or buying new cars is money that they can no longer use to go on vacation, send their kid to college, or spend on something else that they want or need. The money that insurance companies must pay out to compensate victims is money that is not otherwise invested in the economy.
And for the same reasons, more government spending will not create more jobs. Government has no money of its own. Therefore, any money that it uses to finance its programs and operations must, of necessity, be extracted from others, either through taxes or borrowing. That means less money for people to spend the way they wish, and — particularly worrisome at a time of slow economic growth and high unemployment — less money available for the private sector to invest, expand, and hire workers.
Worse, this is not just a question of substituting a dollar of government spending for a dollar of private spending, although obviously every dollar that government spends ultimately means one less dollar of private spending. But private spending and investment decisions are allocated on the basis of economic forces. People seek the best return on their investments or the best deal on their purchases. Governments allocate much if not most of their spending on the basis of politics. The result is that government spending introduces a host of inefficiencies into the economy, as people and businesses spend time, money, and effort either trying to gain government favors or minimize their share of government costs.
For the last two years the Obama administration and its critics have been arguing about whether the last six stimulus packages created or saved jobs. Undoubtedly, they have, and some conservatives sound silly arguing otherwise. And hurricanes and earthquakes will create some jobs, too. But that is not the real question. What matters is whether on balance we are better or worse off as a result of such events.
And when it comes to government jobs or stimulus programs, what matters is whether those programs created any net jobs after all the negative effects of the spending and debt are taken into account. The question is not “Did we create jobs?” but rather “Might we have created more jobs if we hadn’t diverted all those resources to the government in the first place?”
There’s not much we can do to avoid natural disasters. Hurricanes and earthquakes will always be with us. But manmade disasters we can do something about. With that in mind, we should reject another round of more‐of‐the‐same from the Obama administration.