A few months ago I read the following quote in a local newspaper from a business leader, which expresses a commonly-held sentiment:
“Government doesn’t create jobs…People opening that new pizza shop [or] that new dry cleaners – those are the people who are creating jobs and putting other people to work.”
This quotation reflects a profound misunderstanding of the economy which is unfortunately quite common. It is a misunderstanding that has led and is leading to some mistaken economic policies.
Economics has long been subject to fads in which some sector of the economy claims that only its contribution matters. For example, during the 18th century, the ”phyiocratic” school of economists argued that only agricultural development created real wealth, as all other sectors depended on the production of food.
Sometimes regional economists talk as if only businesses that “export” their goods and services outside the region matter. After all, if the regional economy is not bringing in new dollars from outside, who is going to buy the products of that new pizza shop or new dry cleaners?
Today, some commenters talk as if only the private economy matters. After all, if the private economy disappeared, how could we even have a government? Therefore, let’s get the government out of the way, so the private economy can flourish. I don’t know whether the business leader quoted at the beginning of this blog post shares this position. But his comment can lead to that approach.
But a more perceptive analysis recognizes that all sectors of the economy ideally can provide productive goods and services that can help contribute to greater well-being. Our economy is interdependent. The value of what we produce, and the number and quality of jobs, can be affected by all sectors of the economy.
Arguably some sectors of the economy are “more essential” in that if they were abolished, more dramatic downturns in well-being would ensue. But at any given point in time, the path to greater prosperity potentially may be found in any sector of the economy, as that may be the sector where the next $x of investment may be most productively spent.
This includes the government. Government, if and when it is working rightly, produces useful goods and services. These goods and services both directly benefit the public, and help support the private economy. If government is working rightly, the value of these goods and services exceeds the foregone private consumption due to the taxes or bonds used to finance the government’s spending.
Government creates jobs. It creates jobs directly due to its spending. The job creation due to public spending will in the short-run exceed the jobs lost due to the needed taxation to support that spending. We shouldn’t exaggerate that short-run stimulus, but it is real and should be considered in policy analysis.
But more importantly, if government provides productive services, it helps support the private economy. These supports include a legal system of property rights, a criminal justice system that preserves public order, roads and other transportation infrastructure that facilitate commerce, and human capital development programs that develop the skills of the labor force. It is in this last category that early childhood education can make a productive contribution. All these productive services help the private economy provide more and better jobs, and produce greater economic well-being that is more broadly shared.
Perhaps the comment that “government doesn’t create jobs” is meant to simply convey a commitment to the value of private business enterprise. If so, certainly it is true that the “business climate” is important. It is important that business costs be reasonable, which includes the costs affected by business taxes and regulation. Regulations should be designed so that benefits exceed costs. It is also important that the government provide services that help business costs be reasonable, for example by helping to lower transactions costs, make transportation easier, and increase labor productivity.
Some commentators have argued that our recent and ongoing debates over deficits and debt have been driven by the American people’s lack of trust in government, and even their lack of understanding of what government does and what their taxes pay for. Pollster Stanley Greenberg recently argued in the New York Times that “[V]oters feel ever more estranged from government…If government is seen as useless, what is the point of…. aim[ing] to use government to advance some public end?” Jared Bernstein, former chief economist to Vice President Biden, recently argued that
“If too many Americans don’t believe in or understand what government does to help them, to offset recessions, to protect their security in retirement and in hard times, to maintain the infrastructure, to provide educational opportunities and health care decent enough to offset the disadvantages so many are born with…if those functions are unknown, underfunded, and/or carried out poorly, why should they care about how much this deal or the next one cuts?”
One of the key challenges in creating more and better jobs and broader economic well-being in the American economy is to identify areas where a dollar of investment is most likely to be productive. A large part of this task should of course be left to private sector investment decisions. But some of the most productive investments are public investments. This includes but is not limited to investment in high-quality early childhood programs. As I have argued regularly on my blog and in my book “Investing in Kids”, high-quality early childhood programs produce $2 to $3 in extra per capita earnings per dollar invested. Government can use early childhood programs to create more and better jobs, and broader economic well-being, both in the public sector and in the private sector.
It is essential today both to refocus government priorities on the most productive public investments, and to communicate to the public about why high-quality public investments matter. Early childhood program advocates should be at the forefront of helping reprioritize public investments, and at the forefront of communicating why wise use of government can make a difference to our prosperity.