The Folk Economics of Job Creation

“Job creation” is probably the most familiar concern of public economic policy. It has become an economic mantra of sorts used by almost all participants in public policy debates, no matter how ideologically divergent. Some times it takes the form of outcries over “job loss” due to public regulation or the “job creation” that would follow the relaxation of that regulation.

But these days all sorts of non-commercial organizations seek to justify their existence and activities in terms of job creation. The University of Montana, for instance, regularly estimates the economic impact it has on the Western Montana and the state as a whole. The Montana Arts Council, and, now, the United States Arts Council, has estimated the job creation associated with the activities of artists.

This public economic justification of activities takes an approach that to many is straightforward and pragmatic. You study the spending associated with, for instance, the arts and how many people are employed in the arts. You then try to track the dollar expenditures both backward to suppliers and forward to how the artists spend their incomes. This money is assumed to circulate within the economy causing “ripple” or “multiplier” impacts. This should all sound very familiar.

This approach to economic justification, however, raises several questions, some philosophic and some technical and practical.

At the philosophical level, is this the right way to justify good work? Should the Pope, as he considers whether to declare Mother Theresa a saint, consider the job creation associated with her service to the poor of the world? Is artistic activity and a rich culture more valuable to us because there are jobs associated with it? What does this say about our values as a people if only commercial dollar impacts matter to us or if that is the thing that matters the most? Following in the steps of the US Arts Council, I assume some enterprising economist will estimate the economic impact of Holy Communion. The sex trade folks should have a bevy of economists estimating the number of jobs created by prostitution, pornography, and nude dancers at bars. After all, we already estimate the economic impact of gambling in this way. If someone could show that a national child pornography industry would create tens of thousand of jobs, would that make it any less despicable?

Technically most of these “economic impact studies” have absolutely no conceptual or factual underpinnings. They are largely the result of professional wishful thinking. For instance, almost all of these “studies” assume that the natural state of an economy is for valuable resources to remain permanently unemployed. Workers, capital, land, and raw materials are assumed to normally sit idle waiting for someone to come along and put them to work.

But there is nothing in our economy to support that idea. We do not have growing pools of unemployed resources that sit idle for years at a time. In fact, a well operating market economy tends to fully employ the resources that are available. The implicit assumption of “economic inertness” is similar to the false physics that preceded Newton. It assumed that the natural state of material was to sit still. Since the moon, sun, planets, and stars all appeared to move, this movement was taken as a sign of some intelligent life force that was causing the motion. Newton pointed out that the objects in uniform motion tended to remain in uniform motion, requiring no energy to maintain that motion. Einstein, of course, pointed out that there was no reference point from which we could tell if something was moving or not. The idea of a naturally inert universe disappeared, replaced by a “naturally” dynamic, changing, and much more awe-inspiring universe.

Another related problem with the typical economic impact study is that is assumes that if we do not spend money on, say, the arts, we will simply not spend the money. We will do nothing with the money, hiding it in the mattress or burying it in the back yard. The idea that we, in fact, will spend it on something else or lend it to someone who will spend it, thus putting people to work in other economic activities is ignored.

In short, the economic impact modelers assume that our economy is a huge, inert, broken-down system where nothing gets done unless we artificially stimulate it. This is to be contrasted with an entrepreneurial economy where people are eagerly hunting for and creating new opportunities to more productively deploy resources. In that type of economy if a job is not created in one activity, it is likely to be created in another. A person employed in one activity cannot also be employed in another. A job here tends to reduce the likelihood of a job somewhere else simply because productive labor is a relatively scarce resource.

The job creation mentality that dominates our public policy discourse is demeaning, dangerous, and dumb. It is demeaning because it suggests that we as a people value only things commercial. It is dangerous because it promotes public economic policies that treat the economy as a giant government-run make work project. It is dumb because it is based on factual and conceptual errors about how a market economy works.

Next time you hear a business or non-profit organization bragging about job creation or bemoaning the job losses associated with a public policy, think demeaning, dangerous, and dumb.