Sunday, December 07, 2008

The Problem With A Massive Government Jobs Program

"History repeats itself as farce" - Karl Marx

President -elect Obama is asking Congress to draft a massive government jobs program bill so he can sign it immediately after taking office in January 2009. Yes, unemployment is creeping up in the US so as usual in a welfare state the government feels the need to do something to save us. Please see below letter to a group of economists who are supprting this central planning.

"You have invited comments on the 'jobs program' paper.

I just wanted to say that I think it isa horrible idea. In this I take after the work of FA Hayek and other austrian school capital theorists who believe that the government should just not be in the business of planning the economy. Absent price signals of the market and competition, the capital investment and monies spent by government will just create bad investment into unsustainable sectors and 'crowd out' private sector innovation.

We have $10 trillion in government debt in this country and unsustainable government retirement and health care programs, we do not need a massive government jobs programs on top of this unsound fiscal policy. It is a recipe for long term unemployment, just like in the 1930s, and long term declines in US standards of living.

I will not even get into the obvious public choice aspects of which actors will be the recipients of this government largesse you propose.

The private sector is not creating jobs because the financial sector is frozen due to the government take-over of banks and the uncertainty that this causes, not least the banks' unwllingness (and through moral hazard no need to) sell their bad investments at a loss. It is the same situation as in 1932 only instead of a contractionary Fed policy, we have contractionary loanable funds due to government take-over of the banking sector. Prices in the housing market and the other collateralized assets need to adjust (go down) in order for the economy to get on a sound footing again.

Central planning is short-sightedness and does not address the problem. The economic problems in the early 1930s were misdiagnosed and blamed on the 'free market' when this was not at all the case (it was due to bad monetary policy, just like today). This brought us central planning then (and a $10 trillion debt 70 years later), and it is misdiagnosed now.

Do you really want the same result of an average 17% unemployment rate for 10 years?

Thank you."