Many people think government can do a great deal to ‘create’ jobs. That was evident in inaugural speeches by newly elected officials such as Gov. Mark Dayton who said his first priority was ‘to bring more jobs to Minnesota.’
This belief also shows in the comments of political pundits who say Barack Obama erred by stressing health care legislation rather than “focusing on creating jobs” during the first two years of his term.
I know of no economist who thinks the policy decisions of elected officials have zero effect on employment levels. But neither are there many who think the president or Congress has as much influence over jobs as one often hears in popular discourse.
Economists are not unanimous on the subject, particularly on what government can do in the short run during a recession to boost employment. But there is remarkable consensus, across party affiliations and schools of thought within the discipline, on the general lines of how government actions affect long-term economic growth in general and jobs in particular.
First, there are some things government should not do. Taxes should not be unduly high. Regulation of private economic activity should not be unduly burdensome. These cautions are the core message of the contemporary Republican Party.
But there also are some things government should do. It should provide “public goods” — public safety, national defense, basic education, public health, transportation infrastructure and basic research that make an economy more productive and that will not be produced in a free market without government action. And because it must tax to provide such public goods, there is danger of having taxes too low as well as too high.
Government also should provide an efficient and fair legal system that sets the “rules of the game” for private economic activity. For libertarian economists, this may be limited to courts that adjudicate disputes over whatever contracts private individuals willingly make. But for most others, this function includes requirements for truthful disclosure to investors, for proven safety and efficacy in drugs and so forth in situations where disparities in information may render the outcomes of private market activity less than optimal.
Finally, a nation’s central bank should manage the money supply to maintain stable prices. The past three years have taught us, contrary to Alan Greenspan’s assumptions, that it is dangerous to exclude real estate prices and those of financial instruments or commodities when evaluating price stability.
So there is broad agreement on general principles on what government can do over the long run to foster job creation despite sharp debate on specifics.
There is no similar consensus on what it can do in the short run.
For more than a century, most economists thought government should play a minimal role in the short run as well as the long run. That changed in the 1930s with John Maynard Keynes’ assertion that government could play a stabilizing role, slowing an economy that was going too fast and speeding it up when it was too slow. In practical terms, this meant manipulating taxing, spending, the money supply and interest rates to keep inflation in check during booms and to reduce unemployment during busts.
Keynes’ ideas dominated economics for nearly 50 years. But there always were skeptics including the monetarists, led by Milton Friedman, and the “Austrians,” influenced by Friedrich von Hayek and others. Over the past 30 years, a school of thought initially identified as “Rational Expectations” came to the fore and now is the dominant group in economics. These economists argued that Keynesian policies were rendered impotent or even counterproductive by the collective reactions of millions of rational individuals to such policies. And there was a handful of “supply side” economists whose very title was a rejection of the “demand side” manipulation advocated by Keynesians.
However much economists became disenchanted with the outcome of Keynesian policies in the 1970s — both higher inflation and higher unemployment — a large majority supported the Fed’s interventions in 2008. Many supported the smaller Bush and larger Obama fiscal stimulus packages. One disgruntled Nobel laureate at the University of Chicago groused that when push came to shove, “90 percent of economists are closet Keynesians.”
“Stimulus” has become a dirty word in the Republican Party, however. Indeed, one of the candidates to replace Michael Steele as head of the Republican National Committee recently argued, “if you are pro-stimulus … guess what, you might not be a Republican.” That would run some highly respected Republican economists out of the party, including ones who held high positions in the Reagan and Bush administrations.
So Keynesians are the only group that claims government can boost employment levels in the short term. Republicans may counter that supply-side tax cuts will do the job, but that contradicts the arguments of the true supply-siders for whom shunning short-term micromanagement was a core value. David Stockman, former head of the Office of Management and Budget in the Reagan administration, recently delivered the ultimate insult to those pushing tax cuts as a one-size-fits-all policy, arguing that it is not supply-side economics but rather “vulgar Keynesianism.”
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.