Four days ago the New York Times ran a particularly obtuse editorial, "The Myth of Job Creation" which took both Obama and Romney to task for daring to say that the government does not create jobs. The Times' editorial writers huffed:
Except that it does, millions of them — including teachers, police officers, firefighters, soldiers, sailors, astronauts, epidemiologists, antiterrorism agents, park rangers, diplomats, governors (Mr. Romney's old job) and congressmen (like Paul Ryan).
First, the basics. At last count, government at all levels — federal, state and local — employed 22 million Americans, with the largest segment working in public education. Is that too many? No. Since the late 1980s, the number of public-sector workers has averaged about 7.3 for every 100 people. With the loss of 569,000 government jobs since June 2009, that ratio now stands at about 7 per 100….
The government does not create jobs? It most certainly does. And at this time of state budgetary hardship, a dose of federal fiscal aid to states and localities could create more jobs, in both the public and private sectors.
Over at the Washington Post, superb economics columnist Robert Samuelson properly describes the Times' editorial as promoting a "flat-earth theory" of job creation. As Samuelson patiently explains:
Who creates most jobs? Hint: It's not the government. Almost everyone seems to grasp that the private sector is the true jobs machine. But here's a notable exception to the consensus: the editorial page of The New York Times….
And it's true that, legally, government does expand employment. But economically, it doesn't — and that's what people usually mean when they say "government doesn't create jobs."
What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment.
Job creation in the private sector is mostly a spontaneous and circular process. People buy things they need and want. Or businesses and private investors take risks by investing in new products, technologies and factories. All this spending, driven by self-interest and the profit motive, supports more jobs. In a smoothly functioning market economy, the process feeds on itself. By contrast, public-sector employment grows only when government claims some private-sector income to pay its workers. Government is not creating jobs. It's substituting public-sector workers for private-sector workers.
Samuelson caveats that he is not saying that private sector jobs are superior (although they are); not delineating a sharp line between private and public sector jobs; and is not debating "stimulus" vs. "austerity." He correctly concludes:
Understanding job creation has policy implications. If the private sector is the main source of jobs, then the incentives, disincentives and the general climate for firms to expand do matter…There's a flat-earth quality to the Times' argument. If government seems to create jobs, it must. We need to move beyond this primitive view.
Yes, indeed.
In my column, "Government Did Not Build Your Business," I reported research that finds that in fact that vast majority of new jobs are created by new businesses:
A July 2010 study, "The Importance of Startups in Job Creation and Job Destruction," by Kauffman senior fellow Tim Kane found that since the 1980s, new startups "create an average of 3 million new jobs annually. All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers, losing 1 million jobs net combined per year." Kane came to the astonishing conclusion, "Startups aren't everything when it comes to job growth. They are the only thing."
The 2012 study found that while new business startups created 2.3 million jobs between March 2009 and March 2010, the net job creation from all U.S. private sector firms was minus 1.8 million jobs. The U.S. unemployment rate was then 9.7 percent. The number of business startups has dropped from 554,109 in 1987 to 394,632 in 2010. The 2012 Kaufmann report notes that the share of job creation from young firms has fallen from more than 40 percent in the 1980s to 30 percent now. While acknowledging that the severity of the Great Recession no doubt contributes to this decline in entrepreneurial activity, it is important to note that startups were a major factor in lifting the U.S. economy out of previous economic downturns. Why is new firm creation lagging now? Perhaps it has something to do with the Obama administration's idea of governance.
