Business Perspectives

Economists' views on government action differ

Jobs, jobs, jobs — everybody's talking about creating jobs, especially in Washington. But few address the underlying question of exactly what government can do to create jobs, perhaps because the answer is discouraging.

Whether or not they voted for President Obama, people in the United States historically have a "yes-we-can" attitude. They don't like to hear that our ability to solve any particular problem is limited. Nevertheless, it is important to maintain some sense of realism to avoid the trauma that results when some much-vaunted effort fails.

This is an issue on which economists do differ, with some seeing more scope for fruitful government action than others. But they all start at pretty much the same point: Jobs are created when the economic environment for hiring is favorable.

For the private sector, moderate taxes on businesses and on the income from capital are important. I know of no economist who argues the opposite. But while moderate taxes favor employment growth generally, they are far from sufficient.

An economy also needs adequate provision of a variety of "public goods," products or services needed for an economy to use resources efficiently. At a minimum, these include public safety, enforcement of civil law, transportation infrastructure, basic public health, education and investment in research and development.

Here, some economists would stop, while others would add still more government activity. Some also would include the need for an effective nonprofit private sector: the colleges, hospitals, social-service agencies and foundations that play a vital role in many prosperous economies. Others would see them as secondary.

But virtually none argue that an economy can grow well without some public goods. And it is hard for employment to grow without growth in the overall economy.

Moderate taxes and effective public goods are as necessary in good times as in bad. But what else can government do when an economy is in recession as ours is now?

Here, economists differ. For 150 years, the prevailing wisdom was that government could and should do nothing. That changed with the theories of John Maynard Keynes in the 1930s. He argued that in a recession, governments can stimulate production of goods and services and employment by lowering taxes, increasing government spending and increasing the money supply so as to lower interest rates.

That view dominated economics for 50 years. But there always were the dissenters, first Monetarists like Milton Friedman and later the Rational Expectations and Supply-Side schools of thought. There also were the "Austrians," who had useful insights but never constituted more than a small fringe within the discipline.

Keynesian theory is no longer as dominant as it was in the 1960s, but it has governed economic policy in all major nations around the world the past 30 months. And given the depth of ongoing problems, it has the support of many economists who are skeptical of using such policies to micromanage smaller economic fluctuations.

The small Bush and larger Obama stimulus bills were based in Keynesian theory. Both unfortunately were presented as "jobs" bills rather than broader stimulus efforts. The current administration's promise that its bill would keep unemployment below 8 percent was particularly inept.

Some economists and many politicians think the government should do much more. In Washington and miscellaneous state capitals, some propose special tax credits for employers who hire more people. Others advocate direct hiring programs like the Depression-era Civilian Conservation Corps or Works Progress Administration or subsidizing jobs as in the Comprehensive Employment and Training Act program 30 years ago.

Unfortunately, the track records of tax credits and programs like CETA are not good. Just as for business subsidies targeted at special "enterprise zones," one always can identify specific individuals or businesses that have benefited. But studies by independent researchers seldom find any significant net increase in overall employment or business activity.

Many see enlarged public-works spending as a way to get more people back to work. Increased government spending on infrastructure may be prudent, given that in many areas we are not keeping up with replacing existing roads and facilities that are wearing out. But the employment generation aspects of such spending are often oversold.

At the national level, the extent that public works spending is financed by borrowing rather than increases in current taxes, it functions as well or as poorly as any generic Keynesian fiscal stimulus. But at the state level, if one state spends more than others, it is hard to keep the benefits from flowing to others.

Some who style themselves supply-siders call for further tax cuts to spur employment. But this is really half-baked Keynesianism. Supply-side economics emerged precisely as opposition to any short-term attempts to manage the business cycle.

Unfortunately, even among some politicians and members of the general public who openly scorn Keynesian ideas, there remains widespread belief that government can and should do something to lower unemployment. So we are likely to get some mishmash of general stimulus spending, public works projects and employment subsidies channeled through ever-popular tax credits.

Let's hope they have some positive effect. But history tells us to not expect too much.