Job creation under a new president: Romney’s edge over Obama

Mitt Romney

by Michael Tanner

Mitt Romney promises that if elected president, he will create 12 million jobs over the next four years. Not to be outdone, President Obama claims that he has already created 5.2 million jobs during his time in office. For the future, the president says that he will match Romney’s promised job creation and throw in 4 million manufacturing jobs. 

What neither candidate seems to understand is that government cannot create jobs regardless of who is in charge. Government can help create circumstances that are advantageous to job creation — or conversely can erect barriers to jobs — but ultimately only the private market can create jobs.

President Obama, both rhetorically and through his policies, seems to believe that government can directly create jobs, either by hiring workers directly, or by stimulating the private sector through government spending. The problem is that the government does not actually create new wealth — it simply redistributes wealth. Every dollar that the government takes in taxes (or borrows in debt, for that matter) is one less dollar that someone in the private sector has to spend, save, or invest.

Obama assumes that if someone is wealthy, his or her money just sits there. In reality, individuals either spend that money or they save and invest it. If they spend it, it helps provide jobs for the people who make and sell whatever it is they buy. If the money is instead saved and invested, it provides the capital that is needed to start businesses and hire workers.

The French economist and philosopher Frederic Bastiat addressed Obama’s fallacy some 150 years ago, describing “the seen and the unseen.” Bastiat referred to the example of a farmer who plans to hire a worker to dig a ditch on his property, but is unable to do so because the money he’d have used to pay the ditch-digger went instead to pay taxes. A government bureaucrat is able to use those taxes to spend on various projects. Of course, everyone can see the results of that spending, which undoubtedly makes the bureaucrat popular. But what goes unseen is the loss suffered by the poor ditch digger.

Modern research shows the accuracy of Bastiat’s theory. For example, a study done for the European Commission by economists at the University of Paris looked at public employment in 17 countries between 1960 and 2000. It found that for every public sector job created, 1.5 private sector jobs were destroyed. Thus, hiring more government workers actually increases the level of unemployment. And, perhaps more directly relevant to President Obama’s policies, a study of the president’s stimulus bill by Timothy Conley of the University of Western Ontario and Bill Dupor of the Ohio State University concluded that, while the stimulus created or saved some 450,000 government jobs, it destroyed or prevented the creation of more than twice as many private-sector jobs.

Mitt Romney tends to rely on the “government-created job” meme more often in rhetoric than in policy. But he too sometimes falls into the trap of assuming that government can create a job. While President Obama focuses on teachers and construction workers, Governor Romney applies the paradigm to defense workers, attacking the forthcoming defense sequester not on national security grounds, but because defense cuts will “kill jobs.” Yet the taxes or borrowing necessary to pay the salary of a defense contractor or to build a tank has no different an impact on private sector job creation than do the taxes and borrowing necessary to hire a teacher or build a road. Both are examples of the same discredited Keynesian stimulus economics.

On the other hand, Romney does seem to understand that government policies, notably in regards to debt, taxes, and regulation can have an impact on the environment for economic growth and job creation.

For example, if one includes the unfunded liabilities of Social Security and Medicare, this country’s real total indebtedness could run as high as $129 trillion (in current present value). Even under the most optimistic scenarios, our real debt exceeds $92 trillion. Measured as a percentage of GDP, our total debt exceeds the total debt of Greece or Spain. By comparison, the total book value of all U.S. companies is roughly $23 trillion. It’s not a perfect comparison, since future taxes will be paid out of future wealth, but it does put things in perspective. Any business owner looking down the road and seeing debt four to five times the size of his or her company, is likely to decide that this is not a great time to expand or hire new workers.

This long-term burden on American business comes on top of short-term uncertainty. In January 2013, the Bush tax cuts will expire, leading to the largest tax hike in U.S. history unless Congress can reach an agreement. If reelected, President Obama seems determined to use this potential “fiscal cliff” to push for higher taxes on the wealthy, businesses, and investors. The president’s insistence, in particular, on raising capital gains taxes will discourage business investment and expansion, while the hike in federal income taxes will fall especially hard on small businesses and Subchapter S corporations, which often file taxes as individuals.

Of course, business taxes are already high.  In fact, U.S. corporations already pay the highest business tax rates in the world.

Likewise, it is a matter of concern that in the 2012 Economic Freedom of the World report, the United States has plummeted to 18th place in the ranked list, trailing such countries as Estonia, Taiwan, and Qatar. Even such notorious welfare states as Finland and Denmark, not to mention Canada, have freer economies than we do. According to the report, during the past four years, the U.S. saw significant declines in nearly all categories of the economic liberty index. Most significantly, the size of government grew substantially, particularly when measured by size of government subsidies and transfers and by government consumption as a share of national consumption. The United States has also seen a substantial increase in business regulations, labor market restrictions, and barriers to trade. Our standing fell in all those categories, and we have undergone a long-term deterioration in ranking on property rights as well.

Governor Romney has promised to address these issues. Whether or not he does so adequately is a subject of some debate, but at least he understands that more debt, more taxes, more regulation, and more government spending is not going to create jobs. That’s a least a start in the right direction.

Michael Tanner is a senior fellow at the Cato Institute.


photo of Mitt Romney by Gage Skidmore