Have you ever blown your nose and then caught yourself looking at the kleenex to see what came out? That pretty much describes how I sometimes find myself checking in on CNN. This week, CNN has been examining the effectiveness of the stimulus plan now a year old. The extent of their diligence seems to be investigating whether any jobs were created. What’s wrong with this kind of analysis?
Language alters the way people think about things and economics is not immune from this. We are so used to valuing things in terms of money, it’s very easy to confuse wealth with money. Money is how wealth is measured but wealth comes from labour capital and resources. When money is confused with wealth through common speech, many other confusions follow.
Jobs are created from the pursuit of profit making activities. The wealth generated from that activity pays the wages in money. The money acts as a convenient substitute for the wealth that was created. When government tries to create employment, they must confiscate and redistribute the wealth that others generate. The benefits and ripple effects of the new job are computed after the money changes hands. The ripple effects and multiplier effects work just as well if you start before the money changed hands.
For example, assume that under the stimulus bill, a man qualifies for capital to produce solar panels. The product is easily seen as a good thing, but let us look at the means for producing it. What is not seen or counted by CNN is what could have been produced if the wealth had stayed in the hands of the person that created it. We see the solar panel created, we don’t see the box spring mattress that could have been produced but wasn’t. They contribute the same to the economy but stimulus supporters are making the claim that one is fixing the economy!
We are being told that 5-1+1>5. The reason this slight of hand is missed is because people don’t equate the money government spends, with the wealth that money represents.
When you follow the logic of the stimulus plans using wealth instead of money, the slight of hand is obvious! In a pure barter economy, no one would be hoodwinked into thinking that if I give some of my carrots to Bill, we’ll eventually all be better off. Bill can pay me with my own carrot, but I’m already down a carrot! Unless everyone produces more, you can’t conjure stuff out of thin air. You can redistribute it but you can’t create more. Our language has divorced the concept of money from wealth.
The other curious thing to me is why a project is valued by how many jobs it creates. If the number of jobs was valuable, why not use government money to build a bridge with the constraints that no power tools or heavy equipment be used. That way a bridge would be built by 5000 employees rather than 500! The logic of job creation runs opposite to the benefits of productivity. Productivity and improved methods of doing everything are the reason that we enjoy a standard of living that allows us to cure disease and live comfortable lives.