When governments get involved in any activity to create jobs or to create employment, they are also getting involved in the business of creating unemployment. However, the unemployment they are creating is the factor that most people do not consider. Hence, the idea of invisible unemployment.
Many people believe that money spent by the government to fund projects that ultimately require workers to be hired to fulfill the completion of those projects is good business for the government to be involved in. A superficial review of the situation may cause one to think that this use of funds can only help the economy, because the wages provided to each worker will ultimately be spent in the economy, and therefore provide a healthy boost to the economy. After all, the best thing a consumer can do for the economy is to spend money in the economy. In terms of it being “good business”, it goes without saying that most people believe that providing jobs by any means is a worthy endeavor for the government.
Furthermore, if people who are otherwise unemployed can become employed using funds that are already on hand with the government, then that seems like a winning proposition. Using this logic, this can not only be a positive endeavor for the government in terms of individuals being able to earn a wage but also for the other previously employed individuals and businesses, as they can only benefit from a stronger economy.
There are at least two problems with this idea. First, one of the most foundational ideas to understand about government revenue and spending is that whatever funds the government acquires to spend (in this case, to employ people) must first come out of the economy, in the form of taxes. Generally speaking, the government does not manufacture products nor provide services that in turn produce revenue (profits) from the natural working of the economy. There are some exceptions, but by in large, their revenue is acquired in the form of taxes (taking funds from consumers that would otherwise be used in the economy).
In a scenario where a business operates in the free market, the business obtains its funds from the business owner’s own capital, other investor’s capital or other funds that have been “saved” from previous market activities in order to start the business. The business, using its own funds, begins making products and using its own resources, employs people to assist them in carrying out the function of the business. If all goes well, the business will spend less money to make the product than it earns for selling the product and will make a profit, thus allowing them to continue the business and to continuing employing people. Notice, that in this rather simple illustration, the business obtained its capital privately, without having to take money out of the economy to ultimately employ people (provide employment).
On the other hand, in the scenario where the government starts a project (business), the funds used to start that venture or project that will ultimately require people to be hired must first be taken out of the economy. When I say these funds are “taken out of the economy”, I mean that the only way for the government to obtain funds to start these projects is to take the funds from its citizens in the form of taxation. The same $100 dollars that the government takes from an auto mechanic in taxes to fund the project, is the same $100 that will not be spent in the economy by that individual.
To get at the heart of my argument that government creates unemployment by using their projects to create employment, consider this. That $100 that was taken from the auto mechanic in taxes can no longer be used to buy a new toaster that his wife wanted. It cannot be used to buy the shirt and tie that he needed for a interview at another auto shop. These funds taken out of the control and use of the auto mechanic create “unemployment” on the backside of the equation.
And that gets us to the second problem. Whenever these arguments are made, only one side of the equation is really ever considered. Everyone loves to hear the stories of the government creating jobs for those people who otherwise would be out of work. The stories of people regaining their self-esteem, being given a chance to provide for their family and the other countless instances of goodwill are very nice to hear about. If we could consider the number of toaster manufacturing workers and garment manufacturing workers that are not employed because the government had to take the funds away from the consumer that would have employed those workers who would have benefited from the consumer’s funds, then we would have a fuller picture of the offset of job creation in this scenario. We all can see the actual outcome of actual jobs created by government because we can read the stories and see the news reports and perhaps even see our friends and neighbors benefit from them. But, we don’t see the jobs that will never be created because the government took away the opportunity for those jobs to even exist. And this is what I mean by “invisible unemployment”.
So, what we are really dealing with here is a net zero proposition. For all of the jobs that are “created” by government, there are an equal amount of jobs never created, or “lost”, because of the missed opportunity to employ people in the first place.
Note: This idea of “invisible unemployment” is further explained in a similar fashion with the timeless analogy of the “The Broken Window” in Henry Hazlitt’s book “Economics in One Lesson”. Economics in One Lesson
Tell me what you think.