Tuesday, January 26, 2010

Jobs, Jobs, Jobs

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.


CaptainOrange said...

I know you think we would all be better off if the government would keep their greedy hands off of our carrots. Since they don't show any signs of doing that, in the meantime, I think it behooves us all to store our wealth not in carrots, but in things that the government can't (or isn't currently) taking from us.

CaptainOrange said...

That or rise up in rebellion , but you never heard that from me.

Plus, my CAPTCHA is 'nogrupr'. I think they meant to put an 's' instead of that final 'r'.

and then the_doctor said...

"store your wealth not in carrots"

Indeed Cap'n, a noneconomic definition of wealth is easier to hold onto.

enthemic said...

I thought the stimulus budget was being financed primarily by the carrots we have not yet planted. And that this (oh, what's it called, when you borrow against that which has not yet been harvested?) was the main reason people were less clear on the "a solar panel today is not the same a mattress today - er tomorrow"

I'm all for debt based stimulus, but then my carrot futures are all in farms with more punctilious finance ministers.

Kevin Aschim said...

Those foods that represent the greatest store of wealth as represented by their "preservability" are also the least expensive while being the most nutritious.

May I present dried beans.

Even the ever humble potato, onion, garlic and cabbage can be preserved in a cool dark place for months.

But not to be outdone by working class vegetables, the exotic ginger just entered my shopping basket the other day for a very humble $0.16 per 100g.

These are all my candidates for vegetable value investing in a barter economy.

and then the_doctor said...

Enthemic it makes no difference if you redistribute tomorrow's money or today's money. The relevant point is that money, in the absence of wealth it normally represents, only erodes everyone's standard of living by inflating prices and promoting short term malinvestment. The implosion of the housing bubble demonstrates the effects of pouring money into the system.
Confusing money with wealth has led people to think they are the same. Therefore borrowing money, printing money, or collecting money all seems like a "+1" to the economy. Only wealth is a "+1"

and then the_doctor said...

The last ten years of US fiscal policy has been one giant stimulus plan. The FED doubles the money supply, credit is historically cheap allowing even bad investments to pay off, government rules give mortgages to anyone regardless if they can't afford them, and record breaking borrowing by the government pumps hundreds of billions into the economy.
By any definition the US has had stimulus for the last decade, and we can now see the results of it. Strangely no one seems to see that doing more of the same isn't going to make things even worse!

and then the_doctor said...

haha Kevin, I'll be sure to include those in my veggie portfolio!