Government Spending and Unemployment

Ron Paul was recently interviewed on Bloomberg TV.  At one point during the interview (at approximately 3:50 in the video), he suggested that government should cut spending.  The woman interviewing him then said, “How is cutting spending going to create jobs?”  And she said it in a rather condescending way.

There is also a lot of talk about a fiscal cliff coming at the beginning of 2013 because if Congress doesn’t act, then tax rates will go up and there will be mandatory spending cuts.  (These aren’t really spending cuts.  They are just cuts in the projected increase, but for the sake of this discussion, we’ll pretend like they really are cuts.)

It is funny (or maybe sad) that the media and politicians are portraying tax hikes and spending cuts on the same level.  They are both referred to as austerity measures at times.  I have even heard conservative commentators referring to the coming fiscal cliff and mentioning both tax hikes and government spending cuts, as if they somehow have the equivalent effects.

This is really the heart of Keynesianism.  It is one of the biggest fallacies that exists in economics and it does us all much harm.

The whole notion of creating jobs is actually kind of ridiculous.  It isn’t that we want to create jobs.  It is that we want to create wealth and we get that from production.  We get production from people working.  If we had unlimited wealth in this world, then it wouldn’t be necessary for anyone to work and we wouldn’t want to create any jobs.  I have explained this before.

The reason that there is high unemployment for people who want to work is due to government interference in the marketplace.  If this government intervention weren’t an issue, then creating jobs wouldn’t be on our mind.

So with that said, if jobs are going to be created, they should be jobs that meet consumer needs and wants.  They should produce something or help someone else produce something, whether that is a good or service.

Only the free market can properly allocate resources to best meet consumer demand.  When the government takes money (resources) through the threat of force and then spends it, these resources are being misallocated into areas that do not best meet consumer demands.

For people to say that cutting government spending hurts the economy or stifles job creation is ridiculous.  Not only is it wrong, but it is actually the opposite of the truth.  Cutting spending will help the economy in the long run and it will actually lead to good job creation.  This is the kind of job creation that satisfies the needs and wants of consumers and makes us wealthier.

By cutting government spending, it puts resources back into the hands of people and businesses.  While people may make bad decisions with some resources, like in starting a business that is unprofitable, they will be quickly corrected by the market through the profit and loss system.  The lack of profits will stop the wasting of resources, whereas there is no such mechanism when government is wasting resources (which it constantly does).

Even if a decline in government spending leads individuals to save more and invest more, there is nothing wrong with this.  We need savings and investment.  We need capital investment to produce more in the future.  This will eventually lead to a rise in our standard of living.  Without savings, a society is unlikely to advance at all.

In conclusion, government spending cuts is what this economy desperately needs.  We need more savings and investment.  We need a correction to reallocate all of the resources that have previously been misallocated due to government interference.  We need jobs that will produce goods and services that are most demanded by consumers.  This will ultimately lead to a sustained recovery and an increase in our standard of living.  More government spending will only keep us down.