Finance Minister Trevor Manuel has announced that some R1 billion of government spending will be earmarked for jobs creation. In 2000 the sum is to be increased to R1.2 billion and in 2001 to R1.5 billion. But this may not be good news. In fact there is every reason to think that such a massive “jobs creation” effort will destroy more jobs than it creates.
This is not to say that the government wishes to destroy jobs because of some malevolent attitude toward the unemployed. It seems most likely that the opposite is true; never in the history of South Africa have so many members of parliament been inspired by altruistic impulses favouring the poor and disadvantaged. But it should be remembered that such impulses have motivated the current government for its first term of office as well and the result has been a loss of an estimated 500,000 jobs.
One important principle for understanding economics is that good intentions are not enough. Alchemy was a pseudoscience that believed, among other things, that lead could be turned into gold if the right methods were discovered. Regardless of how sincere the alchemist he only managed to waste time and ended up with useless piles of lead and no gold. His efforts at wealth creation simply increased his poverty. Government job creation is the alchemy of modern economics.
But unlike the alchemists whose failures were readily obvious it will appear that the government has succeeded. Trade and Industry Minister Alec Erwin has promised: “We will monitor… and give reports on the employment creating effects.” And to the untrained these reports will no doubt show successes. When the government hires 1,000 people to build a road somewhere it will dutifully report that 1,000 jobs have been created. But this isn’t the entire story. This is only what we see not what we don’t see.
In 1850 the myth of government jobs creation was soundly trounced by a little known member of the French Assembly named Frederic Bastiat. Bastiat wrote an essay on what is seen and what is not seen and his most famous example dealt with the fictional Jacques Bonhomme who found his son had broken a pane of glass. Bystanders attempted to persuade Mr. Bonhomme that such a measure was actually good: “Everybody must live. If no windows were broken, what would become of the glaziers?”
As Bastiat notes this is what everybody sees: a broken window creates jobs for glaziers. But Bastiat notes that matters are rarely as simple as they seem; there are also things which are not seen. Bastiat asks the question: What would Bonhomme have done with the money that was spent on the window? It is entirely possible that he would have replaced sadly worn shoes instead.
Bastiat wrote:
“The pane being broken, the glazier’s trade is benefited to the extent of six francs. This is what we see. If the pane had not been broken, the shoemaker’s (or some other) trade would have been encouraged to the extent of six francs. That is what we don’t see.”
In this small example Bastiat has taught an important principle: look beyond the obvious and consider secondary effects before judging a programme.
Now if we apply Bastiat’s principles to the jobs creation programme we see that the effects may not be entirely beneficial. The government is going to spend R1 billion to create jobs. That is what we see. But where does the R1 billion come from? That is what we don’t see. To the extent that the government spends money it must first collect that money. And the money it collects is no longer spent as intended by its original owners.
Let’s say that R1 billion is collected and used to create jobs paving roads. Where would that money have been spent otherwise? To the extent that R1 billion in road jobs are created another R1 billion in jobs is destroyed somewhere else. As a matter of example let’s assume that the R1 billion would have been spent on new cars. The creation of road jobs would then have come at the expense of the destruction of jobs in auto manufacturing. Every rand spent in one place by the government comes at the expense of a rand not spent somewhere else by the original owner. The government will no doubt create jobs for road workers but in the process it will diminish the demand for workers in many other fields.
Now some may argue that this simply means we come out even. A billion rands worth of jobs in one sector will simply mean the loss of a billion rands of jobs in other sectors. But this is not true. We have to remember that government has to pay the cost of collection, storage and redistribution of the funds. Even in the most efficient governments around the world the amount spent on jobs creation is only a fraction of the amount collected. This would tend to mean that the number of jobs destroyed will be greater than the number of jobs created. Even under the best scenario to create R1 billion in jobs requires the collection of more that R1 billion. The result will be net job losses.
There are also some good reasons to believe that political realities will mean that this downsizing effect will be even greater in South Africa. There is a lot of pressure on the government to hire the previously disadvantaged for various job contracts. And this pressure exists regardless of the experience and thus the efficiency of the company being hired. After all if they have great experience it is unlikely that they were previously disadvantaged The idea of the programme is not economic efficiency but the maximization of jobs. And while that seems like a good idea the results won’t be beneficial. Contrary to government policy economic inefficiency ultimate destroys wealth and that means fewer jobs not more.
If we have two methods of paving one kilometer of road the government is most likely to choose the one that employs the maximum number of workers. The result will be a higher cost to pave each kilometer. In the end the total wealth of the country, in the form of paved roads, will be less than under the competing less labour intensive system. One is never better off spending more than necessary for the same basket of goods. And if you can’t spend more it doesn’t make you wealthier to purchase less with what you can spend.
In the example of Bastiat Mr. Bonhomme spent six francs on the window instead of on shoes. In this example the glazier is six francs wealthier while the shoemaker is six francs poorer. This appears to be a even exchange. In fact there is also a forgotten man: Mr. Bonhomme himself. Prior to the window being broken he had one window and six francs with which to buy new shoes. After the widow was broken he still had six francs but no window. After the glazier came by Mr. Bonhomme now had a window again but no longer possessed six francs for new shoes. Had the window not been broken he would have had the new shoes he was planning to purchase along with a window. The entire episode cost him one set of new shoes. The loss of shoes for Mr. Bonhomme is what we don’t see. So while the glazier is up six francs and the shoemaker is down six francs Mr. Bonhomme is also out one set of shoes. What appears to be an even trade is in fact a loss for Mr. Bonhomme.
Even under the impossible scenario of the government creating R1 billion in jobs for every R1 billion that is confiscated we still have a loss of R1 billion in wealth when we consider that the original owners of the money are now worse off by the sum of R1 billion. This is about as optimistic a result as can be expected. The true result is that to spend R1 billion on job creation the government will have to siphon off considerably more that R1 billion from the productive segments of the economy. So the most likely result is that more jobs will be destroyed than will be created.
And yet no doubt the programme will be considered a raving success. And why is that? On the one hand we will have government press releases and reports carefully outlining the number of jobs created. And these new jobs will be directly attributed to the programme under discussion. Meanwhile other segments of the economy will either contract (or alternatively not grow as much) and this loss of jobs will never be
connected with the programme. In cases where jobs are directly destroyed some cleaver journalist might note the connection.
But no one contemplates, let alone sees, that some jobs which otherwise might have been created will remain non-existent. The company that might have expanded it’s work force by 5 workers may hold still a bit longer to help pay it’s share of the jobs programme and/or due to a lower demand for its product as a result of consumers paying their share. These funds may be used by the government to create 3 jobs. This we will see. And if we don’t notice it the politicians will bring it to our attention. But the company puts off hiring 5 workers and this we don’t see. The net result would be a loss of two jobs but everyone will proclaim the programme a success. The loss on the other side is not likely to be something which Minister Erwin will write reports about or which Minister Manuel will mention at a press conference.
