The rub

From the International Herald Tribune:

The United States lost almost 600,000 jobs last month and the unemployment rate rose to 7.6 percent, its highest level in more than 16 years, the Labor Department said Friday." 

As the government-created recession commences, we can expect more unemployment. The Obama administration argues that its stimulus package will address the problem: "This plan will save or create over three million jobs -- almost all of them in the private sector," the president declared. As for the critique that this stimulus bill is nothing but a big spending spree, Obama said, "What do you think a stimulus is? That's the whole point. No, seriously. That's the point!"

Funny, but will it work? The idea is the Keynesian principle called the "multiplier effect." As the government spends more, consumers have more money, they spend more and jobs are created.

The major flaw with the theory was summed up by humorist Dave Barry, who once wrote, "See, when the Government spends money, it creates jobs; whereas when the money is left in the hands of Taxpayers, God only knows what they do with it. Bake it into pies, probably. Anything to avoid creating jobs."

And there's the rub. The idea that government spending creates jobs ignores the jobs that are lost in the process. If Americans have more money that represents actual wealth, then jobs will be created and society will become richer. But if the government simply prints the money, effectively reducing the value of the money they already have -- or if it takes the money directly through taxation -- that money has simply been sent to Washington and back again.

Of course it's worse than that, since the government does not allocate resources as efficiently or profitably as the market does. It is very inefficient in its wealth redistribution and it does not know which enterprises make economic sense to undertake. Unlike enterpreneurs and other market players, who act and react according to the price mechanism and make billions of individual decisions every day that allow for the productive allocation of resources in the economy, the government imposes one plan on everyone, without the information to be able to engage in economic calculation.

That's why the government's primary mechanism of economic management is coercion, whereas the market's primary dynamic is consent and contract. Market players produce wealth. Government central planning does not; it can only use force to command and redirect wealth created by the private sector.

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