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Why the Private Sector Isn’t Doing Fine
Obama's emphasis on saving government workers hurts American business.


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Michael Tanner

By now, just about everyone has had an opportunity to pick apart President Obama’s fatuous remarks about how the private sector is “doing fine,” while public employees are suffering. The president’s comments, of course, were not even within viewing distance of reality. After all, despite some recent hiring, the private sector is still 4.5 million jobs below its 2008 employment peak. And while public employment is also down from 2008, that ignores a boom in state and local government hiring from 2006 to 2008. The current decline still leaves state and local employment about where it was in 2006. Meanwhile, federal employment is up 88,000 jobs.

But a much bigger question is: Why is the private sector doing so poorly? Perhaps because most businessmen are not that dumb.

If one includes the unfunded liabilities of Social Security and Medicare, this country’s real total indebtedness could run as high as $129 trillion (in current present value). Even under the most optimistic scenarios, our real debt exceeds $92 trillion. Measured as a percentage of GDP, our total debt exceeds the total debt of Greece or Spain. By comparison, the total book value of all U.S. companies is roughly $23 trillion. It’s not a perfect comparison (future taxes will be paid out of future wealth), but it does put things in perspective. Any business owner looking down the road, and seeing debt four to five times the size of his or her company, is likely to decide that this is not a great time to expand or hire new workers.

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That is why the president’s preferred solution of offsetting private-sector losses with increased public-sector hiring is so mistaken. Those new public-sector jobs must be paid for with more debt and taxes borne by the private sector. As Frédéric Bastiat wrote in 1848, public employment “gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.” Bastiat concluded that trying to increase employment through government was “a ruinous hoax, an impossibility, a contradiction.”

For example, a study done for the European Commission by economists at the University of Paris looked at public employment in 17 countries between 1960 and 2000. It found that for every public-sector job created, 1.5 private-sector jobs were destroyed. Thus, hiring more government workers actually increases the level of unemployment.

And, perhaps more directly relevant, a study of President Obama’s stimulus bill by Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State concluded that, while the stimulus created or saved some 450,000 government jobs, it destroyed or prevented the creation of more than twice as many private-sector jobs.

Of course, in general, we know that an increase in the size of government slows economic growth. As Harvard’s Robert Barro points out, there is a “significantly negative relation between the growth of real GDP and the growth of the government share of GDP.” Under President Obama the federal government consumes 24 percent of GDP, a one-third increase over the historic post–World War II average of 19.8 percent. Throw in state and local government spending, and government spending now amounts to 36 percent of GDP.



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