In the wake of their chock defeat to Donald Trump, the Democratic Party is thirsty for headline grabbing policy proposals, and in its search for a vote winning formula it is going increasingly and unapologetically progressive. Seemingly harebrained schemes are gaining broad support. Lately, what started as the brainchild of the socialist Bernie Sanders is now becoming a mainstream idea that is gaining momentum in the party: a federal jobs guarantee, a legal right to a government funded job at $15 an hour. The timing can seem odd. Why pursue full employment via such a radical scheme at a time of record low unemployment? However outlandish this idea may sound, a survey from Data for Progress and Civis Analytics found that 52 percent support the idea and it has support from high-profile senators like Cory Booker (who has his own similar plan), Kirsten Gillibrand and Elisabeth Warren – the two latter are prominent candidates for the 2020 presidential nomination. On top of the generous pay check on offer, Sanders’ plan includes 12 weeks leave, paid child care and pension rights on par with other federal employees.
This sounds like fairy-tale economics. Cirtics have been quick to point out the obvious challenges. The most glaring is how to pay for the party. When Sanders first aired his big idea, funding was still a work in progress. Most likely, a tax on the ‘rich’ will cover some of the outlay.
Another glaring challenge is how to motivate workers to actually work. With a jobs guarantee, the threat of the sack is impotent: should one be fired, one is entitled to another job at the same salary. The tax payer may end up paying $15 for nothing.
But the real danger of the plan is that it will create havoc in the US labour market. The $15 an hour wage will immediately establish a new federal minimum wage. Some economists argue that universally higher wages create increased demand and therefore will benefit business, but this is the usual cart-before-the-horse Keynesian argument that ignores the fact that wealth comes from production, not consumption. If output doesn’t increase, the price level will simply rise. And increased production comes from increases in productivity or more productive working hours. Where is the mechanism to ensure that the newly created government jobs are actually productive? Herein lies the next problem. The draft proposal reads: ‘People working under the federal job guarantee will be serving their communities and their country, uniting use together in a common purpose, rebuilding the social fabric of our nation’. This may sound grand, but jobs that no-one has been employed to do are jobs that produces less than the cost of having them done. True, some projects that could be undertaken under the scheme may have economic rationale. Constructing new infrastructure may be productive, but without a price mechanism it is hard to tell. Other jobs may be blatantly made-up to honour the guarantee of employment. And employing people to perform made-up jobs at $15 an hour will destroy value, not increase it. Whatever the project, the tax payer will stump up the cash, which will be extracted from the productive private sector. This is the classic crowding-out problem: resources spent in the public sector cannot be spent elsewhere. Moody’s economist Adam Ozimek, warns that the plan would effectively nationalize ‘a quarter or more’ of the US labour market. The consequences could be disastrous.
True, there are secondary effects. For example, activating the unemployed can have benefits in terms of jobs skills and equip people to progress in their career. But the proposal contains no mechanism to ensure that the artificial jobs enhance skills in demand in the productive, private sector. To a Kenyesian, an upside to the scheme is also the counter-cyclical effects: as recession hits, people laid off in the private sector will find employment in the public sector, providing a counter-cyclical fiscal boost – and maintaining jobs skills. To an Austrian, who knows that a recession is a necessary process to reallocate capital, this is of course plain non-sense. People don’t need artificial jobs, but to be re-allocated to those sectors who meet the real, underlying demand that the bubble disguised. Only the free market can do that.
A jobs guarantee is classic left-wing populism, designed to appeal to the heart, not the mind. But it fundamentally misunderstands the role of the labour market. A job is not the end goal but a means to an end. Having a job should mean engaging in productive enterprise which results in value creation, not collecting a salary as a government granted right. It should be the only job of government to get out of the way and allow the free market to allocate resources and employ workers in roles where the output has a market value above the cost of production. This is how value is created.
The Republican party has regrettably forfeited the right to argue against plans such as these based on fiscal responsibility, a traditional GOP trademark that has been flushed down the drain after last year’s $1.5 billion of unfunded tax cuts. But some ideas are so outrageously senseless that defeating them should be a matter of course. Even an inept GOP should be able to shoot this idea down.