Why politicians benefit from destroying jobs.

It is fascinating how durable are certain fallacies. While much of economics is counterintuitive the basics are not that difficult to understand. Yet some highly intelligent people continue to say to the same dumb things over and over again.

Just a few moments ago I was listening to some politician prattle on about how some government proposal would create “thousands of jobs”. Of course that simply isn’t true. Government programs don’t create jobs. Government programs can’t create jobs. At best they merely redistribute already existing jobs. In this sense creating jobs is like creating wealth. The government doesn’t create wealth. It can merely change the pattern of distribution.

When government confiscates wealth from one segment of the economy and gives it to another segment no new wealth is created. That is obvious. In fact the redistribution makes the economy poorer. It does so for several reasons.

First, when government redistributes wealth it consumes a good portion of that wealth on the process of redistribution. For each dollar the government confiscates at the beginning of the process it returns pennies at the end of the process.

Second, government has to tax those sectors of the economy that are actually productive. It is hard to confiscate wealth from those who don’t have it. To be profitable an industry must produce something which people want and are willing to pay for. That means it has to produce something which people value higher than the money they spend on the product. So people get less of the things they value.

But where do the redistributed funds go? They go to sectors of the economy that people value less. So government takes money from areas which people want more of and give it to sectors where people want less. It encourages the production of services or goods people want less while punishing the production of goods or services which people want more. The net result is that less valuable things are produced more and more valuable things are produced less. That makes everyone poorer. Government never actually redistributes wealth, it redistributes poverty. Government “redistribution” of wealth destroys wealth.

How wealth is redistributed is relatively open and apparent. And it is pretty easy to see how wealth is destroyed in the process. But how the same thing happens to jobs is hard to see.

The reason it is more difficult to notice is that government doesn’t actually go out and confiscate jobs. It doesn’t appear at the door of a successful company and orders employees out of the building, and then takes them to an unproductive plant where they are forced to work. If that happened it would be clear what is going on.

The way government redistributes jobs is actually the same way it redistributes income. Of course, politicians never admit they are redistributing jobs. They pretend they are “creating” jobs. How does this magic take place?

They find some project or endeavor that they decide ought to be showered with tax money. As the money goes rolling in we see “new” jobs. They are visible and obvious. In fact, the politicians go out of their way to show you these “new jobs”. It might be highway workers standing around a ditch looking serious and filling in the hole that they just dug, or it might be more “supervisors” in the education department, or additional surly desk clerks at the Department of Motor Vehicles. If the politicians are being smart they pour the money into so failed industry so that it appears they are “creating” private sector (another word for productive sector) jobs.

Let us say they pour money on some ethanol plant. You see new workers hired to produce a fuel that consumers don’t want and which is worse for the environment. But hey, that’s okay, it creates jobs! You can see them yourself.

How did they create jobs?

First, they took money out of the productive sector of the economy. That reduces demand in those areas and reduces employment there. But who notices? It’s not like the politician will call in the press to have his photo taken at the company that reduced employment due to higher taxes. The “new” jobs are visible while the jobs they destroy are not so obvious.

Sometimes the jobs destroyed are even less obvious. A company that might have expanded puts off the expansion. They might now lay off employees but they slow down their hiring. Often the jobs destroyed are jobs that were not yet created.

In the case of our ethanol plant notice what else the politicians did. By increasing the demand for corn for ethanol they drove up the price of corn for consumption by humans or as animal feed. The net result is more expensive food. While they created additional wealth for the billionaires who tend to own ethanol plants they harmed the working people who face higher food prices.

So what do you do when food prices go up? Do you stop eating? Not likely. Instead you cut down on other things. You might skip a vacation this year. But the politicians say it is worth it and your sacrifice is minimal. But when you didn’t take that vacation that means less demand in the tourism sector. It means lower profits there. It means less demand for employees there.

Maybe you stop eating out as much. As others do the same the demand for restaurants goes down. Some entrepreneurs who own restaurants lose their business. A lot of waiters, waitresses, dishwashers, counter-help, cleaners, etc., find they either lose their jobs or have their hours cut back.

All over the productive sectors of the economy the same thing is happening. Government “jobs” programs destroy productive jobs. And the results are interesting.

Since the bureaucrats consume much of the money they redistribute they create fewer jobs than they create. If they eat up only 25% of the total (and it is more) then for every $1 million worth of jobs they destroy they create $750,000 in other jobs. Often the jobs they create are better paying than the jobs they destroyed so even more are destroyed than created. It is possible that for every job they create two jobs have been destroyed.

Now if they actually increase unemployment and make the economy poorer then why do they bother?

First, the typical voter is clueless as to what is happening. They actually fall for the baloney that these programs create jobs. Even the politicians who know the smidgen of economics necessary to see through this fraud play the game because they benefit by the delusions of the public. In the end they worry more about being elected again than they do about some poor schmuck who loses his job because of their “jobs program”.

And these politicians know that in doling out the funds that “create jobs” they win favors from special interest groups and votes from the members of those groups. When jobs are actually created in the productive economy the politician can’t claim the credit. They can’t use those jobs as favors to be called in during the election. The jobs they appear to create actually give them power. By destroying jobs through this process the politician actually ends up better off politically.

That is one of the sad truths of politics. Far too often the politician gains the most by during his worst. The successful politician knows how to use the system to stay in office. And in the end the only job he really cares about is his own.

Wealthy and healthy leads to decline in infant mortality

As someone who spent a decade of my life living in the Third World I have long challenged the gloom and doom advocates. The reality was never as dim as the pessimists made it out to be. For the most part, in most places, the poor of the world have seen vast improvements in their lives.

The new Matlhusians, like Paul Ehrlich, had a tendency to be wrong. Wrong would be a vast understatement. They have been spectacularly wrong. Even phony psychics had better “hit” rates. But then “psychics” know they are frauds and make educated guesses. The neo-Malthusians are blinded by ideology and thus unable to digest unpleasantries such as facts.

Today’s New York Times has an article based on the most recent data from the United Nations Children Fund which confirms that reasons for optimism are still strong. The paper reports, “For the first time since record keeping began in 1960, the number of deaths of young people around the world has fallen below 10 million a year....”

This achievement is more spectacular when you realize that the size of the childbearing population has grown significantly since 1960. The report notes: “In 1960, about 20 million children died annually, but the drop since then has been steeper than 50 percent because the world population has grown. If babies were still dying at 1960 rates, 25 million would die this year.”

UNICEF says they expect further massive drops in infant mortality rates in the next few years. There are storm clouds on the horizon, however. The report notes that “malnutrition is an underlying factor in 53 percent of all child deaths, anything that feeds children — whether that means large-scale aid during famines or simply better seeds and fertilizer — reduces deaths.”

Actually this is partially right, about the role of hunger in mortality, and massively wrong in suggesting food aid is necessarily a panacea. Not everything that is done, in regards to food aid, helps. Sometimes it is counterproductive. Here are a few reasons.

1. Food aid is bureaucratic and often takes so long to arrive that it becomes available only after the underlying cause for the aid is over.
2. The aid, if it arrives after the problem is mitigated, tends to suppress or destroy local food production making future food problems more likely.
3. Food aid is often channeled through national governments who use the aid to cement power for themselves. Yet these governments, through various policies including armed conflict, are often the underlying cause of the malnutrition. Food aid helps these regimes remain in power which allows them to inflict higher death rates on their people for decades to come.
4. Food aid is periodically channeled by corrupt national regimes to the world market where it is sold. The revenue from the sale of the aid has been used to purchase arms used to attack the very people it was meant to help.

And the dark clouds include the so-called global warming “solution” of biofuels. As I have pointed out in Save the Planet, Starve the World, biofuel programs, pushed by the political elites in Europe and the United States, are consuming vast amounts of food to produce biofuels of questionable advantage. At least with oil consumption drivers weren’t directly taking food off the plates of the world’s poor.

Now to make matters worse the Stalinists who run the current Russian government are pushing to create an “OPEC” of grain producers to cartelize grain production the way the OPEC governments control the supply of oil. I suspect this measure is likely to fail as the US is the Saudi Arabia of grain and unlikely to join such a cartel.

China is so worried about the use of food to produce fuel that it has stopped the building of new biofuel production facilities. Yet wealthy “environmentally active” governments in the West are throwing billions in subsidies to produce this fuel, which has little advantage over normal fuels. The net result is that politicians in the West are using the confiscated wealth of their taxpayers to bid food away from the world’s poor to turn that food into fuel for other wealthy people to use. They call this “caring”.

And this ill-conceived “solution” is only going to get worse as the U.S. presidential candidates jockey for position. They will use biofuels as a way to throw money at America’s prosperous farming community, in order to buy support. And then they will coo about how “environmental aware” they are in addressing “the global warming crisis.”

Environmental disasters like Al Gore promised to drive up food prices to “protect our vital agricultural lands” (which weren’t under threat to begin with). And they did. Gore says “I’ve always supported ethanol, I have a consistent record of shoring up the farm safety net.” This translates into policies that starve poor people in order to subsidize rich American farmers. As vice president he promised, “Our administration’s goal is to triple the use of biomass technologies, ethanol, gasoline additives, plant-based textiles and other environmentally friendly products by 2010.” He got his way, biofuel is the new rage and people are dying because of him. So much for the compassion of this sanctimonious sermonizer.

Keep in mind the UNICEF figure that 53% of all child deaths are the result of malnutrition. Diverting food from tables and into fuel tanks is contributing to the death of almost five million children per year.

We should also note that almost 1 million infants die from malaria every year. One of the most efficient methods of preventing malaria was DDT which, after the hysteria whipped up by Rachel Carson in 1962, was eventually withdrawn from the market. Infections from malaria skyrocketed as a result of the ban and millions more died every year. After several decades of shunning DDT various governments, along with the World Health Organization, have realized that the ban, once touted as a “solution” to problems, actually made the situation worse. The ban is being lifted and we should see more improvement in the infant mortality rates as a result of ignoring the greenies on that issue.

Apparently the politicians learn slowly. While realizing that the DDT “solution” of the past created problems worse than the problems they were meant to solve they are still embracing new policies which have similar results.

UNICEF says that “public health” measures are the reason infant mortality rates have declined. And no one disputes that such measures are a contributing cause. But UNICEF, which funds such measures, is also blowing their own horn to the exclusion of the other instruments in the orchestra.

A large degree of improvement in the life span of individuals is caused by changes that are not normally seen as health measures but as wealth measures.

There is a direct correlation between economic freedom and individual wealth and a direct correlation between wealth and health. Prof. James Gwartney, of Florida State University says: “Free economies grow faster, have a cleaner environment, a lower infant mortality rate and less political corruption. The per capita gross domestic product is about 10 times the income level of the least free quartile. Further, the life expectancy of the freest group is 77 years, compared to 52 years in the least free group."

Nowhere is this more apparent than in places like China, India and Vietnam. All three nations experienced famine -- though in Vietnam is was much less severe -- when their populations were significantly smaller. Yet, in spite of increased populations they are more food secure today than in the past. All three instituted major reforms which liberalized the economy and all three have seen food production increase along with massive declines in poverty.

Public health measures in these nations are minimal, especially compared to West. But economic liberalization has improved individual prosperity and that has resulted in better health, including lower infant mortality rates and longer life expectancy.

UNICEF, however, can’t take credit for changes in economic policies so one can understand them ignoring the role of prosperity in reducing infant mortality. After all the purpose of the press release is also to promote UNICEF. But the role of economic freedom in improving living standards can’t be ignored by those who are truly concerned about the poor of the world. Nor should we ignore the reality that “environmental solutions” that once were chic and politically popular inflicted a great deal of harm and that it took decades to remove those policies. The DDT ban may now be removed but it took the deaths of millions and millions of people for that to happen. I suspect deaths caused by the ethanol craze will continue to climb for decades to come before this disastrous program is finally taking off political life-support.

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The EU vs the US: Who is Economically Better Off?

My off-hand remark that the average standard of living in the European Union is lower than in the United States was meet with howls of protest. First, as I said would be the case, Europeans denied it adamantly. And many did so in the most bigoted fashion possible. Second, people who are on the political Left howled as well since they love the European welfare states and pretend that they are more prosperous than they are. Of course I get the same howls and dishonesty from the Right when I point out that some of their own myths are false.

In spite of all my criticism of the United States I was accused of being a “patriot” toward the US. In spite of actually living in Europe I was accused of knowing nothing about living in Europe. I made three statement of facts concerning living standards in Europe.

1. I said Europeans had a lower income on average.
2. I said they are taxed more heavily.
3. I said they pay more on average for goods and services.

If you earn less, keep less of what you earn, and face higher prices then the inevitable conclusion is that you can not purchase as much as people who earn more, are taxed less and pay lower prices. I made no other claims in this matter though you would have thought I had argued that George Bush was a knight on a white horse instead of the evil, incompetent man that I actually think him to be.

I did not set out to prove my points regarding Europe as they were secondary to the issue at hand in that blog post. Now I shall do so.

Europeans earn less on average.

The GDP per capita of nations is considered a standard measure of wealth. And these days most people use them adjusted for purchasing parity. That takes into account that spending a $1 in Burundi gets you more than spending $1 in London. So I checked what is the GDP per capita (PPP) for various countries. Germany is $31,900, France is $31,100, Denmark is $37,000, Austria is $34,600, Poland is $14,300, Sweden is $32,000, Spain is $27,400, Netherlands is $32,100 and the UK is $31,8000. The average for the EU is $29,476. The average for the United States is $44,190. The World Factbook has numbers that are very similar: $44,000 for the US and $29,900 for the European Union.

Now some people will compare one nation in Europe to the entire United States instead of comparing the EU average to the US average. That is cheating. For instance Delaware has a much higher per capita GDP than does Mississippi, just over twice as much. No country in Europe beats Delaware on this index. Cherry picking the specific European countries can make the stats look better than the average does as would cherry picking which states one uses for the US.

Instead we take all 50 states all the members of the EU as two groups and compare them. And that gives us the figure of $29,476 for the EU and $44,190 for the US. By the way since these are adjusted for purchasing power that also takes into account the disparities in cost of living. And thus this answers both my first assertion and my third, which I shall address further anyway.

It was asserted by one European commentator that the average American earns something like $23,000 per year. I know that is absurd. So I went to the Labor Department for New York state and went through their data base of hundreds of professions and checked the median annual wage for those occupation. Out of hundreds of positions listed I found only a handful paying near that level. And according to the state of Indiana the “average wage per job in the United States was $36,167 in 2002” I would assume that in the five years since then the average has increased. The same site says wages were increasing at a rate of 3.57% per year. If that remained true that would mean the average today is around $43,100. Well above the bogus $23,000 level that was claimed.

And then there is the undeniable fact that the average US worker keeps a much larger portion of his income and goods and services are less expensive in the US. In addition the average European is almost twice as likely as to be unemployed. The US unemployment rate for last year was 4.6% while for the Euro-zone it was 8.9%.

This unemployment rate is important because people who have zero income are not counted in the average annual wage. Strictly speaking a country of five people, where one is employed at $100,000 and four earn nothing has an average wage rate of $100,000. But the country, where four of the five work for $50,000 and one is unemployed, has an average wages of $50,000. The first country tries to pretend it is better off. In reality the second is. In reality I argued that the incomes of zero must be added in. In that case we discover that in truth the average income in the first country is just $20,000 ($100k divided by 5) while in the second it is $40,000 (4 times $50,000 is $200k divided by 5).

As economist Don Boudreaux noted in an editorial in the Christian Science Monitor noted one way the French, as an example, inflate their average wages is my keeping low wage employees unemployed. The US has millions of immigrants, legal and illegal, who are absorbed into the work force each year. And Americans are younger than Europeans on average and have higher birth rates meaning more young workers enter the force each year. As Boudreaux noted: "If lower-skilled workers enter the labor force in unusually large numbers, the average wage rate will fall without necessarily reducing any worker's pay. Indeed, the typical worker can even see his real-wage rate rise while the average rate falls!" He notes that "A less-flexible economy, such as France's, which makes it difficult for lower-skilled workers to find jobs, will not "suffer" any such fall in its average wage rate." These sort of distortions are routinely left of the debate by the advocates of European socialism.

Europeans pay more in taxes.

The OECD surveys the tax burden in their member states, as measured by tax revenues as a percentage of GDP. The higher the percentage the higher the average tax burden per nation. Since the OECD covers the United States and most of Europe it is a helpful index to use. The five nations with the highest tax burdens were all in the EU: Sweden 50.8%; Denmark 49%; Belgium 45.8%; Finland 44.9%; France 44.2%. The United States was listed at 25.4%. The lowest EU country on the list was Ireland at 30%.

The EU doesn’t deny that is a high tax region, actually the highest taxed region in the world, so I’m perplexed as to why some of my readers want to pretend otherwise. The European Commission Taxation and Customs Union recently released their 2007 index Taxation trends in the European Union (pdf). The opening paragraph of the report states:

The European Union is, taken as a whole, a high tax area. In 2005, the last year for which detailed data are available, the overall tax ratio, i.e. the ratio between total tax revenues and GDP, in the 27 Member States (EU-27) amounted to 39.6 % (in the weighted average; see Table 1); this value is about 13 percentage points above those recorded in the United States and Japan. The EU ratio is high not only compared with these two countries but in general; amongst the non-European OECD members, only New Zealand has a ratio that exceeds 35 per cent of GDP.

We know the US tax burden measured by the percentage of GDP consumed by taxes is 25.4%. Comparing that to individual European countries shows that the rates in Europe are much higher, as the EC admits. In comparison the UK is 37%; Netherlands 38.2%; and Germany 38.8%. And I have mentioned the five very high rates in the EU earlier. But what matters is the average and according to the European Commission that figure is 39.6%. And if the EC knows what they are talking about every country in the EU has a tax burden higher, many significantly higher, than in the United States. In recent years the EU tax burden average was depressed by the admission of relatively low tax states in eastern Europe but the EU is doing its best to force those nations to increase their tax burden to stifle competition within the EU.

Europeans pay more on average.

As I noted above the PPP adjustment takes cost of living into account already. So all I am doing is offer some further comparisons. If I were to purchase an ear of corn at my local store it would cost me $1.36. The store I use is connected in some way with A&P in the US (at least they stock many A&P items) so I pulled up a random store in the US in New Jersey (not one of the cheapest states either) and they had ears of corn on sale for 16¢. Recently when I was spending a few months in the UK I remember the price for an ear of corn there was about $1.00 each.

The US store sells Barbeque sauce for 79¢ and I recently paid $6.80 here but that might be excused since it was "imported". Two liter bottles of Pepsi are $1.25 each while I would pay about twice that for 1.5 liters (actually I stopped buying soft drinks due to the prices). The potatoes I buy in Europe are slightly more expensive but they are very small, potatoes and not of the quality of the Idaho baking potatoes. A store one bus ride away does stock similar potatoes but at a much higher price plus the bus trip is $3 so I rarely purchase there unless I have to be there for another reason. The food items I picked here are items I have priced or purchased within the last few days and are merely examples.

Take petrol as another example. According to the Automobile Association of Ireland the average for one liter of petrol in the US was € .58 during June. The cheapest petrol in Europe, in comparison, can be purchased in Estonia for € .87. Here are a few other countries to compare to the US rate of € .58: Germany € 1.35; France € 1.08; Netherlands € 1.08; UK € 1.45; Italy € 1.21. The average cost for petrol is double to triple what the price is in the US. Of course those high prices have knock on effects on other goods and services as well.

One popular index is the cost of living index for various major cities in the world. They use New York City as the base rate. And New York City is the most expensive American city. It is still cheaper than many European cities. London is scary when one looks at prices. For instance a tube ticket there is almost three times the rate for a subway ticket in New York. A music CD that costs € 13.22 in New York is € 19.17 in London. A burger meal that is € 4.32 in New York is € 5.74 in London.

Of the major cities in the world, as I stated already, New York is the most expensive in the United States. Yet in Europe it would be cheaper than London, Copenhagen, Geneva, Zurich, Oslo, Milan, or Paris.

Of course one can compare specific items and find bargains in different places. The question is not whether a specific product costs more, less or the same but whether all products, on average cost more or less. That is precisely what purchasing power parity takes into account.

The average income in Europe is lower than in the US. The average American is allowed to keep more of his income than is the average European And when it comes to spending the money which is left over the average price of goods and services are lower in the US than in the EU.

Are these the only measures of well-being? No. I never claimed otherwise. Are there problems in the US? Of course, there are problems everywhere. And there are some in the US that are significant. I think the loss of Constitutional rights in the US, under the current regime, has been frightening. I believe the US has been moving rapidly toward a police state but the same is true for the UK as well. And US foreign policy is harmful to the whole world. And I don’t believe the Democrats will reverse any of this. But then I have made my position on those issues well known here.

Is this blind loyalty to the US? If so I would be living in the US. The reality is that the economic conditions in the US are vastly better than in Europe, especially in the old EU nations that have decrepit economies and demographic trends that are disastrous. Just because I despise Bush and various aspects of American culture (like the fundamentalists) that doesn’t mean I’m going to lie about the economic conditions. Unfortunately many people who share my dislikes about such aspects of America feel they are justified in distorting the truth.