The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand.

The White House says the $300 billion spent from the stimulus thus far has financed as many as 2 million jobs. Maybe. However, the private sector now has $300 billion less to spend, which, by the same logic, means it must lose the same number of jobs, leaving a net employment impact of zero. But the White House’s single-entry bookkeeping simply ignores that side of the equation.

Even Washington’s transferring money from savers to spenders doesn’t create demand, since the financial system already converts one person’s savings into another person’s spending (as I detail here). A family might normally put its $10,000 savings in a CD at the local bank. The bank would then lend that $10,000 to the local hardware store, which would then recycle that spending around the town, supporting local jobs. Now suppose that the family instead buys a $10,000 government bond that funds the stimulus bill. Washington spends that $10,000 in a different town, supporting jobs there instead. The stimulus has not created new jobs. It has merely moved them to a new town.

Posted by: kevin at February 18, 2010 01:46 PM (+nV09)

Posted by: the pinko at February 18, 2010 03:24 PM (wZ30l)

Posted by: david foster at February 18, 2010 05:57 PM (Gis4X)

Posted by: Nicole Namken at February 19, 2010 01:48 PM (es18+)

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