Governments will not reduce levels of unemployment by spending more

PUBLISHED : Wednesday, 01 February, 2012, 12:00am
UPDATED : Wednesday, 01 February, 2012, 12:00am


The exchange between Michael Jenkins ('Government purse filled by taxpayers', January 14) and Chohong Choi ('Government funding does create jobs', January 26) illustrates how misunderstood economics is.

Whenever the economy takes a downturn, one often hears about government job creation. However, people overlook the fact that when the government creates jobs, it may do more harm than good. Any country needs government employees to function. However, it's an insidious notion that government job creation actually generates an increase in employment.

The popular view that the government can alleviate economic downturns by spending to create employment may not be so simple. It is either a direct employer (by expanding services) or an indirect employer (by spending on projects). The view is, if firms increase employment by 100,000 jobs with a HK$5 billion programme, then employment is 100,000 jobs ahead. Unfortunately, measuring employment isn't as easy as keeping score. The public rarely focuses on how employment in other sectors is affected by government spending.

These effects are less visible because they are spread across thousands of employers. Your correspondents agree that government spending is mainly derived from taxes. If individual income taxes are raised by HK$5 billion to fund the project, disposable income across Hong Kong is reduced by HK$5 billion.

When taxes rise, people spend less. Lower demand for such things as clothing causes private employers to reduce staff. Since most of us agree that we can spend our income more efficiently than the government, if only because we don't have to pay a bureaucratic overhead charge, we can assume the affected companies' reductions will equal, or exceed, the employment added by the programme. Similarly, corporate taxes will eventually result in higher prices for consumers, lower real wages and lower returns for investors. Again, unemployment increases, not decreases.

Conventional wisdom would have us believe that 'government investment' reduces unemployment. Yet the opposite seems to be the case in the US, which recently 'invested' heavily under two presidents yet still can't put a dent in the unemployment rate. Hong Kong needs government employees. But the Keynesian legacy that governments can reduce unemployment with spending is a fallacy.

Governments the world over must maintain low spending and leave income in the hands of the individuals who earned it. They will spend it much more efficiently than the government can.

Andrew Strain, North Point