South-Western College Publishing - Economics  
When Should the Government Help?
Subject Government Job Creation
Topic Fiscal Policy
Key Words

Government Spending, Job Creation, and Full Employment

News Story

The private sector added 277,000 new jobs in March. This was the biggest gain in job creation in the last two and one-half years. This sounds like good news, but given the fact that total hours worked and total weekly pay declined in March, the report of all those new jobs was somewhat misleading. So, the question becomes, is it time for the government to step in and assist in generating new jobs?

Representative Barney Frank, a Massachusetts Democrat, answers yes. "The normal rule of thumb by which a certain increase in the gross domestic product would produce a concomitant increase in jobs does not appear to apply," said Frank. "People have so attacked government," he said, "that now when there is a need for it to help create jobs, they cannot recognize a positive role for government."

Few people would agree with Frank's views today. Even the Democratic candidate for president, John Kerry, is counting on the private sector to generate enough jobs. President Bush takes a similar stand and counts on free markets to work best without government interference.

Still, the statistics speak for themselves: The continuing theme is of an economy that is not producing enough jobs to bring full employment. The depression that occurred after World War II demonstrated the private sector's failure to produce full employment as government spending for military expenditures was reduced. The result was the Employment Act of 1946. The Act included clauses that mandated government job creation through public spending programs.

Similarly, after another postwar boom ended in the 1970's, Congress tried again to make the government the employer of last resort with the Humphrey-Hawkins Act of 1978. However, the final draft of that Act gave equal emphasis to fighting inflation and reducing unemployment. The result was a Federal Reserve Bank that was primarily concerned with fighting inflation and its policy traded higher unemployment for less inflation.

After experiencing years of layoffs, wage stagnation, and now offshore contracting, a few politicians like Frank are beginning to promote the government again as the employer of last resort. Public spending on schools, public buildings, and highway construction are examples of the kind of spending suggested for helping a sagging economy. "Every billion dollars invested in highway construction produces 47,500 jobs" according to Frank. In the same speech he added, "we must create new and meaningful jobs for all Americans. And we must do this by recognizing once again that government - an enlightened government - has an extraordinary responsibility to assist in this task."


(Updated June, 2004)

Questions
1.

How would you define full employment? How does it differ from the "natural" rate of unemployment?

2. Do you think we should consider the government as the employer of last resort? Why or why not?
3. Explain the multiplier effect associated with public spending suggested by Frank's argument?
Source Louis Uchitelle, "Maybe It's Time for Another New Deal," New York Times Online, April 11, 2004.

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