A recent news show featured elected officials being questioned by regular folks. One man asked a U. S. Senator the following question: “Why doesn’t the government just make up a bunch of jobs and hire people for those jobs the way FDR did during the depression?”
The Senator bumbled around a bit and did not answer well.
The correct answer is easy. That approach does not work. FDR took office early in 1933 and immediately began starting a variety of programs, some of which were make-work programs as described above. After years of these efforts, they accomplished nothing. By 1937 the depression marched on and unemployment was over 17%.
But surely hiring people would help, wouldn’t it? If it did not work, why not?
The answer can be found in the book Economics in One Lesson by Henry Hazlitt. Hazlitt was a writer for Newsweek and, though it was written in 1946, the book is still in print. It is well written and makes profound things simple and best of all, it is only 211 pages. When you are finished you can honestly say you understand economics better than when you started.
To answer why the FDR hiring did not work one simply has to ask what would have been done with that money if the hiring had not been done. Imagine government decides to create 100 jobs paying $50,000 per year. They take $5,000,000 worth of taxes from the rich to pay for it. But what were the rich going to do with their $5 million? They were all going to buy a car. So 100 jobs from the auto industry were lost in order to provide the 100 government jobs. Obviously this is simplified. What if they were going to buy foreign cars? Then the foreign country has money to buy our products or money to buy our bonds, thus lowering interest rates. The book deals with some of the complications but the basic idea is sound.
Another illustration that many have repeated is this. It is like taking water from one end of swimming pool and pouring it in the other end and expecting an increase in the level of the pool.
The book is a great book. The fundamental lesson of the book is that we have to look beyond the short term effects of a policy. When we see the long term effects, it often suggests that a short term policy is unwise.
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