Can the U.S. Government Create Jobs?

"Now, government can't create jobs, but it can help create the conditions for small businesses to grow and thrive and hire more workers," President Barack Obama said in a speech last month. A dash of refreshing honesty?

Or a whole lotta hooey, argued Tim Fernholz at The American Prospect. It's easy for government to create jobs. What are firefighters, police officers, DMV workers, teachers and other public sector position if not "jobs" "created" by "government"?

Actually, there's room for both Tim and Obama to be right. Government can't literally create private sector jobs any more than a dog can give birth to a kitten, although it can create and subsidize infrastructure projects, dangle tax incentives for employers, and try to juice aggregate demand -- but this is indirect. On the other hand, the federal government can explicitly create a public sector job as easily as it can speak the words "you're hired" -- provided Congress allocates the money.

This is the central parardox of job creation. The easiest jobs to save or create are public sector positions, but we judge the recovery by the velocity of private sector job growth. You can spot this in the crestfallen reaction to April's jobs report, in which short-term Census job growth outpaced the private sector by 10-to-1. The federal government makes up only 25% of GDP, but you can't have a nationwide recovery without the private sector grabbing the baton.

Politicians can cheer "jobs bills" like the American Jobs and Closing Tax Loopholes Act* but they're ability to directly impact the private sector is limited. Indeed, the last jobs bill merely offered targeted payroll tax cuts for new hires. The best we can expect now is to prevent state government layoffs either with direct lifelines to endangered sectors like education or by shouldering the Medicaid burden in the hope that states will move that money over to payrolls.

If these are useful weapons against unemployment, then they're also doubled-edged swords. Bailing out states that overpay their employees (or overpromise pensions) does nothing to encourage efficient government. Throwing a $23 billion life raft to public schools for the purpose of job preservation undercuts the administration's efforts to use financial incentives to galvanize education reform.

And yet... Unemployment is kissing 10 percent and the economy is still leaning on the largess of Uncle Sam. If we remove the stimulus crutch, make no mistake: hundreds of thousands of jobs could be lost across the states, and that will have its own ripple effect on demand, profits and private sector employment. State relief is an ugly and messy measure to elevate employment. But the unemployment beast is still kicking, and this is the sharpest weapon we've got.

*Honestly, that name. If you're going to be boring, at least be boring within the rules of parallelism.