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Japan's government cannot just `create' jobs

As Japan's leaders do battle against the ravages of deflation and recessionary conditions that grip their economy, unemployment rates are at a postwar level. Government data indicates the unemployment rate set a record high for the second consecutive month in March and now stands at 4.9 percent.

In response to these many problems, Japan's government announced an "emergency" jobs package as the latest incarnation of an obsession for public-sector intervention in its domestic economy. The aim of the Emergency Employment Measures is to "create" 350,000 jobs during the next fiscal year by supporting small businesses and expanding current job-promotion programs to match laid-off workers with new positions. Although ?400 billion (US$3.6 billion) were committed for this jobs creation scheme, the funds would be diverted from other uses announced in previous budgets.

These funds are dwarfed by the new public-sector budget that stands at a record level of almost ?85 trillion yen (US$776 billion). All this spending is meant to help turnaround private spending in order to revive a crippled economy beset by rising unemployment and declining household incomes.

Yet for all its good intentions, the misguided notion that governments can create jobs was supposed to have gone the way of polyester leisure suits. Like bell-bottom trousers and other sartorial disasters that creep back into the fashion fringes, bad economic policies come back to haunt. In the case of schemes for governments to promote employment growth through deficit spending, these were widely discredited by the end of the 1970s because of their role in the onset of "stagflation." It appears that this lesson has been lost on Japan's policy makers they continue to throw money at the local economy in hopes of re-igniting it.

One thing that governments can actually do is retard economic and employment growth by distorting incentives through excessive taxes. And it is true that removal of the obstacles that they created may allow new employment opportunities to arise.

But it is absurd to credit public officials with the actual act of job formation when they undertake reforms. When liberalization or deregulation allows labor markets to be more flexible, it is entrepreneurs that create jobs by taking initiatives that induce economic growth to expand.

Poor pace

What is surprising about these efforts is that so little is expected from spending so much. Consider the fact that the plan involves temporary employment for 150,000 workers to be hired by local governments paid for with funds from the central government. Adding workers to the public payroll represents a new burden on taxpayers instead of a net gain for the economy.

It is pitiful that the world's second largest economy cannot create more than 350,000 jobs in a year. Even though it is twice the size of Japan's, the US economy creates almost that many in 2 months and has done so for over 8 years.

The motivation behind this flawed policy choice is apparent whenever economic decisions are guided by political considerations. Politicians and bureaucrats tend to implement policies that generate short-run benefits whereas the associated costs are shifted to the future. Conversely, they will almost always avoid policies that generate short-run costs but yield benefits in the long run. Offering quick results and creating the impression of being actively engaged in problem solving increases the likelihood that they will be re-elected or re-appointed even if the eventual result is bad for the community.

What is worse is that government spending schemes that expand public-sector debt imposes several burdens on future generations. Most obvious is their additional tax burden in having to pay for debts incurred in the present. More diabolically, government attempts to orchestrate jobs by spending beyond their means will undermine or eliminate some employment in the future.

From an operational standpoint, a better method for addressing employment growth is to undertake reforms that change the fundamental nature of economic decision making. New government spending cannot and does change the incentive structures associated with tax codes or regulation, both of which impose limits on entrepreneurial choices.

As always, the choice facing political leaders is between political expediency and economic rationality. In confronting this dilemma, Japan's leaders have taken the wrong path.

This is evident from the fact that Japan's economy remains mired in recession despite a decade of squandered tax funds. It proves that politicians are protecting their own well being instead of undertaking reforms that would benefit their constituents. It is high time that the good of the people be put ahead of the interests of the political class.
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