Freedom Is Key to Creating Jobs, Not Stimulus Spending

The government can create jobs and economic growth by understanding the conditions that allow such to happen.

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Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University. He recently gave a testimony before the House Committee on Education and the Workforce on what can government do to create jobs.

On Friday, the U.S. Bureau of Labor Statistics reported that with the addition of 243,000 jobs in January, the (seasonally adjusted) unemployment rate edged down from 8.5 percent to 8.3. This is good news. But it isn't great news.

There are still 12.8 million Americans who are looking for work and can't find it; 2.8 million who want jobs, but since they haven't looked for one recently aren't counted; and some 8.2 million who have settled for part-time work.

Four years after the financial sector began to sneeze, the American economy is still terribly sick. So the natural question is what economic medicine might cure it? Is there anything we can do to put more people back to meaningful and well-compensated employment?

[See a collection of political cartoons on the economy.]

The unfortunate truth is that economists simply do not know much about how to revive an ailing economy. In assessing the results of the American Recovery and Reinvestment Act, President Obama proclaimed last summer: "[T]he vast majority of economists are convinced that the steps we took in the recovery act saved millions of people their jobs, or created a whole bunch of jobs."

In a 2010 interview, future economic Nobel Laureate Thomas Sargent was asked about the economic advice given to President Obama about that same stimulus bill. He replied: "President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced."

Indeed, there is quite a range of professional opinion. Reasonable economists, using valid techniques have found that $1.00 in government purchases can create as much $2 or $3 in new private sector economic activity. But, unfortunately, other, equally-reasonable economists using equally-valid techniques have estimated that $1.00 in government purchases crowd out or destroy as much as $3 or $4 in private sector economic activity.

[See an opinion slide show of 10 wasteful stimulus projects.]

Apparently encouraged by some of the larger estimates, President Obama reiterated his calls for more stimulus through infrastructure spending in last month's State of the Union. But there are other options. We may not agree on how to instantly breathe life back into a moribund economy but economists have made great strides in understanding the conditions that are necessary for long-run economic growth.

For one thing, healthy economies need a healthy dose of "economic freedom": low and non-distortionary taxes, modest government budgets, limited and equitably-applied regulations, stable monetary policy, open international markets, and well-protected property rights. Economists have developed several objective measures of economic freedom and used them to help explain differences in living standards across the world.

Economists Chris Doucouliagos and Mehmet Ali Ulubasoglu reviewed 45 studies examining the freedom-growth relationship and concluded that:

"[R]egardless of the sample of countries, the measure of economic freedom and the level of aggregation, there is a solid finding of a direct positive association between economic freedom and economic growth."

[See a slide show of Mort Zuckerman's 5 Ways to Create More Jobs.]

The benefits of freedom are profound: per capita income in the world's freest countries is about seven times that of the least-free.

Compared with much of the world, U.S. citizens have historically enjoyed a large measure of economic freedom. That may explain why the median U.S. household earns more than 93 percent of the entire planet. Unfortunately, over the last decade—as government spending has piled up and as the government has undertaken unprecedented interventions in the private economy, U.S. economic freedom has been in precipitous decline. Reversing that trend would do a great deal to restore the fundamental conditions that are conducive to prosperity.

There is a lot of uncertainty surrounding our ability to revive a sick economy, but we do know what makes for a healthy lifestyle: a healthy dose of economic freedom.

  • Read the U.S. News debate on the flat tax.
  • See a collection of political cartoons on the Euro Crisis
  • See a slide show of 5 bright spots in the U.S. economy.