BHI Executive Director David G. Tuerck chimes in on the awful "solution" to the fiscal cliff on Fox25-Boston.
Suffolk University PhD candidate and BHI intern Ryan Murphy dissects the argument that state governments can create jobs by investing in green energy or infrastructure projects. Aside from the inconvenient truth that jobs on a project are actually a cost, state governments cannot responsibly create them and proponents rely on unsound economic reasoning. Among the points made in his paper, Fiscally Illiberal: State and Local Projects Cannot Create Jobs Responsibly, Murphy identifies the flaws made by public spending advocates.
As of October 2012, the unemployment rate in the United States was 7.9%. Of this 7.9%, the natural rate of unemployment constitutes 5 percentage points. In addition, one percentage point is explained by the increase in unemployment benefits. Only 1.9% of the 7.9% unemployment can be addressed by government spending as the argument is typically made.(Spending on infrastructure and job training programs could also possibly reduce unemployment, but not by the mechanisms proponents of green energy and infrastructure present their arguments.)
The way green energy and infrastructure projects could in principle reduce unemployment is by increasing total spending in the economy in question.
For increased government spending to increase total spending in the economy, the government must run a deficit. If it increases taxes to pay for the project, it will be shifting spending around, not increasing total spending.
The Federal Government is in a special position to run deficits. Most notably, in can print money to pay off its debts instead of going bankrupt. Greece, since it uses the Euro, is not in the position to use that option and is currently paying the price. New York City went bankrupt because of this in the past, and California may be on the verge of similar collapse. It is not responsible to run deficits to create jobs when the level of government in question does not have its own printing press.
There is no sound rationale for including jobs created in cost-benefit analyses performed at the state or local level.