Let’s take sensible steps toward solving our unemployment problem | Econ Matters

Jobs, jobs, jobs.
President Barack Obama unveiled his new plans to generate greater employment in the United States. The Missouri Special Session is considering proposals to increase Missouri employment. Senators took a weekend off to study the 250-plus-page legislation and to seek input from Missouri’s Department of Economic Development on the impact of the proposals. Whew!

For the moment, I am going to focus on the part of the Missouri legislation that will allegedly increase aggregate employment in our state. The centerpiece of this legislation is the provision of tax credits for warehouse building, freight shipping and some other stuff.
I am guessing that DED will plug the numbers into its computer model, and by the magic of the multiplier process, a large number — at least one larger than $360 million — will be returned. On the basis of cost-benefit analysis, the proposed tax credit program is worth it.
So why am I so uncomfortable about the merits of the proposed Aerotropolis? Over time, I have studied lots of models published in academic journals that attempt to account for phenomenon observed in aggregate economics. This is what science does; it vets competing theories (not hypotheses).
With the absence of evidence and the current models, my view of the effect of Aerotropolis can be easily summarized. The tax credits may induce entrepreneurs to build more warehouse space as the after-tax return to these projects is raised by the implementation of the tax credits.
Suppose this construction does occur. The Missouri economy is then bound by a basic constraint. Those resources behind the tax credits have to come from somewhere. In other words, either the rest of state government spending will shrink or Missouri taxpayers will be forced to pay higher taxes. Suppose it is the latter. Then projects that Missouri taxpayers would have invested in are now cut off from funding because the resources have to go to pay the higher taxes. In this case, the Aerotropolis project redistributes resources from every other potential Missouri project (or out-of-state project) to the St. Louis metropolitan area. Both the state government’s budget constraint and the resource constraint apply.
Why do I think Missouri’s DED will estimate much larger effects? The models used by DED have been discredited mostly because they ignore the constraints I just mentioned. They input a change in spending that goes with the tax credit without recognizing that these resources are not free. If they simultaneously accounted for the reduction in government spending or the reduction in other investments, there would be no net effect. By ignoring the constraints, the DED’s results are grossly biased upward.
It is important to note that economic science continues to make progress. Our understanding of these policy effects will improve. Perhaps future research will present a model economy that produces large estimates for projects like Aerotropolis. However, that model does not exist yet. Dr. Saku Aura recently prepared a report voicing the same concerns by systematically asking how Aerotropolis met the conditions of market failure that justify its implementation. You would disregard medicine as quackery if it claimed it could help you live forever without trials and evidence. Why would you accept such numbers without a clear, concise explanation of how it would work?
The calls are for putting more people to work. This is a noble reaction to the helplessness that goes with having so many unemployed people; the situation creates a sense of desperation. I urge people to carefully think about this goal as the pleas filter up to government officials and ask them to do something. Sheer will cannot fix long-term unemployment.
There is a legend about employment and government projects involving Dr. Milton Friedman. During a visit to India, an official was taking Friedman on a tour of a public works project. New machinery was being used, and the official touted the number of jobs that were created by the project. Friedman responded by saying that if you wanted to count new jobs, the project leaders should have provided the workers with spoons instead of state-of-the-art construction equipment. If it is jobs we want, there are lots of silly ways to get those jobs created. A nobler goal is to find a set of rules that promotes opportunity for all, not just gifts graciously handed to a select few.
The bottom line is that wishing new jobs for our friends and neighbors is appropriate, but let’s take sensible steps toward achieving that goal. Not all fixes work.