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Jobs Creation and Government Policy

address by
Jerry L. Jordan
President and Chief Executive Officer
Federal Reserve Bank of Cleveland

Instituto Mexicano de Ejecutivos de Finanzas AC
Merida, Mexico
Saturday. November 30, 1996

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I. Jobs as an Objective of Government Policy
The dominant view of economic policymakers for much of the 20th century has
been that a competitive marketplace will not generate enough employment opportunities.
This view underlies the advocacy of government programs to “create jobs.” At least
since the Great Depression of the 1930s, we have seen aspiring politicians declare that
their number-one economic objective would be to increase employment.
The intellectual justification for attempting to use government budgetary and
monetary policies to fine-tune macroeconomic activity was provided by John Maynard
Keynes’ “The General Theory of Employment Interest and Money” [italics added for
emphasis]. This landmark book, bom in the great global Depression of the 1930s, was
the cornerstone of the economic doctrine that dominated western macroeconomic policies
for several decades following World War II.
Before Keynes, the notion of jobs creation as an objective of government would
have seemed absurd. I am reminded of a story that a western businessman told me a few
years ago. He had recently been touring China, where he came upon a team of nearly a
hundred workers building an earthen dam with shovels. The businessman lamented that
with an earth-moving machine, a single worker could create the dam in an afternoon. The
curious response from the local official was, “Yes, but think of all the unemployment that
would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s
jobs you want to create, then take away their shovels and give them spoons!”

In the final decade of this century, the role of government has been moving away
from the Depression-era way of thinking. In the 21st century, creating work for people
will not be viewed as a desirable goal of government policy; fostering an environment for
wealth creation will.
Work is the necessary means of achieving wealth: in order to be*consumers, we
must also be producers. Despite whatever good intentions are presumed, when
government shifts the focus away from creating wealth and toward creating jobs, it
inevitably engenders a lower aggregate standard of living. A successful government
policy-one that helps create wealth for its citizenry-must simultaneously reduce the
work burdens of the labor force. That does not mean people will need to “share jobs,”
take low-paying jobs, or go unemployed. Wealth creation occurs as the muscle
component of employment diminishes and the brainware component increases.
Consider the work record of industrialized countries in the past century. In the
United States, for example, the average workweek has fallen by roughly half since 1900,
a pattern followed by every industrialized nation in the world. Among the benefits of
wealth accumulation is the increase in leisure that it affords.. I do not question that very
poor nations are typically characterized by people who work most of their waking hours.
To do otherwise would be disastrous. And I suspect that where you find impoverished
nations with high rates of joblessness, you will also find political/economic systems that
have large disincentives to create and accumulate wealth.
The distinction between creating wealth and creating “work” can be illustrated by
an economy that has experienced a catastrophic natural disaster. A well-known feature of

market economies is that in the wake of a disaster, such as a hurricane or earthquake,
employment and production tend to rise. One conclusion from this observation might be
that market economies routinely maintain armies of unemployed workers who are
gratefully called into service by the new demands of rebuilding houses, roads, and all of
the other investments that were damaged or destroyed. But clearly, these people are not
better off because they are working long, hard hours, A more reasoned conclusion, I
think, is that these natural disasters are destroyers of wealth— creators of work in the
sense that households and firms must now toil harder to help minimize and recover from
their losses. I doubt that this is the sort of “jobs creation” program the electorate has in
mind when they cast their ballots, although I suspect that many government “jobs”
programs operate much like a post-disaster cleanup program.
II. Government and Jobs Preservation
Many people support a government role in maximizing employment in the belief
that markets will not optimally provide opportunities for everyone who is willing and
able to work. But what sorts of opportunities should the government provide under this
Given the importance policymakers generally assign to the task of creating
employment for the citizenry, it is surprising how little they know about the nature of
jobs creation in market economies. Indeed, in examining the U.S. record, we find no
identifiable, systematic factors related to industry, region, wages, employer size and age,
capital and energy intensity, or foreign competition that would account for a significant
share of the types or number of jobs created or destroyed in the economy. Because

policymakers have no clear foresight of where entrepreneurial energies will be directed in
the future, it’s impossible for them to predict where jobs creation “should” occur. It is
not surprising, then, that government policies which seek to direct the flow of
entrepreneurial talents in a effort to promote “good” jobs, and presumably to discourage
“bad” jobs, will have uncertain and potentially negative effects on economic prosperity.
Government-targeted employment policies breed special interest groups that
inevitably reduce the efficiency of markets. These policies tend to persist beyond the
point of any economic desirability and inhibit an important—
indeed, necessaryantecedent to jobs creation: jobs destruction. In the United States, for example, sectors
and industries that claim the highest rates of net newjobs created are generally the same
sectors and industries that have the greatest rates of jobs destroyed. Similarly, nations
with high rates of jobs creation also tend to have high rates of jobs destruction.1
In other words, much of what government touts as a jobs policy is actually a jobs
preservation policy, the net result of which is that resources are held hostage in less-thanefficient, or their second-best, use. Can we conceive of a single job creation for which
there was not a destruction of a less-efficient, and therefore less-prosperous, job? Indeed,
can we conceive of any advance that does not make obsolete some less-efficient order of
I am of the generation that can still operate a slide rule-for what purpose I can
only scarcely remember. But this technology must necessarily have been supplanted by

1 The correlation between jobs creation and destruction rates by industry in the United States over the 1973
to 1988 period is 0.77 percent, as calculated from data found in Steven J. D avis, John C. Haltiwanger, and
Scott Schuh, Job Creation an d D estruction, Cambridge, MA: MIT Press (1996), table 3.1.

the invention of electronic calculators, and already miniature personal computers are
making calculators obsolete. This is the nature of progress— make obsolete old
technology. In the words of Joseph Schumpeter, it means to “creatively destroy” the pre­
existing order.
So, too, with human technology and the jobs that technology defines. As the
stagecoach driver yields to the railway engineer, who yields to the truck driver, who
yields to the airline pilot, the jobs of the old technology give way to the more prosperous
jobs of the new. Yet, because of their imperfect vision, government jobs programs are
almost everywhere jobs protection policies, which by extension tend to inhibit the
creation of new, wealth-enhancing technology. The stagnant labor markets in Europe are
a direct result of labor laws and regulations designed to protect existing jobs, even at the
social cost of discouraging new capital formation.


III. Borders, Prosperity, and Capital Freedom
The natural experiments provided by political borders illustrate what government
can and cannot accomplish. Why economic prosperity varies greatly along a seemingly
arbitrary boundary poses perhaps the critical question for those of us called economic
policymakers. What is the economic importance of these borders that separate prosperity
on one side and poverty on the other?
In the simplest terms, there can be only two reasons for divergent levels of per
capita income: 1) different levels of resources or 2) differences in the allocation of
resources (which may be either how the resources are employed or how many of the
resources are employed). Moreover, these two sources of economic prosperity are

interdependent: how a nation decides to allocate its resources will ultimately determine
how many resources it has to allocate.
Borders separate different political/economic systems with varying commitments
to the unobstructed use of private resources. That is, borders often mark varying degrees
of capital fertility— incentives that promote the propagation of new capital that has
allowed rich regions to achieve andmaintain higher standards of living. The resources of
the industrialized world were not endowed; they were created by entrepreneurial effort
within the political/economic system. Entrepreneurial effort is not manufactured by
social engineers, but nurtured by the tilling of the economic soil in which such efforts
must ultimately take root.
It is a great conceit of governments on both sides of any border, I think, to behave
as if market forces can be forestalled by more vigilant attention to guarding such borders.
And it is a great myopia of governments to misconceive how these flows are the by­
products of their antimarket policies. On both sides of the border, a government’s first
inclination will likely be to build a fence-to try to circumvent the imbalance that the
market is attempting to correct.
IV. The Role of Government in the Economy
The role of governments in the economy was laid out in a wonderful essay by the
late economist Karl Brunner, “The Poverty of Nations.”2 A person in an economy can
use resources in only one of four basic endeavors: he can produce, trade, influence the
political process in an effort to redirect greater resources to his advantage, or protect

2 Karl Brunner, “The Poverty o f Nations,” Business Economics, January 1985 (pp. 5-11).

himself against the wealth-redistributing efforts of others. In the first two uses—
production and trade— total welfare generated by the economy increases. In the
language of economists, these activities represent a positive-sum gain. However, the
latter two efforts—
redirecting the flow of resources or protecting against the wealthredistributing efforts of others— zero-sum, or even negative-sum, games. They add no
value and therefore generate a lower standard of living for the citizenry as resources are
directed away from production and trade. Government institutions—
laws, rules,
regulations, and the judicial system—
influence each of the resource allocation decisions.
The influence of government as a wealth-redistributing body is well known in
both eastern and western economies. As we have had ample opportunity to observe,
government wealth redistribution via explicit or implicit taxation necessarily lowers the
incentive to create and accumulate wealth, thereby lowering the potential productive
power of the economic system. But governments also promote production and trade,
because they are assignors and protectors of property rights, and provide for the
enforcement of private contracts. These are wealth-enhancing activities that help the
productive capacity of an economy blossom. Thus, governments have two necessarily
contradictory and coexisting modes, “the protective mode” and “the redistributive mode.”
These modes of government suggest why arbitrary borders along a political
boundary generally signify regions of varying prosperity. They are the frontiers of a
government’s authority and, as such, they mark the varying degrees of both the protective
and redistributive modes. Either of these two government roles can contribute to a barren
economic landscape. Too little protective power, or too much redistributive effort,

inhibits the creation and retention of wealth within a particular government’s borders, and
retards equilibrating forces that attempt to provide for a more comparable standard of
Now that the concrete and barbed-wire walls that separated the eastern and
western European economies no longer exist, we can expect to see a narrowing in the
wealth differentials between the two regions. However, until a legislative and judicial
infrastructure has been built that allows the protective state to exist in a meaningful sense,
the large gap in economic well-being cannot be closed.
A necessary precondition for the accumulation of capital is the protection of
property rights. Those countries that make the most rapid progress in adopting western
legal, financial, and accounting practices will usher in a new era of prosperity for their
economies.3 Similarly, until the redistributive modes of many Western European
economies are substantially curtailed, the stagnation in their standards of living is certain
to persist.
The ability of governments to influence the creation of wealth, documented in a
recent study produced by a consortium of research institutes—
including the Fraser
Institute in Canada, CISLE in Mexico, and the CATO Institute in the United States-has
generated a great amount of interest. That work attempted to gauge, in a methodical way,

3 In a recent study, Clague, Keefer, Knack, and Olson note that “in general, democracies provide greater
security o f property and contractual rights than autocracies. But these benefits o f democracy did not
appear quickly: the property and contract rights were often poor in dem ocracies that had lasted only a short
time. A m ong the relatively small group o f countries within our sample that m oved from one regime type
to another, the security o f property and contract rights was greater w hile they were autocracies than w hile
they were democracies. We found, by contrast, that long-lasting dem ocracies offer better protection for
property and contract rights than any other regime type o f any duration.” (p. 271)

the economic freedom of a broad cross-section of nations.4 The conclusion from
examining more than 100 countries over a 20-year period was that governments with a
strong commitment to economic freedoms— personal choice, the freedom of
exchange, and the protection of private property—
tended to be faster-growing, wealthier
countries. No nation with a persistently high economic freedom rating during the 20-year
period failed to achieve a high level-of income. Furthermore, the 17 countries with the
most improved freedom ratings all had positive and generally strong growth rates, while
the 15 countries where economic freedoms declined recorded real per capita GDP
V. A Wealth-Creation Role for Monetary Policy
There is a presumption that monetary policy in industrial democracies has two
objectives— promote price stability (low inflation) and to promote employment growth.
Although many contend that these objectives are in conflict, I disagree. It’s false to
conclude that a trade-off exists between price stability and jobs creation. Such a
perception puts proponents of stable monetary systems in the position of appearing to be
anti-jobs. On the contrary, by protecting the purchasing power of a nation’s money—
thereby protecting the property rights of the private enterprises that use the publicly
provided money— central bank promotes the creation and accumulation of wealth.
The alternative of allowing the purchasing power of a nation’s monetary standard
to erode over time— allow inflation to occur—
redirects a nation’s resources from

4 See James Gwartney, Robert Lawson, and Walter Block, Econom ic Freedom o f the World: 1975-1995,
Vancouver: The Fraser Institute (1996). A useful summary o f the book is found in “O f liberty, and
prosperity,” The Econom ist, January 13, 1996, pp. 21-23.


activities that create new wealth toward efforts to protect existing wealth from the ravages
of inflation and currency devaluations. If the wealth-redistributive effects become great
enough-that is, if the inflation rate becomes extreme-the monetary standard will be
abandoned by the citizenry, and a monetary standard that is outside the political
boundaries will emerge.
Historically, nonpolitical payments systems have come in the form of commodity
monies-such as a gold standard-although competing national currencies have been used
in recent times. More than two-thirds of the U.S. currency, for example, is held outside
the country, a trend that has accelerated in recent years. In the 1980s, the bulk of new
U.S. currency was shipped to Latin America, and in particular Argentina, where the dollar
is commonly used to settle ordinary auto and real estate transactions. Since the tumbling
of the Berlin Wall at the end of 1989, currency shipments to Eastern Europe and the
former Soviet republics have grown enormously as the dollar has become a readily
accepted medium of exchange in these emerging market economies. In fact, in 1994,
U.S. currency shipments to Russia accounted for more than half of all net foreign
currency shipments, and in 1995, gross shipments of U.S. currency to Russia are reported
to have been as high as $100 million per business day.5
The reason for the competing monetary system is clear. Because of the
seigniorage incentive of the Russian government, the Russian central bank continues to
debase the ruble. The implicit inflation tax on ruble transactions has provided the

5 See Richard D. Porter and Ruth A. Judson, “The Location o f U.S. Currency: How Much Is Abroad?”
Board o f Governors o f the Federal Reserve System, manuscript, June 1995.

incentive for Russian transactions to occur via a more efficient currency, in this case, the
U.S. dollar.
When we think of money as a public good that facilitates the operation of
markets, we begin to see that stable monetary standards need not be anti-jobs creation,
but are pro-wealth creation. This is the realization in a wide variety of market economies
around the world. Since 1991, seven nations have adopted an inflation objective as the
sole objective of their central banks.6 In large part, these governments had become
disenchanted with the role of the monetary authority as a fine-tuner of the economy. In
virtually each instance, the unintended consequences of misguided short-run “counter­
cyclical stabilization policies” were that the purchasing power of their moneys became
unstable, fluctuations in business activity grew worse, and wealth was eroded.
The evidence on wealth creation and inflation is incomplete, but there can be little
doubt that this view is gaining broad appeal. A recent study for the Bank of England
reported that if country characteristics are held constant, a 10-percentage-point increase in
average inflation reduces the growth rate of real per capita income by about 1/4
percentage point and lowers the ratio of investment to GDP by about 1/ percentage
point. These results imply that the long-run effects of inflation on a nation’s standard of
. .





living can be large when accumulated over a number of years. This work is consistent
with findings by economists at the Federal Reserve: “...evidence consistently points to a

6 This list includes Australia, Canada, Finland, N ew Zealand , Spain, Sweden, and the United Kingdom.
7 See Robert J. Barro, “Inflation and Economic Growth,” Harvard University and the Bank o f England,

Bank o f England Quarterly Bulletin.


negative correlation between inflation and the growth of productivity over the post•

Korean-War period in the United States.”



Economists will debate the details on how best to implement a stable price
objective for central banks. Indeed, such debates have been occurring in the United
States for many years now, as they have around the world. But there is one essential
element of this objective: governments must abandon the notion that unstable payments
inflationary payments systems— useful jobs creation strategies. The record
on this point is clear. To allow for the highest standard of living for its citizenry, the
central bank must provide the highest possible incentives for the creation and
accumulation of wealth, and that, above all else, means they must provide a stable
monetary system.

8 See Glenn D. Rudebusch and David W. W ilcox, "Productivity an d Inflation," Federal Reserve Board
manuscript, May 1994.