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Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation.
Our take on this quote:
The government can't conjure jobs out of thin air. Real growth doesn't come from tax or debt-fueled spending.
This quote from Ludwig von Mises, one of the leading economists of the Austrian School, critically examines the widely held belief that government spending can create sustainable jobs and economic growth. In his view, government spending doesn’t add new value to the economy - it merely redistributes existing resources, often inefficiently.
"Government spending cannot create additional jobs."
Von Mises challenges the notion that the government can generate net employment through spending. While it may appear that government projects create new jobs (e.g., infrastructure projects), the economist argues that this is an illusion. The government doesn't produce wealth - it simply redistributes existing wealth. Therefore, any job created by government spending is offset by the loss of jobs elsewhere in the economy.
"If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other."
Von Mises explains that when the government spends money, it must get that money from somewhere - either by taxing its citizens or by borrowing from the public. If it taxes people to fund a job-creating program, those taxes remove money from the private sector, where it could have been used to create jobs more efficiently through market-driven mechanisms. Similarly, if the government borrows from the public, it reduces the pool of available capital for private enterprises, which could have used it to invest and create jobs in more productive ways. Therefore, no net jobs are created by this approach, and jobs in the private sector are often sacrificed for inefficient government jobs.
"If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation."
The quote shifts focus to a different method of financing government spending: borrowing from commercial banks. When governments do this, it usually results in credit expansion, which means the banks increase the money supply by lending out more than they have in reserves. This creates inflation, as more money chases the same amount of goods and services, driving prices up. Inflation reduces the purchasing power of everyone’s money and undermines the stability of the economy, especially hurting savers and wage earners who see their real income shrink.
Von Mises makes a strong case for the limitations of government spending as an economic growth tool. He emphasizes that wealth and productive employment can only come from efficient capital allocation, which is best handled by the free market, not by government intervention.
According to von Mises, governments don't create wealth or value - they only move it around. Taxes or borrowing remove resources from the private sector, where individuals and businesses would likely spend it more wisely. Moreover, when the government borrows from commercial banks, it leads to inflation, which distorts the economy even further.
Job creation:
Von Mises suggests that job creation through government spending is a zero-sum game. Any employment gains in the public sector come at the cost of jobs in the private sector. Furthermore, public sector jobs tend to be less efficient because they are not subject to market competition and profit motives, leading to lower productivity and higher costs.
Inflation:
If the government chooses to finance its spending by borrowing from banks, it triggers inflation. As more money is printed and injected into the economy, each unit of currency loses value. Inflation is often described as a "hidden tax" because it reduces the purchasing power of people's savings and income, hurting especially those on fixed incomes.
Inflation can also create uncertainty, making it harder for businesses to plan for the future. This discourages investment and can further slow job creation in the private sector, compounding the economic damage.
Government vs. private sector efficiency:
One of the core arguments von Mises makes is that the private sector allocates resources more efficiently than the government. In the private sector, businesses compete for customers, forcing them to innovate, reduce costs, and improve quality. Government programs, on the other hand, are often bureaucratic, inefficient, and slow to adapt to changing circumstances.
Von Mises’ analysis can be seen in various real-world scenarios where governments have used aggressive spending programs or excessive borrowing, often with negative long-term consequences:
Japan (1990s - Present):
Following a massive asset bubble in the 1980s, Japan experienced a prolonged period of economic stagnation. In response, the Japanese government launched a series of large-scale infrastructure projects aimed at stimulating the economy. However, despite massive government spending, the economy remained weak. Critics argue that this is because the government was essentially borrowing from one part of the economy to prop up another, leading to little real growth.
Argentina (2000s):
Argentina offers a stark example of government borrowing leading to inflation and economic collapse. In the early 2000s, the Argentine government financed much of its spending by borrowing from banks and international lenders, which led to spiraling inflation. The country eventually defaulted on its debt, and inflation wiped out much of the middle class’s savings.
U.S. Debt and Spending (Present):
In the U.S., government debt has been rising steadily due to spending programs and borrowing. This has sparked concerns among economists and policymakers that if the government continues to expand its debt and inflate the money supply through central bank interventions, inflation could increase significantly, reducing real wages and eroding savings.
In today’s digital age, with the rise of decentralized currencies like Bitcoin, there are growing discussions about alternatives to government-controlled monetary policy. Bitcoin offers a form of "sound money" that is outside the reach of central banks and governments. It has a fixed supply (21 million coins), which means it cannot be inflated in the same way fiat currencies can.
For those who share von Mises’ skepticism of government spending and credit expansion, Bitcoin represents a potential solution - a decentralized currency that operates without government control and cannot be manipulated to finance unsustainable public spending programs.
However, critics argue that cryptocurrencies still face significant regulatory and practical challenges before they can serve as a widespread alternative to traditional currencies and financial systems. Read a free bitcoin course.
Von Mises’ quote is a clear critique of government-led job creation and spending programs. He emphasizes that government spending is ultimately a form of resource reallocation that does not create new jobs or wealth, but rather shifts them from one part of the economy to another, often inefficiently. Moreover, when governments borrow to fund their spending, especially from commercial banks, it leads to inflation, reducing the value of money and creating economic instability.
In today’s economic climate, these lessons are more relevant than ever. As governments around the world continue to borrow and spend in response to various economic challenges, von Mises’ warnings about the dangers of credit expansion and inflation remain a cautionary tale for policymakers and investors alike. The rise of decentralized currencies like Bitcoin adds a new dimension to this discussion, offering potential alternatives to the fiat money system and the risks of government-induced inflation.
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