Friday, April 22, 2011

Public Vs. Private Sector: Not Two Sides of the Same Coin

Somebody asked me this question the other day, with regards to government jobs vs. private sector jobs:
Isn't it two sides of the same coin? Taxes make more gov't jobs and public services, which puts money in the economy. Isn't that the same as investments in corporations who provide jobs, etc...? Do you know why one stimulates the economy better than the other?
Here is my reply:

There are many ways to answer this question.  I'll go with the most simple one.  The private sector involves a feedback loop that incentivizes productivity and efficiency, and punishes waste and inefficiency.  The private sector is centered around making a profit.  And what is a profit?  It is the transformation of things of lesser value into things of greater value.  That is the essence of human progress, and the free market capitalist system quantifies it with money.  If you're doing work and you don't make a profit, it means you've transformed things of greater value into things of lesser value.  Whoever does that in the private sector loses money and eventually goes out of business.  The profit motive is a feedback loop that ensures that activities done by, and money invested in, the private sector will contribute to economic expansion, not economic contraction.

This feedback loop is not present in the government.  Unlike the private sector, the government does not generally have a competitor, and where it does (e.g. the postal service and UPS/FedEx), it does not compete fairly.  The private sector depends on customers making willful choices to buy from them or to buy from someone else who provides a better product or better value, and on investors making willful choices about where they think their money will produce the most value.  The government takes its money by force.  The government can never go out of business.  If it needs more money it simply confiscates it by force.  There is no punishment in the government for the action of taking things of greater value and turning them into things of lesser value; the government can (and does) do this all day, month, and year, ad infinitum, destroying wealth instead of creating it.

Even when it comes to creating jobs, not all jobs are beneficial to the economy.  If I pay somebody $100/hr to dig a hole and then fill it again, nothing will be accomplished by that work and eventually I run out of money.  If I pay somebody to go around breaking everybody's windows in order to create 10,000 new jobs in the window repair business, I haven't done a service to the economy; I have destroyed wealth instead of creating it.  The private sector has that feedback loop that ensures the jobs it hires people to do create wealth and grow the economy, because the private sector will only hire you if your work produces more value than what it costs to pay you; otherwise the company would lose money on your work and lose out to its competitors.  With the government, on the other hand, there is nothing at all stopping it from hiring people to do work that produces less value than the money paid to do it.

That is why money invested in, and jobs created by, the private sector stimulates the economy, and money/jobs in the government do not.

That is not to say that SOME jobs in the government produce value and create wealth.  But the federal government employs more people than the entire manufacturing, construction, and farming industries COMBINED -- and pays its workers significantly more than the private average.  Think of all the value created for our society from those private industries: just about everything you use, eat, wear, and live in every day.  Compare all of that to the things of value you encounter every day that are made or provided by the federal government.... there's really not much of that, is there?  There is no comparison.  We're spending way too much on government and that's a big part of why our economy is struggling.

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