Are Public Sector Jobs, by Definition, a Drain on the Economy?

Are public sector jobs by definition a drain on the economy?

Some would say that they are.  But I think there might be a false assumption in there -- one which comes from an unexamined assumption.

When a public sector job is funded via a tax on wages, or a tax on sales, or a tax on buildings -- things which are produced by human effort -- there is a burden to the economy. 

• Employers must pay far more than their employees receive in wages and benefits;
• purchasers must pay more for goods than the producers (including those in the distribution chain -- distribution is part of production) receive;
• owners of buildings and other improvements must pay an annual penalty in proportion to the value of those improvements.

All these taxes reduce the demand for what is taxed: work, goods (and, in some places, services), buildings.  Fewer jobs are created, fewer goods produced, fewer buildings built and maintained well, less expensive technologies are favored over more expensive ones.

And these are the taxes most of us think about when we think about how to finance public goods.

But suppose we got ourselves outside the smallish box of taxes we're used to thinking about -- those advocated by the neo-classical economists -- and looked more closely at the wisdom of the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George.

Suppose we thought about the effect of our public spending: effective public spending on goods and services that people value increases land value.

Good schools.  Paved streets.  Well-maintained streets.  Lit streets.  Plowed and cleaned streets.  City water.  Sanitary sewers.  Stormwater runoff.  Police, with well-equipped cars.  Fire departments, with trained professionals and the best of equipment.  Ambulances (ditto).  Hospitals with life-saving equipment and professionals.  Other public-health services.  Courts and jails.  Libraries.  Public health services. Social services.  Parks.  Playgrounds.  Highways (ideally with maintenance taking place at night or at least not during rush hour).  Bridges, well-maintained.  Buses, subways, railroads (passenger and freight).  Airports.  Beaches.  Utilities (more commonly owned by shareholders, but quite realistically municipally provided). Preschools.  Community colleges.  Colleges and universities.  Perhaps after-school activities for children.  A social safety net.  This list is incomplete, but each item on it is a fair example of what makes communities good places to live and worth paying to live in and conduct business in. 

The presence of each of these things increases land values within the area served.  It increases what landlords can charge tenants; it increases what houses and commercial buildings will sell for, without the building owner improving the building or providing additional services.

So does it make any sense to finance these things via taxes on wages?  On sales? On buildings? On imports? On personal possessions?  On cars?  On trucks and business equipment?  On business inventory?    None of these things are increased in value by the provision of public services and goods.  

What increases in value is land -- as everyone can chant, the three most important things in real estate are location, location and location!  Much of that is the availability of publicly-funded services.  (The rest can be attributed to the presence of the community -- drawn in large part by those services, but also by the beauties of nature, the harbors and rivers, the climate, other favorable conditions; to opportunities seen by entrepreneurs and nonprofits to provide commercial ventures and cultural amenities; to advances in technology and science such as air conditioning, mosquito control, fiberglass pleasure boats, etc.)

 

A few weeks ago (8/30/11), David Cay Johnston's blogpost at Reuters, entitled "Budget Costs That Raise Costs," ended with this example:

How can raising taxes put more money in your pocket? By increasing efficiency.

This year we paid $210 in higher property taxes to finance trash collection and sidewalk snowplowing. Purchased retail, those services would cost about $600. So we spent $210 to save $390. That translates into a savings of $1.86 for every dollar of increased tax. As an added bonus we have just one garbage truck a week down our street, not a different company’s truck everyday, and garbage cans on the street only on Thursday mornings.

What matters in public finance is not how much government spends, so much as what it buys with our tax dollars. But don’t count on the new “Super Congress 12″ committee to undertake serious cost-benefit analysis because cutting spending has become dogma and reality-based policies would be economic heresy.

I don't think DCJ has yet seen the cat, but he's certainly recognizing whiskers.

Would you be willing to pay $210 more in property taxes each year to have these services delivered to you by your community?  I'd guess that you might be very willing to pay $210 more in property taxes AND be willing to pay the seller -- and for 30 or 15 years, a mortgage lender -- more for the privilege of living in a place where these things are provided by the community, rather than just outside of town.    (If we paid for this via a tax on land value, the selling price wouldn't rise; and the cost of living would be held down.  If we pay for it by taxing wages, or sales, or buildings, we do burden the economy, just as the "small government" people tell us.  But they don't seem to consider the possibility of taxes which don't burden the economy.)   

There are some who would complain that private trash collectors and the people who specialize in shoveling the sidewalks ought not to have competition from the public sector.   They should all live in communities which feel this way.   And they might concede that others might choose to live in communities which provide these amenities efficiently, with people paid from the public treasury.