Revenue versus Overhead

When President Obama says that his economic stimulus package is creating jobs, that is true. Several million jobs were created or saved by that spending.

When Senator Brown says that no jobs were created, he is also speaking a truth. If you create or save 2 million jobs here, but you lose 3 million jobs there, then your net is a loss of 1 million jobs.

But both politicians miss the point. It is very important what type of jobs you create (or save). We need to grow jobs that provide income, not expense. Let me explain.

From an economic point of view, the government is overhead. It siphons off a percent of our wealth each year to perform services that society deems important and necessary. Where that line is drawn is what we often debate about.

But in the bigger picture, any jobs that we create or save in the government do not contribute to our wealth. In fact, it is just the opposite. They are creating additional expense to our society.

Government workers, therefore, do not "pay taxes." They are given tax money as payment for their services. If the government takes back some of that money, it is not revenue but a (small) reduction in expense.

To illustrate my point, let me hypothesize the typical family of four: Dad, Mom, Sister and Brother. (Obviously, this family is challenged when it comes to names.)

Dad and Mom work in the private sector and earn income. Sister and Brother do chores around the house and are paid by Dad and Mom.

Dad and Mom earn income and pay taxes. Sister and Brother are government workers who are overhead. What they earn is a cost or expense to the family, not income.

Let's say Sister takes out the garbage and Brother feeds the pets. Each child is given $10 per week for their chores. This $20 cost comes out of Dad and Mom's paychecks. We'll call that taxes.

Every year, Sister and Brother get a raise because they get older and do a better job. So after a few years, their weekly pay goes to $25, then $30, then $35, then $40.

Now, along comes a recession. Dad and Mom's income is cut and their expenses are going up, so they sit down with Sister and Brother and explain that they can no longer afford their $40 weekly chores cost, and its $5 per year escalation. Yes, we still need the garbage out and the pets fed, but somehow Mom and Dad will have to figure out another way to afford this growing expense. So they propose that the cost be capped at $30 per week.

Sister and Brother object. Every year, they've gotten a raise. Now Mom and Dad are asking them to do the same amount of work for less money. They are upset.

So along comes Grandpa and Grandma. They are willing to loan Mom and Dad $15 per week, so that Sister and Brother can get their normal raise. This is called the federal stimulus, and Mom and Dad take the money.

So now Sister and Brother are making their normal $45 per week. There has been no cutback or layoff. Mom and Dad continue as before, paying Brother and Sister, but now they have this growing debt to Grandma and Grandpa, with no plans to pay it back. Grandma and Grandpa don't seem too concerned, and haven't even asked for a repayment plan. After a couple of years of this, Mom and Dad owe Grandma and Grandpa hundreds of dollars.

Rather than tightening their belt as a family, they decided to take the loan and keep services and cost the same. They "saved" two jobs. But unfortunately for the family, these two jobs were overhead jobs, not jobs that provided income. And the cost was being paid for through a loan that will have to be paid back.

Now you might wonder whether Sister and Brother contribute to economic prosperity. Well, they don't. Their "net" income is zero. Any "wealth" that is created by their work is being consumed by the debt incurred by the family to Grandma and Grandpa. They may save money to society by doing their job more efficiently, but they are not creating wealth.

Are Sister and Brother's jobs important? Of course they are. They are contributing to society and doing necessary work. But society has an obligation to its taxpaying members to control overhead costs. That is what we have lost in our current debate. We are talking jobs, but we are focusing on the wrong ones. We need to focus on private-sector jobs, not public-sector ones.

Let's say Grandma and Grandpa, realizing the great work Sister and Brother have been doing, propopse a huge raise. Mom and Dad agree, and decide to take on another $100,00 a year in debt in order to boost Sister and Brother's pay to $50,000 a year each. How much wealth has been created?

ZERO.

Brother and Sister now have "good jobs at good wages," but their effect on the family is exactly the same as it was before. Only now, the family is taking on $100,000 a year in debt that it must pay back, with interest.

Even if Sister and Brother start paying Mom and Dad some rent money (they are getting older, of course), there is still no income being generated by these payments. All of this is Mom and Dad's loan, that must be repaid. So no matter what wages the kids earn, it is not actual revenue to the family. If you calculate Sister and Brother's "rent payments," the family is still not earning revenue.

In the real world, government workers are unable to pay taxes. Whatever they pay is just a bookkeeping entry, reducing their expense to taxpayers. No revenue is generated by their activities, no matter what they are paid.

If you borrow money to increase your expense, you aren't creating wealth. You are just increasing your overhead.

So when you go through this exercise and begin to realize why hiring and retaining more government workers is a bad idea and doesn't create wealth, you start to wonder why President Obama and his group of bright economists are pushing this solution. Don't they realize that government workers are overhead and don't create wealth for society? They must.

So what reason would they have to focus on hiring and retaining more government workers when society can't afford it?

Could it be that these same government workers are a solid block of voters who will continue to support politicians who protect their selfish economic interests?

What do you think?

Comments

Feeding the machine.

It has to do more with the growth of government that votes overwhelmingly democratic. It is a voting block lined up to the trough.

Nice article.

This is the part where I tell you about myself. My name is Ken Silva. I am married to a woman who deserves way better than me. However, what I lack in positive qualities, I make up for in hustle. We have two kids who are keeping us busy. I have lived in Acton since 1998. My kids go to school in Acton and they bring richness and life to my world. I recently stepped out of a software company and have started a fitness and wellness business called Personal Triumph. Politically, I am not an ideolog so I do not have an agenda. I am bored by politics that has a “win at any cost” mentality rather than one that serves the common good.