The latest iteration of President-Elect Obama’s stimulus plan calls for 3 million jobs to be created or saved, of which approximately 20% will go towards government positions. For an example of how this has worked out at the state level, see Bill McGurn’s recent editorial on my home state of New Jersey. As usual, no economist or even rational, thinking human being could give sanction to a plan like this in good faith. If giving out jobs to people in government is a good solution to the unemployment problem in bad times, then shouldn’t the government “create” these jobs in good times too? But there is an even more fundamental question than this. Why should government create jobs for the sake of employment in the first place?

It is this question that underpins almost all of the government intervention in our lives over the last hundred years or so. The government is acting as if it is a divine central planner, with the ability to provide ample housing, healthcare (soon universal), credit, flatten market cycles and provide every type of moral-hazard-inducing insurance possible. It is in many respects one big Ponzi scheme where money is taken from the productive and paid out to a wide variety of special interests. The people in response have acted as complacently as the SEC in the case of Mr. Madoff.

If the government can carry out all of these functions in addition to fixing unemployment by simply creating government jobs, then why even have private industry? After all, the government has already monopolized its control of the money supply, and partially nationalized commercial and investment banks and automobile manufacturers. Why let the evil private businesses with their risk-taking, competition and potential failure ever enter into the equation? No, let’s sacrifice the free market to save the economy. Let’s have the government determine how labor should be optimally allocated, determine how much food, clothing and shelter each person should receive and which industries should grow and contract. After all, historically this has worked out quite well in the Soviet Union, Nazi Germany, fascist Italy and even relatively more liberal post-war Japan.

Sarcasm aside, this is something on which F.A. Hayek proved quite prophetic. Granted, I am no expert on Hayek, but having read The Road to Serfdom, it is clear that the problem of economic calculation is the reason the government cannot provide full or optimal employment, or any of its other ridiculous services without leading to utter economic ruin and ultimately revolution. No bureaucrat can figure out how to optimally produce and allocate goods and services, not only because he lacks the specialized knowledge, but because he is not subject to the price-setting mechanism of the market, nor is he held responsible by profit or loss. The government does not need to produce the best good or service at the lowest price to survive. In our particular mixed economy, the government’s economic calculus in attempting to socialize losses, pick winners and losers and “stimulate” the economy sows the seeds of its own destruction because it counters the very forces that led us to prosperity.

Legally, all one has to do is look at the Constitution to see that there is 0 justification for the government to be in the majority of the businesses it is now in. We are supposed to have a government with limited powers, created to protect individual liberty. It is for this reason that the government’s primary positive power granted by the Constitution is the power to defend (though incidentally we do have private defense companies that help with this function). The document is mainly however one of explicitly negative powers (to constrain government), in which without the clauses regarding “promoting the general welfare,” of the citizens, “the power to regulate commerce” amongst the states and the complicit loose-interpretationist judges, there is no way that the politicians could ever twist the language to fit their whims.

One of the little-spoken-of negative provisions in Article I, Section 10 of the Constitution should be given more attention by our elected officials. It reads “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts.“ How much more attractive would those muni bonds be if we were actually paid in gold or silver, as the founders, who understood the problems associated with fiat money intended? Ultimately, the politicians in our current malaise could do right by their constituents by spending more time reading the Constitution, and less time listening to Keynesians. For it is paper money and government we have, and sound currency and liberty we lack.