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The jobs solution
The unemployment numbers that came out today were pretty sobering. We now have 15 million people out of work, twice as many as when the recession started. Another 263,000 jobs disappeared last month, and the unemployment rate hit 9.8%. What to do?
Two prominent economic observers have the same answer -- more government spending.
Here's Marketplace Commentator Robert Reich:
Who's going to buy the stuff we make or the services we provide, and therefore bring jobs back? There's only one buyer left: The government.
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.
Exactly, says New York Times columnist Paul Krugman:
Anyone who thinks that we're doing enough to create jobs should read a new report from John Irons of the Economic Policy Institute, which describes the "scarring" that's likely to result from sustained high unemployment. Among other things, Mr. Irons points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty -- and that there's overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives...
But can we afford to do more -- to provide more aid to beleaguered state governments and the unemployed, to spend more on infrastructure, to provide tax credits to employers who create jobs? Yes, we can.
As in -- yes, we can create more debt. Back to Reich:
The problem isn't the debt. The problem is just the opposite. It's that at a time like this, when consumers and businesses and exports can't do it, government has to spend more to get Americans back to work and recharge the economy. Then - after people are working and the economy is growing - we can pay down that debt.
But if government doesn't spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.
I understand the argument -- an economy that sits still too long suffers from atrophy. And certainly we do need to encourage businesses to hire or to start up. But that doesn't necessarily mean we need more government spending to make it happen.
Your thoughts?
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Looking at the broad picture the problem is truly complex and overwhelming. Ultimately the problem is allocation of resources. Resources were irresponsibly and unreasonably diverted to financial manipulations and consumption without domestic capital benefit (read:imports). There are two solutions to this, both radical. Reduce consumption and imports to the extreme; and take draconian measures to extract needed resources from economic criminals and companies that are not producing benefits for ordinary Americans. Does this sound too radical? Will it when we have 15% or more unemployment with the same scenario?
Governments and banks created the expansion, which led to a red hot employment market - in fact an unnaturally low unemployment number. Now the bubble has burst and we have greater unemployment. The market equilibrium for employment is being "meddled" with by government. As a result, I'd suggest less government involvement in the economy not more.
Governments should encourage business by reducing taxes and providing incentives for businesses to hire employees. These tax cuts and incentives could be established quickly. Then businesses would invest capital on things people want/need, thus the proper allocation of capital for goods and services would occur in the economy. These proper investments would drive the job market to a lower, and sustainable, unemployment number, which would be in a market equilibrium.
Unfortunately, Government is leading the charge to reduce unemployment. It's taking our tax dollars, and printing money out of thin air, to invest in "projects" which may not produce the desired results - lower unemployment. These projects get caught up in committees, politics take over and then finally an investment is made in a project which is unfair, supports a small group (remember the bridge to no-where??) or does not produce the jobs it said it would. In any event, Government involvement will turn out to be a miss-allocation of resources. These miss-allocations will cause wide swings in unemployment until government stops meddling in the economy and turns over the job creation responsibility to the private sector.
What incentive do companies have to expand and/or invest in America right now? Larger companies can take a "Global Approach" and invest in other countries on there terms. Smaller companies generally aren't in a position to expand, even if they were it wouldn't change the overall picture unless there were 100 such companies. This is why I can't trust "The Market" to magically fix everything. The problem isn't that government is taxing them too much, the problem is that businesses don't see the gains made by expanding and reducing taxes by 5-10% isn't enough of a carrot to get them to invest.
This last bubble we had wasn't based on anything real. It was based on perceived value of home prices, the rest was a highly-complicated shell game to hide any real risk. The tech boom of the '90s at least left an increase in computer technology. What did this boom leave except a lot of people in-debt, homeless, and now jobless?
The Fed has made $13.2 trillion available (loans, guarantees, gifts) to financial institutions too well connected to let fail. They have taken toxic assets as collateral. These banks, etc. get 3% tax free from uncle Ben for doing nothing. They have no need to loan money especially in a declining economy. The purpose is to make unsecurted creditors whole at public expense; the Feds and the Obama regime's hope is that the economy will bounce back and the toxic assets (which banks do not want to sell..remember Geithner's PPIP?) will return from the living dead and balance sheets will be rebalanced.
But of course this does to help other Americans. The banks do not even need to provide workouts for underwater mortgages. So why no a WPA program, as Reich suggests, or programs to put people to work in ways that repair or create existing public / capital goods infrastructures? Those wages would, in turn, give people money to spend that would help the economy and provide a less risky environment for banks to loan. Why?
Part of the answer is that the American economy has changed. According to Simon Johnson (The Quiet Coup http://www.theatlantic.com/doc/200905/imf-advice#) during this decade 41 percent of domestic corporate profits were 'earned' by America's financial sector. This began with the Raagan regime and expanded in the years since. The financial sector became an extremely lush source of campaign funds adn congress obliged by repealing Glass Steagal and proscribing regulation of derivatives both signed into law by Clinton in 1999. Congress wants to breathe life back into its golden goose.
The fact is that Wall Street largely financed Obama's campaign and he's not about to forsake them much less claw back their fraudulent derivatives gains over decades. It's heads they win tails we lose; they keep their gains while our government socializes their losses. Louis XIV would find much to approve in American democracy.
I think the "early adoption" of 21st energy and health care reform is capable of putting the job market on a solid ground. As a major driver, IT industry stalled and stranded in a game industry for the lack of 21st energy policy over the stretch of two wars needs to evolve into the all but indefinite energy, medical, and academic industry where the investors are eagerly waiting for policy-makers to act now, which I guess is why the far-reaching and long overdue health care and 21st energy bill have come into focus.
Government spending is the result of simple market economics. I am surprised that so many people miss this (very obvious, IMO) point:
The market invests in government.
There is huge, global demand for government bonds by investors. The money goes into bonds, and as basic market economics dictates, the sector with the investment grows. The solution? Pretty simple:
Stop investing in government debt and invest somewhere else. The government sector will stop growing and something else will.
In the meantime, the only way for all that investment in government to get into the private economy is for government to spend the money.
I'd like to do a survey of conservative, anti-government types and ask how much of their retirement is invested in big government.
It's more of a supply/demand thing. If the market demands something, then supply tends to naturally adjust to meet the demand.
There is a huge demand for government debt as an ivestment vehicle. There are even cases where there are policy or legal requirements to invest in it, like for pensions and such.
As long as it's easy for governments to borrow money at relatively low rates, sometimes even below inflationary rates, they're goin to keep doing it.
That seems to be more of a function of the Fed. If the Fed is buying up a huge amount of government debt (printing money), then it would be the fed that is artificially creating this strong demand. Hence the two institutions that have lied to us in the past are walking hand in had down the same path.
It is true that demand is currently high, but I can't wait to see what happens when the Fed stops buying. I have a feeling that foreign countries and citizens won't be filling that much demand. Hence, it's the Fed and the President that want debt.
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