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No fate: Cut the unemployment rate

By Scott Gilette
web posted November 30, 2009

The unemployment rate has topped 10% for the first time in 26 years. While the American economy ostensibly is growing again, its prospects remain troubled and the unemployment rate will climb further before coming down again.

About 8 million people have lost their jobs since December 2007. This fact has deeply troubling social implications. We can't have over 15 million people officially unemployed with another 10-15 million underemployed or off the radar screen because they have stopped looking for work, and have "a more perfect union."

I offer four prescriptions for reducing the unemployment rate in the long-term. Truth in advertising: I acknowledge that three of the four prescriptions may make matters worse in the short-term. That's how serious the situation has become. However, I submit these policies would make a strong recovery possible in about a year and beyond, so that the economy can return to a 5% unemployment rate sooner than most would expect.

Drain the excess money supply out of the system

The Federal Reserve has printed trillions of dollars out of thin air in the last several years. I believe this is why the gold price has gone up so much. When the central bank prints too much money, every dollar loses value, including the ones in your pocket. That's inflation. 

While the inflation I expected hasn't reared its ugly head as of now, an increasing number of economists and forecasters, especially abroad, believe that inflation and a significantly weaker dollar are coming to the United States.

Columnist Jerry Bowyer has explained why the inflation is not yet here. "Because the money is stuck in the system. The Fed makes it and sends it to the banks. Meanwhile, the banks lend a little and keep the rest in their vaults. Why? They're afraid to lend. And they're afraid to lend because they still don't know the rules."

Once these banks start circulating this money, a dollar today will be worth 90 cents tomorrow, or 80 cents, or lower. This is the worst kind of burden on the poor imaginable. It also makes genuine economic growth almost impossible. Why work, save and defer rewards when any created wealth will be snuffed out?

Stop propping up failed institutions

Former Treasury Secretary Henry Paulson argued that if the massive injection of capital into the nation's largest institutions hadn't occurred, the entire economy would have collapsed. I generally agree.

But once the injection occurred, there was no reason for many of the ins benefiting institutions to remain in business. AIG should no longer exist. Neither should Citigroup, or Bank of America, or General Motors.

The assets of these institutions should have been sold off. Many national and regional players would have been happy to take the leftovers. Any remaining liabilities would reflect that these companies had to go bankrupt in the first place.  

Famed investor Jim Rogers has pointed out the absurdity of the government's bailout program:  "We are taking money from the competent and giving it to the incompetent. Then we are telling the competent that they have to compete with the incompetent." So the companies that did the right things are being penalized for the mistakes of the nation's most well connected firms. Indeed, I can't think of a time when so many powerless people have given so much wealth to a very small number of powerful people.
 
Japan has experienced twenty years of sub-par growth in part because the government propped up failed institutions to the detriment of everyone else. The United States must avoid that mistake.

Furthermore, the financial bailout has provided opponents of the free market system more ammunition than anything they have ever done themselves. This is a troubling trend, because it is market innovation that will get us out of this mess.

The only institution "too big to fail" is the United States.

Put a cap on government spending

I never agreed with deficit-hawks on much. A federal deficit equal to 3% of Gross National Product is not a serious problem, especially if the country is growing at a 3% rate.

But a deficit that is 10% of GNP? 1.4 trillion? That's way, way too high.

This means that government spending must come down.

First, no more stimulus packages. The government can provide a safety net during a time of need. But more stimulus means less economic growth, not more.

Second, discretionary spending must be kept below the rate of inflation. That includes the Department of Defense (which should experience the most cuts), the Department of Education, the Environmental Protection Agency, the Central Intelligence Agency, the National Endowment for the Arts….everybody has to sacrifice.

Finally, and this is the most difficult challenge, non-discretionary spending (Social Security, Medicare and Medicaid) has to decline in the next decade. Social Security benefits have to be means-tested. Increases in yearly benefits have to end. The retirement age has to be raised. These prescriptions are political suicide. But as a nation, there is simply no way to get around these difficult choices.

If the government sticks to a combination of fiscal restraint and entitlement reform, the spending issues will disappear. We will even be able to…

Cut taxes

There is no point in extolling the virtues of cutting the capital gains tax or estate tax across the board at this point in time. While these taxes are actually counter-productive in generating revenues, this White House won't cut them, and it would be politically useless to try.

However, there are ways to decrease the taxes on the people that candidate Obama had promised, while providing true stimulus.

First, cut payroll taxes by 50% for employers. Every company has to pay a social security tax equal to what the employee already pays. Reducing this burden is a guaranteed jobs creator.

During the campaign, President Obama also suggested that he would cut capital gains taxes on small businesses. At the time when these firms are the most vulnerable to external factors, this measure is sorely needed. A corporate rate tax cut on small firms would provide an immediate boost as well.

This is a long-term recession and it will not go away soon. But it is not inevitable that the "new normal" of double-digit unemployment has to be permanent. Many commentators and economists in the early 1980s believed that high unemployment was the wave of the future. With the right policy mix, it wasn't, and the economy experienced almost uninterrupted growth for three decades.

We have it in our power to get more people back to work. It's time to make the tough decisions that will make this happen. ESR

© Scott D. Gillette, 2009

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