I’ve been thinking a lot about the job problem in this country. Jobs are the problem right now. One in eleven Americans is unemployed, the knock-on economic effects are making a bad deficit situation worse and a long-term culture of dependence is being created. I am under no delusion that a blog post will change anything. But I thought I’d write up about 2000 words of thoughts on the subject so you’ll know where I’m coming from.

The fundamental problem with fixing the job situation is that we have two parties absolutely devoted to failed policy. On one side we have the Republicans insisting that just a few more rounds of Bush-style demand-side tax cuts will get things moving. However, there is very little evidence that these would help, even if we could afford them. We know what the Bush tax cuts did for jobs: jack.

The Bush tax cuts were followed by low GDP growth, negative median wage growth, and little job growth. Even before the Great Recession, growth in the Bush business cycle was the weakest since World War II. And the cuts cost about $2.6 trillion between 2001 and 2010, according to the Economic Policy Institute—adding to a debt future generations of taxpayers will pay for, plus interest.

To be fair, Sarbanes-Oxley played a role here as well. But the record is stark — one of the weakest economic booms since World War II and the tax cuts distinctly failing to “pay for themselves”. Tax cuts can pay for themselves when you’re cutting a marginal rate of 97% (Kennedy) or 70% (Reagan). The don’t pay for themselves when the marginal rate is in the 30’s or lower. No one is quite sure where the Laffer Curve turns over, but it’s not at 0.

On the other hand, we have a bunch of Democrats calling for more stimulus spending under the Keynsian theory that … actually I’m not sure what the Keynsians are on about. The stimulus failed and their response is to claim it wasn’t big enough — the equivalent of saying we’ll really really fly if we just jump off a taller building. Will Wilkinson called it a religion, a belief that government can create an infinite multiplier of loaves and fishes. Given the immunity of the Keynsians to fact, that’s a fair description.

So what do we need to do to get the economy moving?

Deficit Reduction: Bruce Bartlett:

Government mainly affects savings not so much through tax rates as through the budget deficit, which constitutes negative saving. When government borrows, it takes funds out of the economy that would otherwise be available to finance domestic investment. Alternatively, the U.S. must borrow more from foreigners, which increases the trade deficit. In the national income and product accounts, the trade deficit is subtracted from GDP, thus lowering growth.

The bottom line is that neither taxes nor spending by themselves are the most important government contribution to the investment climate; it’s the budget deficit. Consequently, a reduction in tax revenue which raises the deficit is unlikely to stimulate domestic investment because more money will have to be borrowed from abroad. Conversely, a tax increase dedicated to deficit reduction could well be stimulative, as was the case with the 1982 and 1993 tax increases. Contrary to Republican dogma, rapid growth followed on both occasions.

But, scream the Keynesians, austerity kills! Look at Ireland! Look at the UK!

OK, assholes. Let’s look at Ireland:

Ireland was the first of the debt-plagued European countries to cut government consumption significantly in 2009, mainly by reducing government paychecks from 12.3% of GDP in 2009 to 11.8% in 2010.

While such gestures toward fiscal frugality lasted, the country was rewarded with a tolerable risk premium on government bonds. The yield on 10-year Irish government bonds was still 5.3% as recently as last August, compared with 10.7% in Greece. This May, the interest on Irish bonds reached 17.6%. What went wrong?

Back in June 9, 2010, I wrote that “unlike Greece, the Irish economy is showing encouraging signs of recovery.” Ireland’s real GDP had increased by 1.7% in the first quarter, with an 11.7% quarterly rise in industrial production. Manufacturing output increased 29% from November 2009 to July 2010, thanks to growing exports.

Ireland tanked shortly after, which the Kenysians blame on austerity. To them, the logic is inescapable — Ireland cut spending, the economy crashed, QED. They leave out the intermediate step, when Ireland did was Iceland refused to do — bailed out foreign investors in their banks and quadrupled their debt overnight. It was an incredibly stupid move that the EU bullied them into. Claiming that austerity caused Ireland’s ongoing economic woes is like claiming that Mexico won World War II. Yeah, they contributed, a little. But let’s not ignore the bigger players.

OK, OK. But certainly the UK is fucked because of … what was that?

Unemployment is falling at its fastest pace in a decade, official figures reveal, in a boost for George Osborne as he prepares to deliver his Mansion House speech. The Office for National Statistics (ONS) said the number of people unemployed fell by 88,000 in the three months to April, to 2.43 million — the largest drop since the summer of 2000. The unemployment rate was 7.7%, down from 8% three months earlier.

The UK has gained 100,000 private sector jobs even as the government has cut 24,000. The recovery is still fragile and could crumble underneath them. But if we had similar numbers in the United States, the President would be turning cartwheels on the White House lawn and prank-calling Mitt Romney (“Hey Mitt, heard you’re unemployed, hahaha.”). Canada and Puerto Rico have followed this model as well.

The ultimate example here, of course, is Germany, which refused to engage in a stimulus despite pressure from the Administration. I’ll have more to say on them later. But I want you to savor this — at least two, possible more European welfare states have righted the ship while keeping their deficit under control. According to both the Keynsians and the Norquistians out there, this should be impossible. Without stimulus spending or tax cuts, you can’t get an economy moving. But the example of these countries belies this. Hell, the example of our own country in the 80’s and 90’s show this to be false. Both decades saw tax hikes; neither saw any stimulus (the GOP filibustered Clinton 1993 stimulus bill). And yet — miraculously — we recovered. Recovered enough that we could later ease the tax burden.

The Tax Code: Despite my aversion to yet more tax cuts, overhauling the tax code would help a great deal. The tax code, because of its complexities, imposes $200-300 billion of deadweight loss on our economy every year. Cutting that in half would be the equivalent of a permanent and massive tax cut. Reagan’s 1986 tax hike was eased by tax reform, which more than compensated for the economic hurt of higher rates. American corporations spend more time figuring out the tax implications of their business decisions than the business implications of their business decisions. Does this strike anyone as healthy?

The most important thing is to broaden the tax base. Our income tax has become highly dependent on the top earners, who now pay almost all of the tax. This is a problem because when the economy is doing well and the rich are getting seven figure bonuses, revenues boom and governments spend like mad. Then the economy stalls, the rich make less and revenues crash, creating a gaping budget hole. Coburn’s idea of increasing revenue by closing loopholes and tax credits is the right one. It’s not just that it bring in more revenue, it stabilizes the revenue by making it less dependent on a few key economic sectors.

The tax code has also contributed to numerous bubbles, especially the housing bubble through the mortgage interest deduction and the home buyer tax credit. The last thing we need is the government stimulating another bubble — this time in green tech — through either direct spending or tax breaks.

There are other anchors on American business as well — notably the failure of the Administration to enact free trade agreements and the hideously awful Sarbanes-Oxley law. Both need to be dealt with as well.

Our regulatory structure also needs help. How do we expect to build a green economy when it takes a decade just to get the paperwork done for a new power line? Congress should create an agency specifically designed to identify regulatory problems. The idea is that a business could go to this agency and say: “Here — this is the law that’s holding everything up. This is why it’s taking us two years to start a business instead of two minutes. This needs to be fixed.” And Congress would fix these not with waivers doled out to powerful industries but with a repeal that benefits everyone. The most important business to help are the ones that don’t have lobbyists.

The German Model: You can read here about what Germany did to make their economy healthy. It’s a long post, but the gist is that Germany made jobs their sole focus. They enacted provisions to make sure that people stayed working. This meant reforming their unemployment system so that people had to take any job they could find, even if it was “beneath” them. Their unemployment system focused on finding people jobs — any jobs. They also made it easier to hire and fire workers.

I’m not so sure how well this would work here. Our unemployment benefits aren’t as generous and a government job-matching service isn’t that useful in the internet era (and our government would inevitably find a way to fuck it up). But the philosophy — a focus on jobs — is the right one.

One thing we should do it make it easier and cheaper to hire people. The problem is that everything this Administration has done has made it more expensive to hire people. From health insurance mandates to supporting Davis-Bacon mandates to raising the federal minimum wage, they have made it more and more expensive to hire people. And they’re surprised that people aren’t hiring.

The solution seems simple. First, suspend Obamacare provisions or lighten them by allowing cheap high-deductible insurance and HSA’s to qualify (the latter, in my opinion, having the added benefit of fighting rising healthcare costs). Second, suspend Davis-Bacon provisions in federal spending. The Democrats seem to think that 100 jobs at union wages is better than 120 jobs as sub-union wages. I don’t see that. The other thing we could do is lower the “employer contribution” on Social Security and Medicare. Obama almost did this, but decided to cut the employee contribution instead — yet another failed supply-side tax cut.

If you make it easier to hire people, more people will be hired. Take it from a rocket scientist — this isn’t rocket science.

So to sum:

  • Close the deficit, even if it means broadening the tax base.
  • Overhaul the tax code.
  • Repeal Sarbanes-Oxley.
  • Sign the pending free trade agreements.
  • Create a process to identify and remove the most damaging regulatory provisions.
  • Suspend Obamacare or allow HSA’s to qualify.
  • Suspend Davis-Bacon provisions.
  • Reduce the employer contribution on payroll taxes.

I’m not a complete moron. I don’t expect all of the above to happen, certainly not on my suggestion. But we are moving on the first goal. There are rumblings on the second and fourth. And each goal we move on multiplies the effect of the others. If you close the deficit, signs the FTAs and overhaul the tax system, the combined effect will be greater than any of them.

Anyway, those are my thoughts. And I’m judging candidates based on them. Mindless anti-tax rhetoric doesn’t impress me — Pawlenty’s proposal is especially ridiculous. What impresses me is someone looking directly at the issue — thinking in terms of how we make it easier for jobs to be created. When one of our six hundred Presidential candidates gets there, I’ll let you know.

Update: Heh.

Comments are closed.

  1. AlexInCT

    On one side we have the Republicans insisting that just a few more rounds of Bush-style demand-side tax cuts will get things moving. However, there is very little evidence that these would help, even if we could afford them.

    You seem to have a problem with the reality that jobs get created by people investing their money and wanting to grow their businesses. And people get this incentive when their government isn’t punishing them harshly by taking away a great chunk of that cash. tax cuts stimulate investment and growth because it works on the basic principle that when a man believes his work will yield him a good reward, he will do more of it. The other party’s elitists believe government creates jobs, the nonsense that other people – not them of course, because they are better than the peasants after all – that want more of their own money are greedy and evil, and that all businesses should double as make work programs and honey pots for their big government schemes. In the end you end with things ranging from the extremes of North Korea to Greece. And anyone that tells me what about the other European nations that are better off than Greece, simply hasn’t grasped the concept that Greece is just leading the curve on the reality that eventually you run out of other people’s money. Government driven economies aren’t just inefficient and always a 10 minutes late to an emergency that needed attention immediately, but are ripe for abuse by the elite class in charge.

    I am not saying the republicans are that much better than the democrats, but they at least they understand that when government gets too large and in the way of the economy, it is going to go bad. Also, and this is a big deal, they are only dangerous in that they try to legislate morality and not “social justice”. The first one can transparently be seen as idiotic a thing that more often than not doesn’t really change behavior anyway. The second one has killed over 100 million, enslaved billions in misery if not outright prison countries, and made the elite pretending to be fighting the powerful, rich, or both, beyond the wildest dreams of past monarchs or emperors. And it’s soft variants adopted in the west are about to plunge humanity back into another such dark age, as our elites use the made up “crisis du jour” to steal more of our money and freedoms, not to do anything of value, but simply to extend the time in power they have before the house of cards their insanity has built comes plunging down.

    Republicans are a bad choice for me, but democrats since the fall of the USSR are not any kind of choice for sane people.

    You want to create jobs Hal? Get government OUT of people’s pockets. As long as business owners believe this government is both unpredictable and sees them only as a piggy bank to raid, businesses will not hire anyone. Even when they could be doubling or tripling their profits right now they are not hiring. Tell people you get to keep what you work for, and that government is out of the business of using “Social Justice” or “Global Warming” as excuses to raid their wallets, and watch things change. Society will take care only of those that truly need it and able bodied people will either work or suffer the consequence of that choice. The only thing people are entitled to is the freedom to pursue their dreams. Not healthcare, not a comfortable (or otherwise) life at the expense of the productive, and nothing from a government that steals twice as much to enrich its bureaucracy and elite, to buy the allegiance of the perps. As long as those with the philosophy that government makes jobs and is in business to fix whatever invented injustices they can use to justify up heaving the status quo so they can take power – and have no doubt this is about them and getting more power – and lock their hold on it, do not be surprised the economic situation will not better despite any and all efforts.

    If anything, the housing market implosion and the Greek situation should be a wakeup call to those that still hold onto the idiotic beliefs that government is going to right all wrongs and injustices and that we all should finish as equals.

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  2. hist_ed

    Alternatively, the U.S. must borrow more from foreigners, which increases the trade deficit.

    One little quibble-at the moment we aren’t borrowing too much from foreigners-we are printing money like a banana republic. The Fed has been buying US debt as part of its “quantitative easing” and is now talking about QE3. If we ever stop doing this, it will be very interesting to see what interest rates we have to offer to bet people to buy our debt. It could get very very bad very quickly.

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  3. loserlame

    I lost my best job, ever, one I’d held for nigh 10 years, thanks to ancient, storied, regal, fair and balanced *CANADIAN* telecom giant Nortel wasting so much money on benefits until not even a flashy globe-trotting European CEO could fix it anymore.
    I’ve been moving from one temp job (“lucrative 6 month assignment” = 4 days) to another for a while now, and, as Obama has proven wholly ineffective at creating jobs, or getting me free health care in the 3 years since I voted him to do so, so I’ve taken to asking sundry rich persons publicly in touch with the suffering masses, like Michael Moore, to give us some change for a while longer – keep government out of charity. No such luck so far.

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  4. loserlame

    Making jobless benefits less generous has upped the incentive for the unemployed to look for work. “The search intensity of the unemployed has increased, because it’s become more painful to stay unemployed,” Sabine Klinger, an economist with Germany’s Institute for Employment Research, told The Lookout.

    Which is why thinker poets took to calling Merkel a Nazi / Zionist oil puppet. The truly suffering masses speak the truth. The Internets are awash with expert proof of her “creds”

    This meant reforming their unemployment system so that people had to take any job they could find, even if it was “beneath” them.

    This has always been a big issue with Krauts and its pretty remarkable that Merkel achieved this.

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  5. Hal_10000 *

    Alex, you are exactly illustrating the point — that tax cuts move the economy has become dogma, not thought. We’ve had four waves of tax cuts in the last ten years and what has it done? Produced a weak recovery for a few years. It reminds me of the old Marxists: I know it doesn’t work in practice, but does it work in theory?

    Incentives matter and, all things being equal, low taxes are good. But things are not equal. Current taxation is 15% of GDP, about 40% lower than what is needed just to maintain our existing commitments and 25% lower than the historical baseline. Why aren’t we in boom times?

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  6. CM

    as our elites use the made up “crisis du jour” to steal more of our money and freedoms, not to do anything of value, but simply to extend the time in power they have before the house of cards their insanity has built comes plunging down.

    Yet another example of someone else bringing up climate change.

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  7. CM

    Good on her. It should certainly be more painful to stay unemployed. (Although I think that’s pretty much the case anyway – who the hell, beyond those few that really are terminally lazy, really wants to live the sort of pitiful existence that the dole gives you?)

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  8. AlexInCT

    Alex, you are exactly illustrating the point — that tax cuts move the economy has become dogma, not thought. We’ve had four waves of tax cuts in the last ten years and what has it done? Produced a weak recovery for a few years.

    If you choose to ignore the problem of spending like you seem hell bent to Hal, of course the tax cuts don’t pass muster. The fact is that every time there have been tax cuts they have had major positive impact on the economy. Reagan’s cuts doubled what the government ended up taking, in less than 6 years of all things, by growing the economy. Democrats controlling the house trippled spending in that time. Bushes cuts prevented the 9-11 slump from being a full blown depression. Republicans spent more than government was taking in for 4 years, then Pelosi & the donkeys took over congress, promising to stop that spending, but then, in just 4 years, pissed $5.3 trillion more dollars down the drain, with promises of trillions more to come. And nothing to show for it but the idiotic excuse that the problem was the tax cuts and not government spending like they couldn’t care about tomorrow.

    It reminds me of the old Marxists: I know it doesn’t work in practice, but does it work in theory?

    Like the old marxists you mention, you refuse to focus on the fact that the problems aren’t caused by the tax cuts but the fucking assholes that use any and every economic upturn as an excuse to double down on spending to grow government. Even more important is the fact that you are advocating we let them raise taxes on us yet again, while leaving the door for them to just increase spending right along with it wide fucking open. There is no compromising here. Unless they stop the spending and cut deeply, they shouldn’t be allowed to take more of anyone’s money. And if they do take more money, it needs to be to pay down debt. Not to grow government yet again.

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  9. AlexInCT

    Andrew Sullivan? Seriously? I avoid that shit. He is insane. And that people still read him for anything other than laughs, brings into question their sanity. Using him as a source is akin to using Bozo the Clown as one.

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