How to solve the unemployment problem in America

There are two theories for solving our current unemployment problem:

  •  Free Market (Austrian)
  • Macroeconomic (Keynesian)

One works, the other doesn’t.

  •     The first concentrates on the problem:  Employers are not hiring.
  •     The second concentrates on the symptom: People are not being hired.

The Free Market solution does not involve Federal spending.  The dollars are low, but the political difficulties are high.  We have not yet tried it – in fact what we have done in the past two and a half years has made things worse. The Macroeconomic solution is very expensive: more than a trillion dollars has been spent with no positive results. We are deeply in debt and committed to more spending with no easy way out.

To understand the situation, you have to go back to Keynesian theory.  All economists in the Federal Government today (and most of those in our universities) believe in Keynesian theory.  Keynes taught that unemployment is caused by a failure of consumer demand: people were not spending enough. Solution: spend a lot of government money. Put that money into the hands of consumers. The spending will encourage consumers to buy products and services, thereby putting more people to work. Keynes never spent much time discussing the employers (the entrepreneurs). He did not understand them. He felt they were motivated by “animal spirits”.

Free market economists teach that entrepreneurs are the driving force in an expanding economy.  Find a way to motivate employers to invest and hire workers and you will solve the problem. Entrepreneurs are interested in making a profit. Workers are a resource that can help entrepreneurs to become profitable. Find out ways to help entrepreneurs to expand their businesses.

Look at our situation today from the standpoint of the entrepreneurs.  For the past 2 ½ years they have faced constantly increasing regulations, uncertainty concerning their future, and the knowledge that the government is planning to take away any profits that they will make through further investment. For instance: In his April 13, 2011 speech President Barack Obama made it clear that although he agreed to an extension of the Bush tax cuts at the end of 2010, he will resume his fight to end Bush’s tax cuts for people making more than $250,000 a year.  Who are these rich people?  The entrepreneurs of America.  What is the situation today?

Review of the past 2 ½ years of Macroeconomic Failure 

Unemployment continues to at 9.2% in 2011. It shows no signs of getting any better. Since 2009 we have lost a total of 3.6 million jobs – and continuing job losses in the next few months are predicted.

It is much worse than previous recessions. We lost a total of 1.6 million jobs in the 1990-1991 recession before the economy began turning around and jobs began increasing; and we lost a total of 2.7 million jobs in the 2001 recession before it ended.

Macro Solutions that did not work 

Spending solutions:  Since the recession began, the Obama Administration and the Federal Reserve have attempted to solve the unemployment problem using a number of macro-economic high-cost solutions that have not worked. These include the $870 billion stimulus package, very low interest rates, and massive injection of cash by the Federal Reserve which has boosted bank reserves so that they could make loans. There have been other efforts such as Cash for Clunkers, Cash for Home Buyers, extension of unemployment benefits to 99 weeks.  We have tried almost every macro solution that the Administration could think of. Nothing seems to work.

Regulation Restraints: At the same time, almost as if they were unrelated to the unemployment situation, the past 2 ½ years have seen the issuance of hundreds of new Federal regulations that make the hiring of new workers more difficult and unprofitable. These regulations have introduced uncertainty into the budgets of those who might hire new workers. These regulations include EPA edicts, drilling moratoriums, permit delays, declaring vast areas of the US and our surrounding waters off limits for present and future energy production, NLRB regulations, SEC regulations, CPSC regulations, CAFE rules, financial regulations (Dodd-Frank), trade agreement delays, minimum wage increases, and the passage of the Patient Protection and Affordable Care Act (PPACA).

Why don’t employers hire more? 

The main reasons why employers do not hire more workers are not hard to find.  There are five basic reasons:

1.    Energy sector restrictions.

2.   Complex and growing federal regulations on all sectors of business

3.   High government spending and debt

4.   Control and uncertainty in the health sector.

5.   Complex, high and uncertain taxes.

 The solution – a new administration

It is clear that the current administration cannot solve unemployment today or for the next year and a half. They are too committed to the mistakes they have already made.  Their supporters believe in macroeconomic solutions, high regulation, high government spending, high taxes on the rich, and government health care.  Change can only come from a new President and a new Congress.

Employment Growth Agenda for a New Administration 

The business economy of the US today is in too bad shape that simply electing a new President and Congress will not solve anything unless the new team is committed to making major changes in taxes, spending and regulation.  Here is an agenda that will promote growth and solve the unemployment problem:

1.  Free the energy sector.  Eliminate all restrictions on energy growth: permit onshore and offshore drilling and production including Alaska and all other areas. Speed up the issuance of drilling permits. Build the Keystone XL pipeline. Open up the Marcellus Natural Gas and Oil Sands development.  Delay EPA’s new ozone standards until 2013, and build more Nuclear Power Plants. Goal: more than three million new jobs in the energy sector within three years.

2.  Regulation Rollback. Review and scrap all the Federal laws and regulations that prevent employers from expanding and hiring.  This is so important (and massive an undertaking) that an executive order will not do it. A temporary Federal Agency should be set up with legislative authority to review all federal regulations on the business sector, do cost benefit analysis, hold expedited hearings, and submit legislation to end hundreds of laws and regulations. Their recommendations should automatically go into effect unless overridden by a vote in both houses of Congress within thirty days. Goal: More than one million new jobs in within three years.

3.  Spending Rollback.  Revise the Congressional Budget Act of 1974 to eliminate Baseline Budgeting.  Have the President submit a balanced budget to the Congress with legislative modifications that eliminate all legal entitlements and special payments to individuals and businesses except in Health Care (see below).  Goal: Balanced budget within two years.

4.  Healthcare rollback.  Repeal the Patient Protection and Affordable Care Act. Enact the Ryan Plan for Medicare and Medicaid. Goal:  put Medicare and Medicaid on a fiscally sound basis for the future.

5.  Tax Reform.  Eliminate capital gains and all other business taxes. Instead, get the same revenue from taxes on individuals.  Streamline the number of tax brackets, reduce rates, and eliminate itemized deductions.  Eliminate the death tax and the AMT. Simplify the individual income tax system to two rates: 15% on the first $50,000 of taxable income ($100,000 for couples), and 27% on everything else. Replace mortgage interest and charitable deductions with limited credits. Apply the new taxes to all taxpayers.  Goal:  Keep revenue the same.  Reduction in uncertainty, rates and regulation will boost employment by 500,000 in two years.

Summary  

If the President and the Congress are committed to these goals and elected on the basis of their pledge to achieve them, they should result in 4.5 million new jobs within three years, and set to continue to add two million jobs a year thereafter – enough to keep up with the projected population growth without adding to the US debt.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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