Saturday, June 25, 2011

Snake Oil: Cures Cancer, Creates Jobs

It always strikes me as comical when an economist states that the economy would be so much better and there would be so many more jobs created if we only did x,y and z. The economic axiom that should override every other is this one: "There is no free lunch." Every economic discussion should be structured in the form of a cost-benefit analysis. Articles, like this one from Irwin Kellner, really rub me the wrong way when they smugly claim to have a magic elixir with no side effects.

Creating jobs is not rocket science.
If this were the case, then no economy in the world ever need experience double digit unemployment. Today's global economy is as competitive as ever. Now here is something that doesn't require an advanced degree in extra-terrestrial propulsion systems to comprehend: those countries who's input costs (particularly land and labor) are high relative to their productivity are going to struggle to create jobs.

On the hiring side, the first thing that comes to mind is that the government should make it less expensive for business to hire U.S. workers. This means some combination of tax credits and a payroll-tax holiday when a firm adds to its payrolls.
According to data from the OECD, US corporate tax rates are admittedly high relative to the rest of the world. However they are on the same level with advanced industrial nations who are our primary competitors, like Germany and Japan. Both of which have much lower unemployment rates than the US. The major categories of labor costs can be broken down into salary, benefits and taxes. If the tax portion is small relative to the other two, then reducing taxes will have a minimal effect at best.

Additionally, no mention is made of the effect of lowering taxes by a government that has $14 trillion in debt and is running a $1.6 trillion annual deficit. Government debt at these levels creates all kinds of uncertainty regarding the future direction of fiscal spending as well as the overall economy. Forced austerity is generally not conducive to an expanding economy (case in point: Greece, Ireland, Iceland...).

In addition, we should see to it that the dollar is appropriately valued in world financial markets so that our exporters have a level playing field on which to compete.
Good old competitive devaluation (this should be added as an Olympic event in 2012). Doing this in a controlled fashion is easier send then done. Kellner makes no mention of the negative effects, such as higher energy prices, which at this very moment are considered one of the major impediments to the economy. Just this past week the US announced it was releasing 30 million barrels of crude from the Strategic Petroleum Reserve.

More free-trade agreements would help as well.
Generally agreements involve give and take. Are we to believe that other governments are going to willingly enter agreements that will obviously be net-job positive for the US?

Banks should be encouraged to step up their lending.
Alcohol as cure for the alcoholic. Loose lending standards were a major cause of the current mess and banks are still saddled with billions of dollars in suspect loans. Banks, by their very nature, are in the business of making loans to make money. Why not let them decide whether or not a loan is viable?

Flattening the yield curve, thus reducing the appeal of Treasurys over business loans, is one way; lower capital requirements on loans as opposed to investments is another
Kellner provides no specifics on how to exactly achieve this. All of the methods I can think of have consequences. Two ways to flatten the yield curve: 1) bring down long term rates and/or 2) bring up short term rates. I'm absolutely certain that Kellner is not advocating option 2 because all of his other suggestions are text book Keynesian and the last thing a Keynesian would suggest at this point is for the Fed to raise overnight lending rates. That leaves option 1 which the Fed has already been engaged in with Quantitative Easing. A direct correlation appears to have been established between QE and energy prices. Again, lunches are not free.

To this end, the government should offer more cash for clunkers, another tax break for home buyers and — my long-standing suggestion — a gift card loaded with $3,000 that must be spent within 90 days, sent to everyone over the age of 16.
As ludicrous as this sounds on the initial reading, be aware that this is just another form of currency devaluation. Currency devaluation = higher energy prices. Also be aware that the US has a significant Current Account Deficit, meaning we spend a lot more on imports than we receive in exports. A good portion of that increased consumer spending is going to find its way into the pockets of foreign companies. I've always been of the opinion that the current account deficit has to be fixed first before making attempts to encourage consumer spending. The problem is, selling stuff has always been more difficult than buying stuff.

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