Quote of the Day
Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.
Douglas Adams
Why Obama's Jobs Initiative Will Fail
In last Sunday's post I pointed out an Austrian school of economics' refutation of the Keynesian school claim that FDR's alleged austerity/balanced-budget fixes allegedly caused the 1937 recession. The argument is that by seeking to cut spending, FDR had blundered his way into undermining the progress that had been made by large-scale public spending, particularly in public infrastructure. There are a number of points to be made here, but the core points include that the closing of the budget deficit had more to do with increased taxes (e.g., payroll taxes), not decreased spending. Another is that various labor market interventions (e.g., sticky union compensation floors) and financial reform interventions, which had the net effect of lowering the number of stock market participants made the market more volatile.
So what's truly remarkable is how little progressives really learn from their past failures: you don't want to increase the cost of labor with payroll tax hikes or labor contracts or counterproductive policies (e.g., minimum wage), maintaining an artificially high effective minimum wage. The point is that regulations obfuscate the labor market, and we would be better served by allowing wages find a market-based bottom.
Not only that but we had loose monetary policy which contributed to counterproductive artificially lower interest rates and hence the cost of capital. Among other things, this contributes to an excess capacity problems and related effects, e.g., price wars, bankruptcies, bailouts, etc.
Paul Krugman and his fellow neo-Keynesian cohorts didn't learn anything from the late 1990's and the Internet bubble where companies borrowed against future technology purchases, placing multiple purchase orders to ensure a supply with the intent of subsequently canceling redundant orders. Companies went belly-up; their assets hit the liquidation market which competed with new technology sales. The progressives concluded the exactly wrong conclusion: it was Bush's "tax cut policies and wars" that caused a sluggish economy, not artificially low interest rates and other policies which allowed customers and businesses to borrow from future purchases.
There are some obvious lessons from 1937 and the 2000 decade: right-size interest rates to minimize inflationary risks and counterproductive business investments; in times of economic uncertainty, be very careful about regulations which may contribute to unintended consequences and/or have the effect of increasing the cost of labor, e.g., ObamaCare and financial reform; promote a more efficient economy by minimizing ineffective federal toll collection and spending and instead adopting more balanced model of federal revenues, including fewer penalties to savings and investments and taxing consumption.
What do I see within Obama's Pelosian "I know how to solve the jobs problem but it'll wait until my vacation is over by next month" jobs solution? I'll point out that it is just as morally bankrupt to make the country wait a couple of weeks to hear his Nixonian "secret plan" if he does have "the answer" to the jobs market
A lot of it will be quite predictable, i.e., more spending on unemployment insurance, partial payroll tax holidays, increased public infrastructure spending, "investments" in green energy and other politically correct areas (which, of course, do little more than add new floors to the convoluted federal house of cards).
What would I do? The following is an initial abridged collection of ideas: try to eliminate uncertainty with a five-year freeze on regulatory mandates, including any new net tax or regulatory burden (including ObamaCare); at minimum, suspend dysfunctional labor market interventions, like minimum wage requirements in smaller markets; institute a national consumption tax, reduce moral hazard by cutting unemployment compensation check amounts and limiting the period of eligibility; cut business tax rates and any savings and investment taxes; accelerate free trade pacts, none of which have passed over the past 5 years; defend the dollar by reverting to a more consistent natural interest rate.
Musical Interlude; My Favorite Groups
Bread, "Let Your Love Go"
