Saturday, December 4, 2010

When Will There Be Jobs?

Here, Former Secretary of Labor Robert Reich laments that the unemployment rate is not falling.  He even admits that it might not fall anytime soon, if ever.  He's right, and the correct explanation for slow job growth can be found here and here.

Like any good liberal, Mr. Reich is upset that Washington isn't doing anything to help the problem.  What Mr. Reich doesn't say is just what it is he thinks the federal government should be doing.  But he doesn't have to; we already know what Mr. Reich would say.  He's said it before.

More stimulus spending financed by federal borrowing and raising taxes on the rich; that's what Mr. Reich would say.  Mr. Reich would push this prescription because he is a Keynesian, and he believes the federal government has both and obligation and the power to reduce unemployment by attempting to borrow what has not yet been produced.

Readers of this blog no doubt understand that you can't borrow what hasn't yet been produced, even if you are the United States Treasury.  Mr. Reich is no dummy; why does he think the federal government can deficit spend the economy back to the natural rate of unemployment --- which is probably somewhere in the neighborhood of 5%, based on history.

To believe that spending money newly created by the Fed will lower the rate of unemployment, one has to believe that the only reason so many people are unemployed is because producers are fearful that they won't be able to sell what they produce.  In the words of good old Keynesian economics, "aggregate demand is insufficient."  Solution (according to folks like Mr. Reich), get the federal government to spend borrowed money. 

The notion is that whoever has the money isn't spending it.  Since whoever has the money isn't spending it, the U.S. Treasury can borrow the money and  spend it.  That way, producers won't be worried that no one will buy what they produce.  That means producers will hire more workers, produce more goods, and unemployment will surely drop.

So what's wrong with this sort of thinking?  Hasn't federal deficit spending reduced unemployment in the past whenever we've had a recession?  Well, no, federal deficit spending hasn't reduced high unemployment in the past, and logically, all kinds of things are wrong with this sort of thinking.

In other words, the Keynesian prescription of Mr. Reich and others like him are wrong theoretically, and historical evidence also doesn't doesn't support the prescription.  Read this and this if you want data instead of just my say so.  Read here John Cochrane's explanation of why no thoughtful person should expect the Keynesian prescription to work.

So, when will the American economy generate sufficient new jobs to reduce the measured rate of unemployment?  To understand the cure, we must first understand the cause of the disease.

In my judgment, today's high and undiminishing unemployment has two fundamental and important causes.  One is structural and will require years, not months, to mitigate.  The second is political, which means it could be mitigated fairly quickly, if the 545 had the knowledge and will to do so.

The structural cause of high and undiminishing unemployment in America is a widening mismatch between the skills and knowledge available from the labor force, compared to the skills and knowledge producers need in today's high tech information-driven economy. As Mr. Reich noted in his lament, the unemployment rate among people with a college education is only 5%.  Surprise, surprise; employment is correlated with education.

The political cause of high and undiminishing unemployment is the powerful confluence of ever rising transfer payments of entitlement programs (social security, medicare, medicaid, and unemployment benefit payments), incredibly bad income tax policy, rising moral hazard in financial markets, and the growth-stifling hand of ever rising regulation in the American economy.

Liberals and so-called progressives (I prefer the term "socialists" in the interests of clarity and truth) cannot refute the first, structural cause with theory or data.  They can and do deny the second political cause, but they do so with neither theory nor data to buttress their rebuttal.

When will there be job growth again in America?  When individual people acquire skills and knowledge that are in demand in the labor market, and when politicians reverse the relentless march toward top-down, liberty-depriving, growth-stifling regulation and socialist public policy.

Forget about federal stimulus spending, Mr. Reich.  Forget about monetary policy, Mr. Bernanke.  Forget about both, Mr. Obama.  See the problem of high and undiminishing unemployment for what it really is.

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