The Unemployment Debate

Different experts answer the same question: what can government do about joblessness? But is more government likely to solve anything?

With some 14.6 million Americans out of work, the extension of unemployment benefits and suggestions of a renewed wave of stimulus measures are high on the political agenda in Washington. From The Atlantic to ABC’s This Week, news media offered a platform to economic experts, most of whom wondered what government can do to curb unemployment.

In The Atlantic this week, Don Peck fears that a new “jobless era” will fundamentally transform America. With unemployment still hovering near 10 percent and no sign of recovery in sight, it is becoming “chronic” and “all consuming” — “a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society.”

Little wonder policymakers and economists alike worry and fight among each other about the best ways of combating America’s persistent unemployment rate. New York Times columnist Paul Krugman, who fears a “lost decade” for the United States similar to the Japanese experience of the 1990s, admitted last summer in London that even he has “no idea” how to return strong, sustainable growth to the American economy. But that hasn’t stopped him from urging government to continue to spend and stimulate.

Christina Romer, President Barack Obama’s foremost of economic advisors, said last fall, “By mid 2010, fiscal stimulus will likely be contributing little to further growth.” Unemployment, she added, is unlikely to drop until at least 2011. Both the Federal Reserve and Goldman Sachs have echoed that prediction since meaning that, after spending hundreds of billions in “stimulus,” even the most ardent of interventionists don’t believe government can do much more at this point.

Senator Bob Corker of Tennessee had some common sense advise to offer on ABC’s This Week Sunday morning when he urged his fellow lawmakers to “calm down” and quit making “sweeping changes.” Washington, he said, has contributed to “an air of unpredictability” over the past year by passing monumental health care and financial reform legislations. The best thing it can do now is “let people’s balance sheets sort of get back where they need to be. That will stimulate demand over time,” according to Corker, “as families and people, households across our country, get their balance sheets in order.”

The ruling party doesn’t have the patience to let the market freely recover however. Laura Tyson, also among the president’s economic advisors, spoke instead of the need to “stimulate demand in the economy.” She mentioned payroll tax credits and infrastructure projects (“A dollar spent by the public sector on infrastructure can bring three dollars of private spending.”) as ways to get people to work while those who are still jobless need to be “taken care” of. “That’s why I really have supported the extension of unemployment benefits and the extension of benefits to help people maintain their health insurance if they lose their job,” she said.

Tyson’s concern over high dropout rates in public schools and the subsequent and gradual impoverishment of the American economy are well founded but her solution — help from the government — may be unlikely to do any good. For one thing, public education has been failing for many years and the answer is not to pour even more tax or borrowed money down the drain rather to free children from government schools and let competition deliver better results. American infrastructure is also in dire need of improvement but again, past experience with government intervention (Amtrak) is hardly encouraging.

The American economy has to catch up with fast paced innovation in Asia and, to a lesser degree, Europe, but the past two administrations’ bailouts of banks and automakers have left a nasty taste of protectionism to current economic policy. Peck projects that the “construction and finance industries, bloated by a decade-long housing bubble, are unlikely to regain their former share of the economy,” while manufacturing jobs and even white collar work is increasingly shipped overseas. “Ultimately,” he believes, “innovation is what allows an economy to grow quickly and create new jobs as old ones obsolesce and disappear.”

While Tyson urges government to “invest, invest, invest,” in infrastructure and in education, Martin Regalia of the Chamber of Commerce, asked on This Week why the private sector isn’t investing, pointed out that tax laws and regulations “don’t foster that. And when you don’t have the kind of laws and the kind of tax structure that facilitate and encourage investment,” he said, “you get a lot less of it.”

Senator Corker, more explicitly, argued in favor of tax reform as well. “We do tax investment. We encourage people to go into debt.” While Congress gets easily mired in trivial debates about specific tax codes, the bigger question, said Corker, is how much the federal government ought to “take in” from private companies — and private citizens. “I think most people in America would rather determine what to do with their own money versus let 535 people decide for them.”

On Fox News Sunday Moody’s economist Mark Zandi and Fox Business News’ Liz Claman agreed that raising taxes now is a terrible idea. Zandi said it would be a mistake “to raise taxes on anyone” while Claman added that it “could really cause some problems at the moment.” The Bush era tax cuts on wealthy Americans may need to expire eventually in order to balance the budget but any increase in taxes right now would jeopardize a still very fragile recovery.

No matter the optimism among younger Americans, for whom job switching and short periods of joblessness, whether voluntary or forced, are common, Peck warns them in his article that they will see their “life chances permanently diminished by this recession.” Starting incomes for college graduates will decline; their chances at finding a professional, even prestigious job diminish. “Strong evidence suggests that people who don’t find solid roots in the jobs market within a year or two have a particularly hard time righting themselves.”

Prolonged periods of unemployment not only undermine youngsters’ chances on the jobs market; they can break up families and neighborhoods and leave society “more mean spirited and less inclusive.” The social legacies of the Great Recession are still being written, according to Peck, “but their breadth and depth are immense.” Positively frightened by the prospect of a Krugmanesque lost decade, or, indeed, a lost generation praying upon the social fabric of America, everyone, government included, has a “moral responsibility,” Peck believes, to try to stop it — “before it gets even worse.”

Such scaremongering should be effective when this administration attempts to impose even more extensive controls on the American economy. Peck may not have any intention of legitimizing pervasive government intervention but fears of another sharp economic downturn or, worse probably, a protracted descend into stagnation will only louden calls onto Washington to “do something”, stimulate the economy, spur growth and innovation.

No central planner in the capital can hope to encourage job growth and entrepreneurship by scrapping a few taxes and introducing a few bills in Congress. What American business needs foremost is breathing room. What the people need is an assurance from government that it won’t burden them with tax hikes and fresh regulations. The administration should dispense with its government knows best mentality that is affecting almost every industry and dividing the country and the states. Learn instead from experience: American enterprise never prospered when it was badly restrained but the American people always excelled when they were left free to produce and trade without anyone telling them how and when to do it.