Monday, November 9, 2009
Unemployment and Deficit Increase: What Should Be Done?
“THE EMPLOYMENT SITUATION -- OCTOBER 2009
“The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.
“Household Survey Data
“In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points….” (Source: U.S. Bureau of Labor Statistics)
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“I have always been a great supporter of Winston Churchill's statement about the United States. The United States can be counted on to do the right thing, after having tried all other conceivable alternatives.” – Former Federal Reserve Chairman Alan Greenspan 
Unemployment to Remain High
From all indications, including the White House’s own projections, unemployment is expected to remain high through much of 2010. Depending on the legislative results of the current Congress, a lot of variation is possible, but with policies now in place, things are bad, with the potential of getting much worse if we get Obamacare and cap and trade.
I and many others have made suggestions for improving the economy. The following are some I have made before, but here, I have added some detail and support.
Deficits to Increase
The situation is difficult at best, but is not being helped by the $787 billion stimulus. The overall business environment discourages business expansion and hiring. In general, what is needed are policies to encourage private sector economic activity. Also, in general, this can be done best by reducing taxes and pulling back on some regulations. Reducing the deficit will happen if these things are done, because increased production will lead to more employment, more taxpayers and more revenues to government.
Part of the answer to huge deficits is to reverse some of the things that have brought them on. Also, the government and the Fed need to consider the magnitude of their actions. Trillions of dollars, amounts hardly comprehensible, should not be handled so carelessly. This is the stuff of economic ruin.
Martin Crutsinger, in an Associated Press article, says:
“What is $1.42 trillion? It's more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada's, and more than $4,700 for every man, woman and child in the United States.
“It's the federal budget deficit for 2009, more than three times the most red ink ever amassed in a single year.” 
Also, the national debt could rise to $17 trillion by 2019. 
Crutsinger also points out that increasing deficits will make it harder to sell this debt to investors, resulting in higher interest costs. He has the following quote:
“We should be desperately worried about deficits of this size,” says Mark Zandi, chief economist at Moody's Economy.com. “The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation.” 
First Things First
First priority ought to be to get America back to work. The Administration’s priority is not this, but rather, putting in place their socialist agenda of Obamacare and cap and trade, etc. They say that huge government spending and deficits are justified for the purpose of boosting the economy, but their fiscal “stimulus” is not particularly stimulating to the economy, and must be paid for by taxpayers.
The economy is going to be a serious political problem for Obama as time goes on. Already, he has lost a significant amount of favor among voters. According to Rasmussen’s survey of likely voters, 49 percent at least somewhat approve of Obama’s performance, and 50 percent disapprove (11/09/2009). 
1. Forget Obamacare. Take up health care issues later and forget nationalizing it. If this was done, our nation could breathe a large sigh of relief. This plan, in whatever final form it takes, will definitely increase the deficit. It also will not meet the goal of insuring everyone. The resulting tax increases will slow the economy. It might be hard to measure how much the deficit would increase, since one bundle of a trillion dollars of deficit looks pretty much like another. The people in charge now don’t mind throwing around trillions.
2. Forget cap and trade. Recognize it as the fraud and hoax that it is. Cap and trade is a great job killer and will result in hardship for many Americans. There will be more foreclosures, more bankruptcies, lower tax revenues in a fairly short time (not higher as the government expects), and the number of “green jobs created” will be small compared to the number of better-paying jobs lost. Also, the creation of a new “carbon credits” market is an invitation to a great amount of fraud and abuse. Trading in credit default swaps has been a huge mistake (and a failure of government regulation), and carbon credits would probably be worse. Not to mention that all this would do nothing to help the environment. It’s a nightmare waiting to happen.
3. Keep the Bush tax cuts in place, and don't reduce tax deductions. If businesses and individuals knew in advance that taxes would not be raised, they could confidently spend and invest. Tax increases are a strong disincentive to economic activity. The Reagan and Bush tax cuts were a major factor in the 25-year economic recovery, and proved their worth. Higher taxes would not help the deficit, but would actually increase it. Also, Obama wants to decrease tax deductions for medical care and charitable deductions. Both of these would penalize the people he supposedly most wants to help.
Forget the notion that tax cuts only benefit the rich. About 47 percent of Americans don’t pay income taxes. High taxes for “the rich” translate to fewer jobs and therefore less tax revenue to the government. Taxpayers are over-taxed at best from federal, state, and local taxes.
“Those who argue that the Bush tax cuts were a ‘give-away’ to the rich assume that incomes grow at a constant rate, regardless of how heavily they are taxed. That is the fallacy of the recent  CBO [(Congressional Budget Office)] study. The report concedes: ‘Our analysis does not account for incomes changing in response to the tax cuts.’ It’s like assuming that you’re not going to take off any weight if you stop eating hot fudge sundaes with whipped cream and cherries on top. This is the same whimsical logic that compelled the tax accountants on Capitol Hill to famously estimate that a 100 percent income-tax rate would bring in billions of dollars in federal revenue….
“The CBO estimate says that the share of income taxes paid by the richest 20 percent of earners fell from 82.5 percent to 82.1 percent in 2004. The report also states that the top 10 percent of earners will pay ‘only’ 66.7 percent of 2004 taxes, with the top 1 percent paying 32.3 percent. Fully 80 percent of Americans pay less than 18 percent of total income taxes….” 
As of 2005, the latest year for which I found data, the top 25 percent of earners paid 85.99 percent of federal income taxes. The top 1 percent paid 39.38 percent. 
4. Reduce corporate tax rates to 15 percent or less. The U.S. has a higher corporate tax rate than other industrialized countries, which puts us at a competitive disadvantage. If businesses could have lower tax rates, they could more readily hire people and buy new equipment. Unemployment would quickly decrease if businesses could be confident about continuing lower tax rates. And another result would be increased tax revenues to the government. While we’re at it, reduce capital gains tax rates, too.
5. Sell government interests in GM, Chrysler, AIG, etc. Recover as much as possible of the billions that were spent on these transactions.
6. Recover all TARP funds possible as quickly as possible. Don’t do any more bailouts, period. If a business fails, it fails. That’s why we have bankruptcy courts and established processes for failed banks. Why should taxpayers be on the hook paying for big banks’ big mistakes? There is no bank or business firm that is “too big to fail,” or that government should bail out at taxpayer expense. If some big banks or other businesses fail, this will discourage the kind of behavior that led to their failure, and the market will adjust.
It is unjust and unnecessary to force the taxpayers to bail out banks that failed. Capitalism is based on the principle of risk-taking. Risk involves the possibility of failure. With the massive Fed and Treasury bailouts, Americans are on the hook for such huge amounts that the taxpayers are now the ones at risk. If large banks are assured of being bailed out in case they have large losses, they lose incentives to operate efficiently and the system loses competitiveness. The large banks, already lacking a good level of competition, will operate even more like a cartel.
I have said that the financial meltdown is largely the fault of government, in that the government forced banks to make bad mortgage loans, and Congress stood in the way of regulation of the misbehaving Fannie Mae and Freddie Mac. Common sense about loans, and proper regulation, could have prevented much of the problem. That said, the big banks did take extreme undue risks by issuing and trading in derivatives that never should have been created or traded. This is a failure of the banks, but also a failure of government regulation. The SEC should have seen the danger and acted.
The Bush Administration, to their credit, tried, though unsuccessfully, to regulate Fannie and Freddie, but they erred terribly in yielding to the bullying tactics of Henry Paulson as well as the Fed. To approve legislation of the magnitude of the TARP bailouts, handing over virtually a blank check for $700 billion to Paulson, and doing so without significant debate or discussion was foolish at best. The Fed and the Treasury Department decided the winners and losers of this “bailout bingo,” dividing and distributing bank assets at will. There should be a full accounting and public disclosure of who got what and under what circumstances with all the bailouts.
An inspector general’s report concluded that banks were forced to take money even when they didn’t need or want it.  To hand out money like that is nonsense.
A Federal Reserve Board book states that according to the Federal Reserve Act, the Fed’s purpose is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  It appears that the Fed is also interested in bailing out favored large banks at taxpayer expense. I support the proposed legislation to audit the Fed.
7. Get out of foreign financial entanglements. The U.S. should not participate in any international financial bailouts nor contribute to any kind of international bailout fund. The world’s central banks are infatuated with bailouts. Foreign banks got a considerable chunk of the TARP money and Fed bailouts. These things threaten not only national solvency, but national sovereignty, and ultimately, national security.
8. Back off on “stimulus” bills. Repeal the remainder of the $787 billion stimulus and don’t do any more of them. If tax rates are made more reasonable and the high-cost, job-destroying Obamacare and cap and trade proposals are defeated and discarded, the private sector will be “stimulated” to the point that the recession will soon be over and employment will soon be back to normal.
But the Administration is apparently about ready for a second stimulus:
“There is growing recognition in the White House that the stimulus package wasn’t enough. The White House is considering further stimulus measures -- a combination of more infrastructure investments, more money to weatherize homes and businesses, more tax cuts for businesses, and/or more steps to promote lending. This will be a matter of weeks not months. They know they have got to turn this job cycle around.” 
Dealing with the longer-term problems
Even if the changes mentioned above could be made, after our economy began to look normal, we would still have very serious longer-term problems with unsustainable entitlements.
Phasing out Social Security and Medicare over a 25 to 30-year period should be considered, because these programs are not sustainable, and are in themselves capable of toppling our economy. These entitlements currently represent unfunded liabilities of about $83 trillion.  It is, arguably, impossible for this to ever be paid.
Younger people should be encouraged to finance their own retirements and provide their own health care. The welfare system should be reduced to a basic safety net, not permanent incentives to refrain from working. This seems to be a problem that is beyond anyone’s expertise to solve, and something politicians routinely pass along to their successors. But it’s going to be a “sudden” big crisis in not many years if nothing is done.
Unless significant changes in direction are made, the actual current economic outlook is not encouraging. There is a likelihood of a second “stimulus,” and the Administration is pushing hard for Obamacare and cap and trade. More taxes are on the horizon. More international arrangements that entangle the U.S. in banking and climate commitments will add to the problems.
My own view is that if the Administration were more concerned about the unemployed, and the suffering of American families in this time of economic hardship, more concerned about restoring long-term prosperity, and less concerned about getting their socialist-fascist program in place, they would take steps similar to what I have described above, and many others have suggested. That would improve the economy fairly quickly. Their own political fortunes will ultimately depend on the economy.
But Obama is determined to fundamentally change American government and social structure, and that is his priority. Other considerations must serve that objective. This kind of “change” is destructive and unconstitutional, and, I believe, will ultimately be rejected by the American people. The more successful this agenda is, the more that economic “hope” will decline.
 Martin Crutsinger, Associated Press, “2009 federal deficit surges to $1.42 trillion,” 10/16/2009, at Google News, http://www.google.com/hostednews/ap/article/ALeqM5iPlbcTnWEfuKimEaDq0UdU2Uxk1gD9BCG27O0.
 –  Crutsinger, see .
 “Daily Presidential Tracking Poll,” 11/09/2009, Rasmussen Reports, at http://www.rasmussenreports.com/public_content/politics/obama_administration/daily_presidential_tracking_poll.
 Stephen Moore, “Killing the Class-Warfare Argument,” 08/19/2004, National Review Online, at http://www.nationalreview.com/moore/moore200408191201.asp
The CBO study cited was touted by the Kerry-Edwards campaign as finding that the Bush tax cuts unduly favored the rich.
 Rush Limbaugh.com, at http://www.rushlimbaugh.com/home/menu/irs_screen_grab.member.html
 Matt Cover, “Inspector General: Treasury Secretary Forced Banks to Surrender Ownership Interest to Government,” 10/05/09, CNS News.com, at http://www.cnsnews.com/news/article/55017
 The Federal Reserve System: Purposes and Functions, Board of Governors of the Federal Reserve System. Ninth Edition, June 2005, page 15. Ebook available at
 Jake Tapper, “Wave After Wave of Bad News,” 11/07/2009, ABC News at
 Gary North, “Social Security and Medicare: The Twin Disasters That Will ‘Break the Bank,’” Gary North’s Specific Answers, at http://garynorth.com/public/department30.cfm